Conference on Drug Pricing Inject New Statistics Into Debate, Few New Insights (Part 2 of 2)

Posted on November 9, 2018 I Written By

Andy Oram is an editor at O'Reilly Media, a highly respected book publisher and technology information provider. An employee of the company since 1992, Andy currently specializes in open source, software engineering, and health IT, but his editorial output has ranged from a legal guide covering intellectual property to a graphic novel about teenage hackers. His articles have appeared often on EMR & EHR and other blogs in the health IT space. Andy also writes often for O'Reilly's Radar site ( and other publications on policy issues related to the Internet and on trends affecting technical innovation and its effects on society. Print publications where his work has appeared include The Economist, Communications of the ACM, Copyright World, the Journal of Information Technology & Politics, Vanguardia Dossier, and Internet Law and Business. Conferences where he has presented talks include O'Reilly's Open Source Convention, FISL (Brazil), FOSDEM, and DebConf.

The first part of this article described the upward pressures on costs and some of the philosophical debates over remedies. This section continues the discussion with several different angles on costs.

Universal access and innovation

It’s easy to call health care a human right. But consider an analogy: housing could also be considered a human right, yet no one has the right to a twenty-room mansion. Modern drug and genetic research are creating the equivalents of many twenty-room mansions, and taking up residence means the difference between life and death for someone, or perhaps between a long productive life and one of pain and deformity.

Universal access, often through a single-payer system, is in widespread use in every developed country except the United States. Both universal access and single payer are credited with keeping down the costs of health care, including drugs. It makes sense to link single-payer with lower drug costs, because of the basic rules of economics: size gives a buyer clout, as we can see in the ways Walmart lords it over their suppliers (documented in a 2006 book, The Wal-Mart Effect, by Charles Fishman). At the conference, Sean Dickson from the Pew Charitable Trusts gave what he called an “economics 101 course” of health care and how the industry diverges from an ideal market. (He did not come out in favor of single-payer, though.)

How much fat can be cut from pharma? My guess is a lot. As we saw in the previous section, profits from pharmaceuticals tower above profits in most industries. But we don’t have to stop by simply shaving payments to shareholders, or even management compensation. I know from attending extravagent health care conferences that there’s a lot of free cash floating around the health care industry in general, although it’s unevenly distributed. (Many hospitals, nursing homes, and other institutions are struggling to maintain adequate staffing.) In industries possessing such easy money, it does trickle down somewhat. Gaudino pointed out ruefully that health care is one of the few fields left that can give ordinary people a middle-class income, something we don’t want to lose even as employment continues to rise in that space. But easy money also leads to bloat, and this is almost certainly true throughout health care, including pharma.

Even so, projections of the cost of universal access are dizzyingly high, placing pressure on the historic universal access model in Massachusetts and forcing Vermont to give up single-payer. The pressures that could be applied to the health care field by the US government would certainly outweigh the negligible impact that Vermont–with its population of a mere 600,000–could exert. But it’s unlikely that the easy wins falling out of single-payer (squeezing drug companies, eliminating the administrative overhead of handling health insurance) could make up for the staggering costs of adding whole new swaths of a high-need, difficult population to government rolls.

What we need to lower health costs is an overhaul of the way health care systems conceive of patients, taking them from conception to the grave and revamping to treat chronic conditions. T.R. Reid, in his book The Healing of America, says that universal access must come first and that all the rest will gradually follow. I would like to have at least a strong concept throughout the health care system of what the new paradigm will be, before we adopt single-payer. And in theory, adopting that paradigm will fix our cost problems without the wrenching and contentious move to single-payer.

What non-profits can teach us

So how do we recompense manufacturers while getting drugs to low-income people who need them? Some interesting insights did turn up here at the conference, through a panel titled From Development to Delivery Globally. All three speakers operate outside the normal market. One is a representative of Gilead Sciences (mentioned earlier), whereas the other two represent leading non-profits in international health care, Partners in Health and the Bill & Melinda Gates Foundation. Nevertheless, their successes teach us something about how to bend the cost curve in traditional markets.

Flood said that Gilead Sciences made an early commitment to get its AIDS drug to all who needed it, without regard to profit. At first it manufactured the drug and distributed it in sub-Saharan Africa at cost. That failed partly because the cost was still out of reach for most patients, but also because the distribution pipeline was inadequate: logistics and government support were lacking.

So Gilead took a new tack: it licensed the drug to Indian manufacturers who not only could produce it at a very low cost (while maintaining quality), but understood the sub-Saharan areas and had infrastructure there for distributing the drug. This proved highly successful. I’m betting we’ll find more drugs manufactured in India over time.

Hannah Kettler of the Gates Foundation described how they set 50 cents as an affordble price for a meningitis vaccination, then went on to obtain that price in a sustainable manner. The key was to hook up potential buyers and manufacturers in advance. The buyers guaranteed a certain number of bulk purchases if the manufacturers could achieve the desired price. And armed with a huge guaranteed market, the manufacturers scaled up production so as to reduce costs and meet the price goal.

The Gates model looks valuable for a number of drugs: guarantee an advance market and start out manufacturing at a large scale to reduce costs. This will not help with orphan diseases, of course.

More generally, in my opinion, developed countries have to define their incentive to provide aid of any kind–medicine, education, microloans, or whatever. Is it enough of an incentive to empower women and keep population growth under control? To avoid social conflicts that turn into civil wars? To avoid mass emigration and refugee crises? What are solutions worth to us?

The contributions of artificial intelligence

Aside from brief mentions of advanced analytics by Gaudino and Taylor, the promise of computer technology came up mainly in the final panel of the conference, where Petrie-Flom research fellow Sara Gerke offered some examples of massive costs savings that AI has created at various points in the drug development chain. These tend to be isolated success stories, but illustrate a trend that could relieve pressure on prices.

I have reported on the use of AI in drug development in other articles over the years. This section consolidates what I’ve seen: although AI can potentially help at any point in an industry’s business, it seems particularly fertile in two parts of drug development.

The first area is the initial discovery of compounds. Traditional research can be supercharged by analyses of patient genes, simulations of molecule behaviors, and other ways of extracting needles from haystacks.

The second area is the conduct of the clinical trial. Here, techniques being tried by drug companies are variants of what clinicians are doing to engage and monitor patients. For instance, clinical subjects can wear devices with minimal disruption to their lives, and report vital signs back to researchers on an ongoing basis instead of having to come into the researcher’s office. AI can also find suitable subjects, increasing the potential pool. Analytics may reveal early whether a clinical trial is not working, allowing the company to save money by shutting it down early, and avoiding harm to subjects.

Of course, we all look forward to some marvelous breakthrough–the penicillin of the 21st century–that will suddenly open up miracle treatments at low cost for a myriad of illnesses. Current research is pushing this medical eschaton further and further off into the unforeseeable future. We are learning that the genome and human molecules interact in ways that are much more complex than we thought, that a lot is dependent on the larger biome, and that diseases are also cleverer than we thought and able to work around many of our attacks.

Analytics will certainly accelerate medical discoveries. In doing so, it could drastically reduce the costs of drug discovery, and therefore reduce risk and ultimately prices. But stunning new drugs for rare diseases could also vastly increase prices.

Baby steps

I’ll end with a few suggestions made by conference participants to create a more competitive market or reduce prices. Outside of explicit price setting (on which participants were deeply split), the proposals looked like small contributions to a situation that requires something big and bold.

  • Price transparency came up several times.
  • Grogan would like Congress to re-examine reimbursement for Medicare Part D (especially the donut hole and catastrophic coverage) to give both PBMs and vendors incentives to lower costs.
  • Gaudino said that Australia does a much better job than the US of collecting data on the outcomes of using drugs, which they can use to determine whether to approve the drugs. The U.S. payment system is more privatized and fragmented, making it impossible to collect the necessary data.
  • Caljouw praises the efforts of the Massachusetts Health Policy Commission, which has no power to set costs but meets with providers and asks them to reconsider the factors that lead to jacked-up prices.
  • Caljouw also mentioned laws requiring price transparency from PBMs.
  • Several participants suggested reversing the decision that allowed companies to air advertisements directly to consumers. (I’m afraid that if all the misleading drug ads disappeared from the air, a bunch of television networks would go out of business.)
  • Taylor cited pressure by Wall Street on drug companies to maximize prices without regard for the social impacts–an intense kind of pressure felt by no other industry except fossil fuels–and called for the extension of socially responsible investment to drug companies.

I’d like to suggest, in conclusion, that we may be focusing too much on manufacturers, who are taking enormous risks to cure difficult diseases. A University of Southern California study found that 41% of the price is absorbed by intermediaries: wholesalers, pharmacies, PBMs, and insurers. Whether through single-payer or through other changes to the health care system, we can do a lot without constricting innovators.