The Fog of Healthcare Policy
Seasoned, battle-scarred military strategists often speak of the debilitating effect of “the fog of war”—the chaos, the unknowns, and the complexity that can cloud judgment in the midst of a military operation.
State officials, similarly, can face the same experiences when tackling complex policy challenges such as identifying ways to contain medical costs—presenting us with the opportunity to review some “biopharma basics” to clear some of the fog surrounding prescription drug pricing.
In isolation, prescription drug costs can appear very high.
Taken as a component of overall healthcare spending, however, prescription medicines comprise a relatively small share of 10 to 15%. It’s commonly less known that the other 85 to 90% of healthcare costs include surgeries, hospital bills, doctors’ fees, and physical therapy.
In that light, prescription medicines can add value because their cost is less than what they replace. They free up resources to be spent elsewhere.
For example, a patient cured of melanoma with an immunotherapy medicine like Bristol-Myers Squibb’s Opdivo, or whose disease never manifests itself owing to the new class of LDL (bad) cholesterol-lowering biologic drugs, costs the healthcare system much less than the same patient treated without the benefit of these innovative biopharmaceuticals.
Cutting-edge medicines are sometimes labeled “pricey,” but, in fact, are bargains compared with the disease management costs, hospitalizations, out-patient and in-home nursing care they replace.
R&D and the Free Market
The market for prescription medicines in the U.S. is freer than most other places in the world, but it is highly regulated. It also fosters innovation like no other.
This, in turn, brings high value-added, cost-saving therapies to the healthcare system sooner than later.
The key difference between our market and most, if not all, of the developed world is our acknowledgement of the cost of research and development, and our willingness to pay for it.
The market would work better if the FDA processed generic drug applications quicker than the average three years it takes today.
It is during this period of patent protection that companies recoup the $2.6 billion it takes to develop a medicine and make enough money to cover the cost of other research projects, most of which are unsuccessful, and give management, employees and investors reason to keep directing the companies’ scarce resources into new research.
The incentive is critical because companies are constantly assessing whether other much less risky investments, though of much less value to society, like over-the-counter cough medicines or “cosmeceuticals,” make more financial sense.
One idea that often arises in the healthcare debate is reducing the length of the patent exclusivity period.
Unfortunately, this would cause drug prices to rise. It’s simple arithmetic. With fewer years to recoup their research and development costs, companies would need to price their on-patent medicines higher.
Rather than cutting into the patent exclusivity period, regulators should focus on shortening the process for approving generic drugs—a process that can take up to three years.
It’s important to keep in mind that once an innovator company’s patent expires, others have free access to a drug’s “recipe” and can make generic or biosimilar copies.
The market would work a lot better if the federal Food and Drug Administration would process applications to produce generic drugs more quickly than the average three years it takes today.
Think about it. A drug formula is known and well documented, an applicant has an FDA-approved facility ready to manufacture the generic drug, yet the FDA takes three years to approve the cheaper generic.
Very few take advantage of this lag time and the unnecessary three-year monopoly it ensures.
This three-year “bonus” monopoly is a failure of federal regulation, not the market, and it can have costly consequences (think Martin Shkreli of Turing Pharmaceuticals or EpiPen).
Drug Prices Overseas
It is often true that in much of the developed world, medicine prices are lower than in the U.S.
This is the case because their healthcare systems are a monopoly—a single payer—and have the power to bar a medicine’s entry into a market unless a discounted price is granted.
As long as companies can cover manufacturing costs, they put up with this strong-arm price-setting.
This means that we in the U.S. are covering the cost of new medicine research and development. We’re willing to do this because of the benefits, including effective treatments, cures, and the added value to our economy.
But the “free riding” of other developed nations on our research and development investment is an international relations problem, not a failure of our regulatory system.
What if we controlled and limited prices the way many other developed countries do?
We would stifle innovation and undermine one of our most productive, job-creating industries. The majority of biopharma companies are U.S.-based and, worldwide, the industry depends on our freer market to justify its research and development spending.
Would academia and non-profits come to the rescue?
A great deal of excellent basic research is conducted at our universities, but research and development is far more than just basic research.
The cost of translating basic findings for clinical use and testing them in clinical trials dwarfs basic academic research expenditures.
And non-profits? They do a lot of good delivering drugs and treatment services, but account for at best one out of 10 drugs developed beyond the concept stage, tested through clinical trials and brought through FDA approval to pharmacy shelves.
Many of the elected and appointed officials in the legislative and executive branch of Connecticut’s state government are working diligently to chart the right path forward for healthcare policy in our state.
When things get foggy, CBIA and the Connecticut Bioscience Growth Council are bringing all members’ voices to the table to help clear the way.
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