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Can Higher Drug Prices Lower Healthcare Costs?

Posted by Brian James on May 11, 2017 9:33:00 AM
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Of course, if you can get the same medication for less, that is better, but what if switching to a newer more expensive drug actually saved money?  Recently I had the pleasure of moderating a panel at the Outsourced Pharma conference in Boston that was focused on cost and price pressures in the pharma industry. Based on the nodding heads in the audience, I think it is fair to say that our industry has an image problem.  While I cannot and will not try to defend some of the more recent high-profile cases that have garnered media attention, there is certainly a case to be made that not all pricing is gouging patients.Image showing the relationship between healthcare costs and pharma

Last week the Chicago Tribune highlighted a Blue Cross Report that squarely blames pharma companies for high drug prices.  According to the report, member plans spent 73 percent more on prescription drugs in 2016 than in 2010, attributed to "large year-over-year price increases" for new drugs that are protected from competition by patents.  in addition, the report highlighted the increase in consumer spending on drugs noting that consumers have been paying 3 percent more a year, out-of-pocket, for all prescription drugs but 18 percent more a year for patented drugs."

The major flaw in this report is the focus on drug costs exclusively, without consideration of the overall cost of healthcare in general.  In addition, no perspective was offered on potential savings realized by using these newer patent protected drugs.  This attitude was mirrored in the May AARP bulletin.  On the cover, front and center was the definitive statement "Why Our Drugs Cost So Much!"  The article starts out with a with the story of a 74-year-old patient with a hereditary disorder that causes her body to overproduce LDL cholesterol; left untreated her levels are over 300.  Statins are somewhat effective in that they lower her LDL levels to about 220.  However, treatment with Repatha (presumably in conjunction with statin therapy) stabilizes her statin levels at around 35.  The cost to keep the patient's LDL levels so low?  $14,000 a year.  This one-sided gem of a hit piece condemns the entire pharma industry for charging the highest price the market will bear because nothing is stopping them.  The next page shows a graph of the "outrageous" operating profits that pharma companies make compared to other industries (Google's parent company does better than Pfizer).  The conclusion is simple, those evil pharma companies are to blame.

Not only do I disagree, I will make my point using the same patient's story.  The general consensus is that lower LDL levels correspond to a lower risk for heart disease, including lower risk for a major cardiac event, such as a myocardial infarct.  So in taking Repatha let's assume our patient avoids a heart attack that she may otherwise suffer in a given year.  Here is a breakdown of some of the costs avoided, because our patient doesn't need to dial 911 and experience a costly hospital stay:

  • Ambulance trip starts at around $1000
  • Average hospital stay for a patient suffering a myocardial infarction is 4 to 5 days; typically one of those days will be in the ICU
  • United States average for an inpatient day was about $1800 in 2015 and it is safe to double (maybe even triple) that for ICU
  • Additional fees for the emergency room, independent doctors (emergency, primary, cardiologist and radiologist), supplies and inpatient medications

In order to break even on Repatha, those "extra" costs would have to be less than $4000.  According to the Agency for Healthcare Research and Quality, the average length of hospitalization and related costs for heart attack patients is 5.3 days at $21,500 per stay.  Keep in mind that is only for the basic heart attack hospital stay.  Time on a ventilator or bypass surgery will raise those numbers through the roof.  When my mother had bypass surgery in 1996, the itemized bill sent to the insurance company was over $180,000.  In comparison to a six-figure bill, the cost for Repatha seems like a bargain. 

 "Reducing the mean age of drugs used to treat a given condition from 15 years to 5.5 years will increase prescription drug spending per medical condition by $18 for the entire population, but will lower other medical spending by $129."

                                                                                                - National Bureau of Economic Research

While I cannot defend or condone some of the pricing practices that I have seen, the story is not as simple as some would like to believe.  Although drug costs are highly visible in the health care cost equation, that doesn't mean they are the final word.  The industry needs to focus on cost reduction and the benefits that new therapies deliver.

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Topics: Pharma Pricing, Pharma and Politics