Expensive medicines… Confrontation or solutions?

By Prof Dr Leo Neels, Chairman of the Advisory Board of the Vlerick Healthcare Management Centre, former CEO of pharma.be and author of “België Fantastisch Farmaland” (2013)

Innovative medicines are not cheap, and their price often becomes a bone of contention. What is more, this price is highly visible, which is not the case for other health insurance costs. The debate on correct drug pricing has always been there and always will be. This is because the parameters that determine pricing, such as value, cost and arguments for and against, are unstable.

The greater the medical need, the more elastic the prices or the “willingness to pay”. This adds a subjective element and also – since it is a matter of life and death – an ethical dimension. In 2010, EU authorities announced that they would pay for valuable drugs; ‘valuable’ meant those medicines that fulfilled an “unmet medical need”. Now there are more and more of them: lifesaving drugs for rare, ‘orphan’ diseases, even cures for previously incurable conditions such as hepatitis C or certain forms of cancer. Yet the debate is ongoing and livelier than ever.

The value of a drug is difficult to determine.

A medicine such as a vaccine can prevent you from getting a disease. The value of this is enormous. We live in a world of mass vaccination, resulting from an efficient health policy, which has made us take this value for granted. But do not underestimate the great value of vaccines: they have a high value and a low price.

Many major drugs of recent years have stabilised patients, increased their quality of life and extended their life expectancy with the disease. A disease that often used to be fatal has become chronic. Think of asthma, heart conditions, diabetes etc. This is a question of large numbers of patients and high-value drugs that now have a low price.

There are also many drugs that cure. These are often for conditions that are  well known and not all that dangerous, which nevertheless require treatment. For many of these conditions, which are often highly prevalent, there are cures. The value is high, and by now the price is also low.

Today great medical progress is being made for small groups of patients. This is a matter of treating rare diseases and developing personalised medicine. The value of these drugs is high, since they save lives and cure diseases...and the price is also high. This is because the number of patients is low. Volume and turnover may sometimes grow, but only with new indications that demand new evidence and therefore new research. Research is an investment that is earned back by the price of a drug that becomes successful later; otherwise, the lost cost must be recouped against income from drugs that already have market authorisation.

The price (E. PORTER, The Price of Everything 2011) of a drug is also difficult to determine. The most usual instrument, the market, is out of the picture: the government sets the price, which is linked to reimbursement. However criticism of the price of medicines is usually directed at the pharmaceutical sector.

A new drug proves its efficacy and safety for the EMA according to the gold standard of clinical trials, but that is not enough today. Real medical practice is different, people consider patient related outcomes, there is no longer a consensus as to the end points of safety or efficacy,  neither do people agree on health-economic end points, while only short-term data are available when the price decision needs to be taken. So we look for criteria such as cost-effectiveness, QALYs and ICERs. But these parameters are also instable, and consensus is lacking as well. Once again, this makes the value of the drug problematic. And this disagreement is always fought out by national authorities when it comes to decisions about reimbursement of drugs; it helps to fuel criticism of the pharmaceutical sector.

The pharmaceutical sector has a classic set of arguments, namely the research and development costs, aggregated in a “black box”. These costs are highly variable and unpredictable over the course of development, and afterwards it is difficult to  make these transparent in a competitive environment. This generates suspicion. The company suggests a price and selects more generous countries or countries without price testing; this is how the first prices are set. They are prices determined by  authorities. These prices then become references, often from a selective list of companies, but there is nothing else available. The inequality of information then works against national authorities. What about average prices? You will not get far with those. The traditional calculation method is the one by Tufts. According to Tufts, the average investment in the development of one drug is now approximately $2,558 million, of which a capital cost of $1,163 million; the latter is the loss of profit on the invested amount during the development period. There is a lot of controversy surrounding this. Averages also seem to be a poor way of establishing the price of something that positions itself as extra-ordinary, and averages also  factor in the cost of  inefficient research processes. The “average” cost of $1,800 million, calculated by Lilly in 2010, was criticised for this reason as being unfeasible for a normal pharmaceutical innovation process, and back in 2010, Nature called increased efficiency the greatest challenge to the research process.

Authorities are also under pressure from doctors and patients who have heard about the promising new drug and want access to it, which creates time pressure. The greater the medical need, as yet unfulfilled, the higher the social pressure for reimbursement of  the drug. So experience is gained in temporary solutions such as provisional prices, contracts with more flexible terms, only paying for responders, recurrent re-evaluation, re-evaluation when a new product arrives in the same therapeutic class, pressure on the permitted price and patient selection, which involves the exclusion of patients who would benefit from treatment.

These are stopgap solutions, given a lack of real insight into the elements that constitute price. The American doctrine of free price setting by companies  renders the pricing debate opaque, whereas medicines in the EU are highly subsidised with public funds. This tension can lead to a showdown between the local refunding authority and the pharmaceutical sector… which is often a negative factor in terms of both investments and good governance, because stability is lacking.

Governments then come up with budget impact, the macro-economic effect. The budget for drugs is only 10% of healthcare spending, and  used to be rising more quickly than other costs, whilst it is now rising more slowly. Price measures are easy to implement, seem to have no adverse consequences and their effect can be calculated with crystal clarity. Saving measures in other areas of healthcare spending do not have these characteristics.

Pharmaceutical companies also come up with macro-economic arguments: the enormous research risks, strict requirements, long duration, need to recover investments and their role in the knowledge economy. There is widespread understanding of these arguments, although they are less convincing.

The impression remains that not all arguments are equally well-based in facts. There are examples of rapid development (although only occasional ones) with far lower amounts of money, just as there are long, expensive development processes. And it is true that everyone understands that pharmaceutical companies are private companies that are responsible for their own continuity, meaning that they have to make a profit, and that they can make a significant contribution to providing jobs in a country and to the knowledge economy.

Several new elements, that are not directly related to price, have  greatly influenced the debate more recently, i.e. elements related to profit and attitude. Transparency, accountability and responsibility are the new societal standards.

This puts a burden on governments, which need to be more transparent than before when it comes to how they deal with national debt, the reduction of the cost of government and management of spending when the growth in GNP is estimated at between 0 and 0.5%.  Thus governments can no longer allow higher increases in their spending, or at least not unless justified by extraordinary circumstances. They also need to maintain transparency as to how they correct the supposed 15% inefficiency cost included in that spending (Lieven ANNEMANS, De prijs van uw gezondheid, 2014). The credibility of present governments rests on these elements, which we might sum up as the ‘new good governance.’

Pharmaceutical companies also need to get used to the values of this new era, in which  public funds is scarce and must be spent appropriately. The pharmaceutical companies are not grudged a reasonable return on their risky investments, but the 78-91% gross profit margin that the leading pharmaceutical companies reported in Q3 2014 are seen as excessive and not justified with respect to solidarity-based insurance schemes using public funding, nor as an acceptable consequence of success in matters of life and death.

In the meantime, ‘big pharma’ companies have been reporting net profit margins (2013) of between 43% and 19%, that are also experienced as unusual and inappropriate. The fact that some pharmaceutical companies get big figures like this from one or only a few drugs  increases opposition, even in the case of lifesaving drugs or absolute breakthroughs in previously unmet medical needs.

Of course there has been a reaction to this, from oncologists, patients’ associations or even from ASCO, with its new value framework for cancer and the KCE (Belgian Healthcare Knowledge Centre).  The debate is fierce.

‘Big pharma’ pays for its lack of credibility in a currency called ‘trust & reputation’.  Its tax-dodging and/or -evasion, corruption scandals and CEO pay packets have only added to this.

There is an enormous opportunity here for pharmaceutical companies, incumbents and biopharma start-ups. They are universally praised for their genius in developing medicines and are not grudged a profitable, healthy business environment. That is a good basis for increasing stakeholder value as well as shareholder value (R. BARKER, 2030 The Future of Medicine, Avoiding a Medical Meltdown, 2011; H. TOCH, Happy Profit, 2014; Stephen COVEY, The Speed of Trust, 2006).

In Europe (and, gradually, in the US as well) national authorities  subsidise  drugs; in the US (and sometimes also in the EU) governments often subsidise development costs (or part of them). This has largely become a matter of course, with the result that arguments that were partly sufficient in the past no longer seem adequate.

The world is changing, and today’s world requires accountability: “Trust is not a message, it is an outcome” (R. PHILLIPS, Trust Me, PR is dead, 2015). Drug prices need to be normalised, for certain, but it is a confusing process.

In fact the pharmaceutical sector has a longer track record here than is usually assumed. For example, pharmaceutical companies often grant considerable discounts on the established “basis for payment” (the legal term for “price”), for drugs purchased by hospitals.  Undisputed breakthrough drugs  can be offered at about 50% of the US price in EU . Prices in Europe – which are set for each country individually – are adapted to local living standards and the national GNP. Pharmaceutical companies provide many millions of euros’ worth of free drugs in the context of clinical trials and what is known as ‘compassionate use’ or ‘medical need’ programmes. There are gigantic discounts, donations and campaigns in countries with a limited GNP, whether in Africa, Asia or Latin America. It is easy to misuse price differences in the debate, but they usually have a social aim and effect. There are already national contracts for “managed entry agreements,” which offer a solution in cases of therapeutic uncertainty or budgetary issues; there are also agreements relating to the limited growth in spending on drugs etc.

This is where we will find the solutions for the future. Patients, pharmaceutical companies and governments all benefit from sustainability, the maintenance of wonderful solidarity schemes in times of economic crisis and decline. The requirement for this is that all stakeholders keep their cool, discuss the issues calmly and approach the steps to be taken with lucidity. And these are no small steps, nobody should underestimate them: not for authorities and not for companies either. But they need to be taken now to create new models for the future.

The price of drugs will be a cause of debate for as long as the parameters of the debate are unstable. They are unstable and will probably remain so, but that does not matter. The solution lies in negotiation, under a few basic conditions: keeping all agendas clear, all arguments transparent and all actions consistent. This requires a collective effort from all  stakeholders, to reach agreements without resorting to a test of strength or taboos, with a well-defined, collective goal. This goal consists of giving all patients who will benefit affordable access to new innovations and ensuring solidarity-based healthcare that is sustainable and affordable, whilst ensuring a fair reward for innovation.

“The challenge is to give the principles of ‘shared value’, ‘shared interests’, ‘long-termism’ and ‘engagement’ some meaning. Business has a core role in transforming society. (…) A good metaphor for the appropriate role of business in society is citizenship. A conscious business behaves like a responsible citizen in all its communities.” (R. PHILLIPS, 116).

Related news

  1. Your money or your life: a critical note

    Date: 29/09/2016
    Category: Opinions
    In this era of healthcare budget constraints there is worldwide outrage at the high prices of medicines. And doctors are quite rightly concerned about the question of whether all their patients will continue to have access to lifesaving medicines at affordable prices. However, according to professor Walter Van Dyck the solution does not lie in scrapping the patent system, nor demanding transparency regarding the costs incurred by the biopharmaceutical industry for the new medicines that they want to bring onto the market. The only solution to this issue lies in a conditional dialogue between the community and the innovative biopharmaceutical industry.
All articles