Last week I wrote about pharmacoeconomics and drug prices. Pharmacoeconomics, which attempts to quantify the value of drug benefits in economic terms, certainly can be an important tool in our national discussion about health care costs generally and pharmaceutical prices in particular. However, while pharmacoeconomics can sometimes serve to make the high price of a drug seem more reasonable by showing that it produces an overall savings in health care costs, it doesn't explain why competition in the pharmaceutical marketplace does not result in substantially lower prices. After all, if two or more drugs for the same indication provide the same pharmacoeconomic benefit, it would be logical to expect that buyers would choose the least expensive, the other pharmaceutical companies would respond by lowering their prices, and this process would continue until a price equilibrium was reached below which the producers of the drug would be unable to earn a profit or reasonable return on their investment. But that does not happen. Prices do not drop substantially on a name brand drug until a generic of that drug is introduced. Even then, the prices of its competitor drugs are not significantly reduced, although their market share may drop as adoption of the generic increases. How can this be?
Before discussing price competition, I should explain those hedge words "substantially" and "significantly" as they apply to price competition among brand-name drugs. When there are multiple drugs in the same therapeutic category there is certainly some price competition, although it is hard to measure. The price competition that does take place primarily takes the form of discounts from pharmacies and rebates from drug companies negotiated by pharmaceutical benefit managers (PBMs) acting as intermediaries for the insurance companies.1 However, while discounts and rebates do result in some price competition, that level of competition is marginal relative to the overall prices of drugs and truly astonishingly small when compared to the price of generics that may be in the same therapeutic category. The entry of a second competitor into a new class of drugs does not generally result in significantly lower prices, nor does the entry of a third, fourth, or even seventh competitor, as has been the case for numerous classes of drugs, including the statins, the SSRI antidepressants, proton pump inhibitors, and others.
There are basically two different and not mutually exclusive explanations for the relative price inelasticity of brand-name pharmaceuticals. The first explanation is one that applies not only to pharmaceuticals, but to the health care system as a whole: the relationship between the consumer/patient and the seller/provider is indirect, with insurers directly bearing the costs. The result of this triangulation is that the consumer is substantially insulated from the prices of goods and services and, to a substantial degree, ignorant of the actual prices of the goods and services they consume. (Of course this is a major factor in spiraling health insurance premiums.2 To compound the effect of the interposition of the insurers between consumers and sellers, a very large percentage of consumers are suffering from conditions that leave them with little choice as to whether or not to buy some drug or treatment and relatively little knowledge of the comparative costs and benefits of their drug or treatment options. For example, JAMA Internal Medicine published an article on the difficulty of obtaining price information from hospitals on hip replacements, a common surgical procedure, and the absurd range of actual prices for the procedure.3 However, the solution for that is relatively obvious: require prices to be readily available. But for drugs the availability of price information is not the problem. It isn't nearly as difficult to learn the price of a drug and the only dramatic differences in price are between brand-name drugs and generics. This leads to the second explanation for the low level of price competition between brand-name drugs.
The principal reason that pharmaceutical companies do not compete primarily on price is because of the absence of good information about the real effectiveness measures (such as survival, or cardiovascular morbidity, or overall mortality, or increase in ability to perform the activities of daily life). Good data is generally lacking and in the absence of that information pharmaceutical companies can pick a feature of a drug and tout it in the marketplace. The absence of reliable information about the relative costs and benefits of various treatment options is the reason that a major part of the battle over the Affordable Care Act was about funding research into comparative effectiveness of both procedures and products, as well as the use of of comparative effectiveness data. Comparative effectiveness research will certainly have a salutary impact on the pharmaceutical marketplace, but it will only do so slowly and over time, as more data is generated. Without high quality information about overall effectiveness, brand-name drugs will continue marketing by focusing on product differentiation. In the statin marketplace, drug makers directed their marketing efforts on a variety of features, including relative effect on total serum lipids, or on raising HDL, or lowering LDL, or lower incidence of skeletal muscle effects, or liver damage, or other adverse effects. As I discussed in my post on Drug Prices and the Pharmaceutical Market (April 12th), Astra Zeneca spent a very large amount of money in an unsuccessful effort to demonstrate that its drug, Crestor, was superior to Pfizer's Lipitor, in the degree to which Crestor produced a reduction in atherosclerosis measured by intravascular ultrasound. Although head-to-head studies are risky and rarely performed by major drug companies, in most classes of drugs competing brand-name drug companies can find some effect or feature to emphasize in their marketing efforts.
All the attention paid to Gilead's pricing of Solvadi and its record-breaking launch4 will now turn to the competition with Abbvie's soon-to-be launched all-oral Hep C drug.5 Will the competition be focused on price? Not likely. Will Gilead or AbbVie do head-to-head studies to demonstrate the superiority of their product? Not likely. Instead the focus will be on whatever features the competing drug makers can hype. The labeled directions for the use of Solvadi's for treating the most common type of Hepatitis C in the U.S. (HCV type 1) recommends its use with pegylated interferon alpha, while Abbvie's drug is "interferon free." There are also differences between the drugs in various other genotypes of HCV, different disease states (cirrhosis or non-cirrhosis, for example), and different patient genotypes. Let the games begin.
1 R. Guha, A. Lacy, and S. Woodhouse, Analyzing Competition in the Pharmaceutical Industry, ABA Section on Antitrust Law Economics Committee Newsletter, v.8(1):6 (Spring 2008) online at http://www.cornerstone.com/getattachment/5f41372f-11ac-4f45-9f27-45b1dad16444/Analyzing-Competition-in-the-Pharmaceutical-Indust.aspx (visited April 25, 2014).
2In terms of pharmaceutical benefits, insurers create formulary tiers with different copays to try to create some price sensitivity in their insureds.
3 J. Rosenthal, X. Lu, P. Cram. Availability of Consumer Prices From US Hospitals for a Common Surgical Procedure, 1173(6) JAMAInternMed 427 (March 25, 2013)
4 See Gilead's Solvadi® Hep C Cure Sold $2.27 Billion In First Full Quarter On Market -- In U.S. Wow! available on line at http://ewallstreeter.com/gilead-s-solvadi-hep-c-cure-sold-billion-in-first-full-quarter-on-market-in-us-wow-7893/.
5 Damian Garde, AbbVie heads to the FDA with its Hep C combo in a race with Gilead, Merck, Fierce Pharma, April 22, 2014, available at http://www.fiercebiotech.com/story/abbvie-heads-fda-its-hep-c-combo-race-gilead-merck/2014-04-22.