What the Market Will Bear: Pricing Pressures and Pharmaceutical Value

Until recently, the high prices of drugs seemed to be something like the weather—something people complained a lot about, but about which nothing could be done. That may be changing.  I think the push-back on drug pricing is reaching new levels and both the pharmaceutical industry and its chief lobbying group, PhRMA, are showing concern and taking action.  Examples of the pushback on pricing can be seen in this CBS 60 Minutes clip and in this article on Gilead’s pricing of its newer-than-Sovaldi combination Hep C drug Harvoni.  The level to which this rising criticism of drug prices is causing PhRMA to be seriously concerned can be seen in its post-60 Minutes statement and in this video  and accompanying text about treatments for cancer and in this shot across the bow of critics of drug prices.  PhRMA is even suing the U.S. Department of Health and Human Services over a rule that requires Orphan Drugs that also have non-Orphan Drug uses that are priced at a discount, to be sold the discount price even when a hospital uses the drug for the Orphan use. I will address this PhRMA Orphan Drug suit in a future post.  The pharmaceutical industry lobbying group is clearly pulling out all the stops to make the case that pharmaceutical R&D is a very costly enterprise and that expensive drugs are well worth their high prices because of the health benefits they provide.

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One of the most basic points I make to students in my FDA and Biotechnology Law Seminars is that pharmaceutical companies set prices for their drugs at what the sellers judge is the maximum price the market can bear.  That how almost all goods and services are priced in Western free-market economies.  The biggest difference between the pharmaceutical marketplace and most other markets is the difficulty, or even impossibility, for consumers to assess accurately the value of the goods they are purchasing.  People can test drive cars, or look at big screen televisions, or try out a computer or a pair of running shoes and get a reasonable idea of the degree to which the goods satisfy their preferences.  And there are certainly cases in which much of the value of a good is created by marketing.  For example, a Rolex really does not perform better than a Seiko (that costs one-tenth the price) in any watch function other than the “impressing other people” function that Rolex and other luxury goods companies can use to generate high prices.  But the marketplace for drugs is different because the information about a drug’s value is enormously expensive to generate and comparative information about drugs in the same class is often non-existent.   The information that informs doctors and patients about drugs is generated in clinical trials, which are enormously costly, but required for FDA approval; and, the information about the comparative value of two drugs is both costly (clinical trials again) and even more complicated (see my post on Comparative Effectiveness ).  The cost and complexity of information about drug “value” produces a marketplace in which marketing can drive drug usage and competition between drugs is rarely based on hard data (see my posts on Pharmaceutical Pricing and Competition in the Pharmaceutical Marketplace).

So where are we headed in terms of drug development and pricing in this environment of increasing criticism of drug company prices?  Perhaps a clue to the future can be glimpsed in this recent decision by British National Health Service’s NICE (National Institute for Health and Care Excellence) to provisionally recommend coverage for Sovaldi for some Hep C patients in Britain:

In further draft guidance NICE has recommended sofosbuvir (Sovaldi, Gilead Sciences) as a treatment option for some people with chronic hepatitis C. The positive recommendation follows receipt of additional information about the drug’s cost effectiveness from the manufacturer.

[emphasis added].

Sovaldi has been the focus of some of the most heated criticism of drug pricing, and the introduction of Harvoni has only added fuel to the fire.  But as the NICE provisional decision shows, what the market will bear is in fact a function of cost-effectiveness and pharmacoeconomics.  Where we are headed is most likely an era in which insurers will be demanding more and better evidence that a drug’s price reflects its value, but that is not necessarily a bad thing.  It may even focus pharmaceutical R&D on those areas where there is the most to be gained in terms of health.  Salut!