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Ryan Haake

Examining the Cost of Drugs

By | Drug Costs, Healthcare Access, Healthcare Costs, Rising Cost | No Comments

drugprices

In a previous blog post, I discussed the complicated nature of drug pricing and the public relations issues that the biotech and pharma industries face. Issues include high-priced drugs and accusations of price gouging as well as unusually or unnecessarily high profits stemming from supposed greed within the biotech and pharma industries. In this blog, I want to provide a few examples of profits, how these profit margins compare to other industries, and the ethics of profiting from potentially life-saving and necessary therapies.

As I pointed out previously, drug pricing is unusually complex. While it is true that manufacturer pricing tends to be a black box, that is, pharma companies closely guard how they price their products, this price is rarely passed on, in full, to the patient. Instead, insurers cover what co-pays do not which is typically a fraction of the whole cost. The involvement of insurance companies as well as government entities (Medicare and Medicaid) are also undoubtedly taken into consideration for drug pricing. Other complicating factors such as intellectual property, foreign market pricing, and drug development costs must be factored in to how drugs are priced by the manufacturer.

In large part due to this lack of transparency, consumers have griped about drug pricing and pointed to pharma profits as being too high, excessive, or, perhaps, unethical.   

An article posted by the BBC [1] in 2014 took the pharma industry to task by highlighting Pfizer’s 2013 profit margin of 42% as evidence of their greed and profiteering. However, as stated in the same article, this figure is inflated due to Pfizer’s spin-off and profit from their animal health branch, Zoetis, which netted Pfizer $10.5B that year. Neglecting this influx of cash, their profit margin came in at 24% which the author claims as “spectacular”. While higher than some industry peers, or other biotech/pharma companies, this is not atypical from profit margins of other industries according to BusinessInsider [2] listing “Software and Tech” at 26.9% and “Beverage and Tobacco” at 29.2%. In terms of industry peers, BI lists pharma and biotech’s average profit margin at 19.3% which is generally in line with most other S&P500 sectors.

In terms of sales, from 2010 to 2013, Pfizer’s sales revenue dropped from $67B all the way to $52B, a drop of over 22% [3]. Since 2013, Pfizer’s profit margin has dipped as low as 9.4% in the 4th quarter of 2014 [4]. In fact, by their financials, in addition to the cash influx from Zoetis, Pfizer cut roughly $5B from their liabilities in 2013 by reducing “Unusual Expense” which inflated their net income for the year, thus boosting their profit margin. So, while their overall revenue was declining, their net income shot up for one year, and the BBC decided to pick this anomaly as their benchmark.  

In terms of increasing profits year over year, a recent article from Forbes [5] suggested that biotech and pharma companies are facing an uphill battle to increase yearly profits. From their calculations, the top 15 biotech companies only posted a year over year profit increase of 2.4%; dramatically lower than annual profits Apple posted between 2010 and 2012 at 78.5% 66%, 44.6%, and 9.2%, respectively [6]. So, while their sales and revenues are in the billions of dollars, their revenues, over a yearly basis, are not increasing as dramatically as the public may perceive them to be.

The underlying issue here, however, is the ethicality of profiting, no matter to what extent, at the expense of patients in need. The argument boils down to if an average profit margin of 19.3% for the biotech/pharma industry is too high and ethical to do so. On one hand, cutting-edge therapeutics should be provided to patients in need at the lowest cost possible. Therapies should never be a burden to the patients that require them. After all, if the cost is too prohibitive to even get it to a patient, what is the point of developing a therapy? On the other hand, these industries are still composed of businesses that rely on profits to continue to develop innovative technologies, attract the best qualified, most intelligent talent to the their organization, and deliver on the promise to save lives and improve global health.

Of course there’s always room for criticism and room for improvement. Non-profit entities have shown promise for reducing costs associated with drug development and reducing risk for larger companies, but their effectiveness has yet to be proven as the number of non-profit companies remains low. Also, many companies such as Pfizer and Abbvie participate in prescription assistance programs that provide their drugs for free to needy patients unable to afford them.[7,8] In these cases, the drug industry has provided ways to reduce the price burden on the patient.

The Center for Healthcare Innovation remains unbiased, objective and neutral. In future posts, I will continue to look at drug pricing and focus on the issue of high-priced drugs and how this affects public perception of pharma as well as increases costs throughout the healthcare system.

References

  1. http://www.bbc.com/news/business-28212223
  2. http://www.businessinsider.com/sector-profit-margins-sp-500-2012-8
  3. http://www.marketwatch.com/investing/stock/pfe/financials
  4. https://ycharts.com/companies/PFE/profit_margin
  5. http://www.forbes.com/sites/johnlamattina/2015/03/23/big-pharma-but-not-such-big-money/
  6. http://www.wikinvest.com/stock/Apple_(AAPL)/Data/Revenue_Growth/2012
  7. http://www.pfizer.com/health/financial_assistance_programs/patient_assistance_programs
  8. https://www.pparx.org/prescription_assistance_programs/list_of_participating_programs

Complications in International Drug Pricing

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Drug pricing in the United States is a complicated issue that has recently been the focus of healthcare legislation and oft contention between pharma, providers, and patients. Major sticking points for the consumer are typically the most visible: lower comparative prices internationally, high priced drugs for high-profile indications like cancer, and the perception of large yearly pharma and biotech revenues. One such example is the coverage of drugs for orphan diseases that have skyrocketed, in some cases reaching over $250K for a single treatment.  While these may be off-putting at first glance, there are many social and economic factors that play into the cost of, what may seem to be, unnecessarily high drug pricing. Here, I seek to identify several of the contributing factors to drug pricing and address concerns relating to lower comparative prices overseas.

A major reason for the costing complexities is the overwhelming fact that the drug industry in the United States is simply complicated. In terms of competitive market economics, the consumer and producer of an entity will traditionally set the supply and demand curves. However, in the drug market, payers and government regulation are thrown into the mix and will act to modulate and complicate market pricing. There are other such considerations that affect pricing, such as the amount of money that pharma companies pour into research and development, money spent on clinical trials and the approval process, and costs associated with infrastructure.

That said, many Americans point to international drug prices being cheaper – most notably in Canada and Mexico – as a reason for high relative healthcare spending. Current estimates suggest that roughly 1 to 10 million Americans have purchased drugs from Canada alone. Access to Canadian pharmacies via the internet has likely increased and helped to keep them relevant in the American healthcare dialogue. Further, in the years since 2004, Americans have also turned to purchasing relatively cheap prescription drugs from other countries such as Thailand and India, despite increased risks of these drugs being counterfeit.  It is interesting to note that while Canadians do generally have cheaper brand name drugs, the prices of their generic medications typically run higher than other countries.

A major reason why drugs are cheaper internationally is due to government intervention either setting price caps or negotiating prices with manufacturers. Typically the government only intervenes when they sense that competition within a market does not exist, or they suspect price gouging by participants in the market. Further, government participation within a market, especially as complex as the Pharma industry, would only serve to complicate issues further, as was seen in the Netherlands when generic manufacturers were actually incentivized to increase prices to meet the reimbursement limit rather than letting the competitive market dictate prices. To this extent, Canadian prices are artificially cheaper due to a compulsory licensing period when generics were actually encouraged, contributing to their relatively higher price today.

A very public manifestation of the rising cost of pharmaceuticals in the U.S. is the lower relative cost in other countries. While this is generally true, there are many factors that play into an already very complicated industry, complicated pricing system, and complicated approval processes. Another major factor is government intervention setting price caps or negotiating prices. The discussion of drug pricing is far too extensive for a short blog post, however, I wanted to point out the fact that simple benchmarks between American and foreign drug prices cannot necessarily be drawn. In such a complicated global industry, it is necessary to identify all of the things that go into drug pricing. In future posts, I will continue to look at drug pricing in the United States and identify, among other things, high orphan drug costs and seemingly ever-increasing drug company revenues. For further CHI Research on costing issues, see: http://www.chisite.org/research/costIssuesofNewInterventionsonHepatitisC

References

  1. Bhosle, M., & Balkrishnan, R. “Drug Reimportation Practices in the United States.” Ther Clin Risk Manag. 2007 Mar; 3(1): 41–46. http://www.cmaj.ca/content/170/6/945.full?etoc
  2. Schoonveld, Ed. The Price of Global Health. Burlington: Gower Publishing Company, 2015. Accessed: books.google.com

Unintended Consequences of Healthcare & Life Science Legislation

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Often, legislative efforts by Congress have far-reaching consequences surpassing the intentions of the legislators that have drafted, re-worked, and sponsored these bills. This is especially the case when legislation is drafted to address nationwide issues such as health care. Federal legislation, such as the 2010 Affordable Care Act (ACA), often features hundreds of moving parts, new regulations, and changes in past laws. Whether it be new taxes, insurance regulations, or health standards, implementation of these new laws and regulations may lead to off-target effects that can affect people as well as structure of the health system itself. An example that garnered much national attention was the effect of new policies on business structure leading to cuts in the labor force at several prominent national companies including Abbott Labs, Welch Allyn, and Stryker. With such sweeping changes from the ACA affecting several different industries, it is unsurprising that, like many other pieces of legislation, there are several prominent unintended consequences, both positive and negative, that have obscured the true purpose and intent of the bill.
The ACA mandated several dramatic changes of the American health system, including a re-tooling of the insurance system and a pre-eminent focus on individual health. On top of these major initiatives, the legislators that drafted the ACA desired to reduce and consolidate costs for patients and providers and attempt to make the process more efficient. While still relatively early, there have been many financial ramifications that will continue to affect the economy into the foreseeable future. One such example is the impact of the ACA on the healthcare workforce and the educational pipeline that feeds this sector. By mandating that all citizens be covered by health insurance, up to 30 million Americans are thrown into eligibility, creating headaches for those agencies assigned to register them, as well as healthcare workers that will be potentially plagued by an influx of patients. Many advocates have argued that the surge of insured will equate to a surge in patient visits. While only time will tell, it’s a difficult assertion to make that somehow insurance eligibility is correlated with a rise in doctor visits. Nevertheless, it is still widely accepted that the healthcare infrastructure is increasingly being taxed by an aging American population as healthcare providers are encouraged to ration their time from patient to patient.
Another example of financial unintended consequences of the ACA are the benefits of the Medical Loss Ratio (MLR) regulations. MLRs were designed to set a limit on the amount of premium that revenue insurers could use for issues relating to healthcare or quality improvement – insurers would then have to issue rebates to consumers when a set limit was not met by the insurance companies. On one hand, America’s Health Insurance Plans (AHIP) has argued that setting these limits has the unintended consequence of inhibiting innovation internally by limiting the flow of cash towards improving healthcare and insurance issues. Despite this argument, the Kaiser Family Foundation has shown that the MLR regulation has been quite beneficial to consumers – and not necessarily in regard to an increase in rebates. To bypass the MLR regulation and limit the amount of revenue that is applicable to this regulation, insurance companies reduced premiums, resulting in savings of $2.1 billion for consumers in 2012 alone.
With such a high profile, far-reaching piece of legislation, it should be unsurprising that there are dozens of positive and negative unintended consequences that affect consumers, insurance companies, and healthcare providers alike. Many of the repercussions will continue to come to light in the next decade, but it’s possible with each intended regulation there will be unintended effects.  The Center for Healthcare Innovation will explore these unintended consequences at our 2nd annual Unintended Consequences of Healthcare & Life Science Legislation Symposium on October 15th in Washington, D.C.  Please visit chisite.org/events/Legislation to register or for more information.

Soaring Clinical Trials Costs and Effects on Drug Prices

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The cost to bring a new drug to market has skyrocketed over the past several decades and, in large part, is due to the rising cost of clinical trials. In 2013, Forbes magazine estimated it would cost a company over $350 million for one drug to reach patients. Taking into consideration an estimate that 95% of drugs in a company’s portfolio fail, Forbes calculated that large pharmaceutical companies can spend between $1.2 and $5 billion to get a single drug to enter the market. [1,2] Other sources have estimated drastically different costs ranging from $100 million to $800 million not taking into effect capital depreciation costs. [3] Regardless of discrepancies in total cost estimates, these costs have risen dramatically in the past 20 years; in general, rising by 7.4% over inflation each year and costs of clinical trials are largely responsible [4]. These rising costs burden several facets of the healthcare system: drug prices increase costs paid by patients and insurance providers, innovation and scientific progress is hampered by creating a cost-prohibitive environment for drugs to even enter Phase I clinical trials, and pharmaceutical companies face increasingly high hurdles to profits. Despite addressing rising drug development costs being of critical importance to reduce overall healthcare costs, the Affordable Care Act (ACA) and other legislative efforts have focused on general costs of drugs, but less on the inefficiencies within the clinical trial system.

The costs accumulated from clinical trials vary by disease indication, but generally weigh in around a few hundred million dollars per drug. Phase III trials alone account for roughly 40% of the entire amount spent to bring a drug to market. This is, in part, due to inefficiencies within the clinical trials system including long trial length, an increasing number of procedures within a given trial, and continually increasing work burden of trial staff. Also, between 1999 and 2005, clinical trials in general obtained fewer participants as well as saw retention rates fall [5]. These factors, along with several others, contribute to the escalating cost of drug development.

Absent from the ACA were provisions to remedy these inefficiencies or to streamline the clinical trials process. The ACA did provide drug cost reimbursement to Medicare-eligible patients as well as ensuring that clinical trial patient participants would not be dissuaded by medical costs, as all trial-based costs must now be covered by insurance. However, the ACA did little to change the infrastructure or the framework of clinical trials and any of the inefficiencies aforementioned. Furthermore, the FDA has issued limited guidance regarding clinical trials structure with the exception of Investigational New Drug (IND) applications and the ability to bring new drugs to patients more quickly and cheaply.

While there is obviously no one step or sole piece of legislation that will fix this problem, there seems to be a lack of action from legislators despite increasing coverage of the issue from both clinical researchers as well as media outlets such as Forbes. With an increase in awareness comes an influx of potential remedies – one of which includes the expansion of conditional approvals that would allow the most at-risk patients to purchase investigational drugs while continuing examination of the drug in Phase III trials. Thus, money would be raised to fund the clinical trials, reducing costs and returning money back to the company, theoretically reducing drug prices. Other solutions target general infrastructure of the trials to make them more streamlined and more efficient at tracking patients and progress [6]. Despite many solutions being offered, the FDA and government as a whole have done little to manage the rising costs of clinical trials as they continue to balloon to higher and higher levels.

 

References:

1. Feyman, Yevgeniy. “Shocking Secrets of FDA Clinical Trials Revealed.” Forbes. 1/24/14. Accessed 7/29/14. <http://www.forbes.com/sites/theapothecary/2014/01/24/shocking-secrets-of-fda-clinical-trials-revealed/>

2. Herper, Matthew. “The cost of creating a new drug now $5 billion, pushing big pharma to change.” Forbes. 8/11/2013. Accessed 7/29/14.<http://www.forbes.com/sites/matthewherper/2013/08/11/how-the-staggering-cost-of-inventing-new-drugs-is-shaping-the-future-of-medicine/>

3. Morgan, Steve, et al. “The cost of drug development: a systematic review.” Health Policy 100.1 (2011): 4-17.

4. Johnston, S. Claiborne, and Stephen L. Hauser. “Clinical trials: rising costs limit innovation.” Annals of neurology 62.6 (2007): A6-A7.

5. Roy, Avik, S. A. “Stifling new cures: The true cost of lengthy drug trials.” Manhattan Institute for Policy Research. 4/5/2012. Accessed 7/28/14. <http://www.manhattan-institute.org/html/fda_05.htm>

6. Eisenstein, Eric L., et al. “Sensible approaches for reducing clinical trial costs.” Clinical Trials 5.1 (2008): 75-84.