America’s Broken Health Care System: The Role of Drug, Device Manufacturers

Health care costs are dramatically higher in the U.S. than in the rest of the world. Yet our health care outcomes – from life expectancy to infant mortality – are average at best. Few dispute these facts.

The real debate starts when we ask why. While there isn’t one single answer, the rapidly rising cost of drugs and medical devices is a significant factor.

And the magnitude of this problem is likely to spike in the future if not properly addressed.

Americans pay significantly more for prescription drugs and medical devices than patients in the rest of the world.

The justifications for these extraordinarily high prices vary, but the industry is well aware that most patients have no choice but to pay whatever they charge. (If you want to change this, join the #IWantDirectCare movement)

Pharmaceutical pricing has long been a point of contention among manufacturers, patients and payers of health care (including insurers, employers and unions).

The U.S. drug patent system allows a drug discoverer to exclusively sell the new drug for an extended time period. Theoretically, this protection is designed to encourage new medical discoveries and enable a drug or device company to recoup its R&D investment.

Because the theory makes sense, drug manufacturers use it to defend their prices. Certainly, those higher prices could be justified for developing clinically superior products but, all too often, the added cost far exceeds the incremental benefit.

How does drug pricing work? It’s hard to say. Pharmaceutical pricing is opaque. Drug manufacturers aren’t asked to quantify their costs or compare them to projected sales and profits. Business school students learn that the price of a product isn’t determined by what’s reasonable but what the market will bear. A wide array of drug pricing examples would indicate that pharmaceutical and medical device companies hire a lot of business school graduates.

Take sofosbuvir, a new drug used to treat Hepatitis C. It’s marketed as Sovaldi by Gilead Sciences.

As a more effective treatment of Hepatitis C than those available today, this drug will be a positive addition to the physician’s armamentarium. Its effectiveness at ridding the body of this virus justifies a higher price than the treatments available today.

But at $1000 a pill, its pricing is exorbitant, monopolistic, and disrespectful to the purchasers and patients who will bear the brunt of the massive cost.

It is estimated that total treatment costs will range from $84,000 to $200,000 per patient, depending on treatment length. That’s 10 to 20 times the cost of today’s approach. Is this a reasonable return for the company?

Drugs this expensive are typically produced for those with rare conditions. These “orphan drugs” should cost more per patient because of the limited treatment population. But Hepatitis C is a very common disease. It affects nearly 4 million Americans, according to the American Liver Foundation. So, this can’t be the reason.

High development costs are another oft-cited explanation for extremely high drug pricing. Typically, manufacturers don’t disclose exact R&D costs but Gilead is reported to have paid $11 billion for Pharmasset, the drug company that developed the medication that led to Sovaldi. From this purchase price, we can estimate the R&D costs of this drug.

At Sovaldi’s price-point, Gilead is estimated to recoup its total investment in less than 18 months with revenue estimates of $269 billion over the drug’s lifespan.

That is a friggin’ 2,500 percent return on investment!

Even when a new product is essentially the same as an old one, manufacturers use their patent protections and market control to drive up revenues. A great example is an injectable drug for a medical problem called “wet macular degeneration.”

Manufactured by Genentech, Avastin is an FDA-approved drug for cancer treatment. It slows the growth of new blood vessels that feed a tumor.

A while back, a thoughtful group of ophthalmologists recognized that if this drug could limit blood-vessel proliferation to stop tumor growth, it might also be useful in slowing the overgrowth of blood vessels inside the back of the eye – the cause of wet macular degeneration.

These physicians tried injecting a very small dose of Avastin at about $60 per treatment with excellent clinical results.

But here’s where it gets interesting. Genentech recognized the same opportunity at about the same time. And instead of recommending Avastin as an effective treatment, Genentech created Lucentis, a new drug with a biologically active component identical to Avastin.

Once Genentech received FDA approval, it priced Lucentis at $2,300 a dose, never showing that it was superior to Avastin at $60 a treatment.

Ophthalmologists across the country were outraged. Adding insult to injury, Genentech tried to embargo sales of Avastin for non-oncology practices. Not surprisingly, when the National Eye Institute tested Lucentis against Avastin, it found essentially no difference for a drug priced 40 times higher.

There are legitimate reasons why some drugs and devices are very expensive. But it’s common for manufacturers to hike up prices even when the magnitude of improvement is minimal.

If we’re serious as a nation about making health care more affordable while increasing quality outcomes, we’ll need to rein in these practices. We’ll also need to get insurance away from things we expect. That starts with Direct Primary Care, where, due to our proclivity for preventing disease, we make use of existing drugs (these drugs fight problems we already know exist, right?). Yes, we want a market that incentivizes pharma commpanies to invent new drugs to fight new conditions. But do we need big pharma making so much money that THEY control healthcare?

No way! They’re not the organization that’s forging actual relations with actual patients.

Start by demanding that drug companies disclose the true cost of development as part of the FDA approval process. Regulatory agencies, use this information to evaluate price appropriateness.

The FDA could also require all new agents and devices to be tested against existing approaches so that pricing and incremental value can be measured. Make this information accessible and transparent to patients, that way they can make the best decisions for themselves.

However, there may be a flicker of hope. Recent public disclosures of new Hepatitis C medication prices has sparked a national debate. Congressional leaders are questioning drug manufacturers’ pricing stratagem. Will greed have finally exceeded reason? Patients and employers need to demand regulatory backlash.

Americans should understand that these exorbitant health care costs are not free. They come out of their paychecks and reduce the amount of public services the government can provide.

We know our health care system is broken and that the FREE market can improve patient outcomes and doctor incomes. However, given the drug pipeline aimed at maximizing prices and profits — and big pharma’s ability to hide the real costs associated with their products — consumers lose their power to influence the market the other direction. If consumers can’t fight to minimize expenditures while maximizing benefits, the problems will get worse before it gets better.

And even if Direct Care can’t fix the price woes brought about by big pharma, we can cut the red tape, and keep primary care costs down.

Do you have Twitter? Tell your followers that you want direct care. Every person who demands it will motivate another doctor to join the movement.