Mariana Mazzucato - The Value of Everything - Making and Taking in the Global Economy

So, unsurprisingly, pharmaceutical companies are turning to a different line of defence. They argue that these prices are proportionate to the intrinsic ‘value’ of the drugs. ‘Price is the wrong discussion,’ declared Gilead’s Executive Vice-President Gregg Alton, responding to criticism over the price of Sovaldi: ‘value should be the subject.’ 54John LaMattina, former Vice-President of Pfizer and a leading figure in the pharmaceutical industry, was even more explicit. In a 2014 piece published in Forbes under the title ‘Politicians shouldn’t question drug costs but rather their value’, he argued that:

in the mind of patients, physicians, and payers, the pricing of drugs should have little to do with the expense of biomedical R&D, nor should it be associated with recouping R&D investment. Pricing should be based on only one thing – the value that the drug brings to healthcare in terms of:

1) saving lives;

2) mitigating pain/suffering and improving the quality of life of patients;

3) reducing overall healthcare costs.

Interestingly, LaMattina was also explicit that value-based pricing is meant to justify charging prices that are completely out of line with production costs and R&D expenses. Commenting on the world’s most expensive drug, Alexion’s Soliris, which is used to treat a rare form of anemia and also a rare kidney disorder, Mattina noted that the price (Alexion charges $440,000/year per patient) ‘is really not related to the R&D costs needed to bring this drug to the market’. Yet, he continued:

private insurers and national health agencies in Europe willingly pay for this drug. Why? Because the costs of caring for patients with these conditions can run into millions each year. Soliris, even at this high price, actually saves the healthcare system money because using it results in dramatic decreases in other healthcare system expenses generated by these patients. 55

The high price of specialty drugs – the argument goes – is justified by how beneficial they are for patients and for society in general. In practice, this means relating the price of a drug to the costs that the disease would cause to society if not treated, or if treated with the second-best therapy. So we read, in a ‘fact sheet’ prepared by the US industry trade body PhRMA to justify high prices, that ‘every additional dollar spent on medicines or adherent patients with congestive heart failure, high blood pressure, diabetes and high cholesterol generated $3 to $10 in savings on emergency room visits and in patient hospitalizations’, that ‘a 10 per cent decrease in the cancer death rate is worth roughly $4.4 trillion in economic value to current and future generations’ and that ‘research and medicines from the biopharmaceutical sector are the only chance for survival for patients and their families’. 56While these claims may be true, it is striking that they are used as an explanation (or justification) for high drug prices.

Critics have replied that there is in fact no discernible link between specialty drug prices and the medical benefits they provide. They have some evidence on their side. Case studies have shown no correlation between the price of cancer drugs and their benefits. 57One 2015 study, based on a sample of fifty-eight anti-cancer drugs approved in the US between 1995 and 2013, illustrates that their survival benefits for patients do not explain their mounting cost. Dr Peter Bach, a renowned oncologist, put online an interactive calculator with which you can establish the ‘correct’ price of a cancer drug on the basis of its valuable characteristics – increase in life expectancy, side effects and so on. The calculator shows that the value-based price of most drugs is lower than their market price. 58

Unfortunately, however, most of the pharmaceutical industry’s critics fight its arguments on the field big pharma has chosen. In other words, they implicitly accept the idea that prices should be linked to some intrinsic value of a drug, measured by the monetary value of the benefits – or avoided costs – to patients and society. This is not as odd as it might sound.

The idea of value-based pricing was initially developed by scholars and policymakers to counteract rising drug prices and to allocate public healthcare budgets more rationally. In the UK, for example, the National Institute for Health and Care Excellence (NICE) calculates the value of drugs in terms of the number of quality-adjusted life years (QALY) that each class of patients receives. One QALY is a year of perfect health; if health is less than perfect, QALYs accrue at less than one a year. Cost-effectiveness is assessed by calculating how much per QALY a drug or treatment costs. Generally, NICE considers a pharmaceutical product cost-effective if it costs less than £20,000–£30,000 per QALY provided. A price-based assessment of this sort is powerful: NICE advises the UK National Health Service (NHS) on its choice of drugs.

A cost-effectiveness analysis like the one NICE conducts makes sense for allocating a national healthcare system’s finite budget. In the US, where there is no cost-effectiveness analysis and the national insurance system is forbidden by law from bargaining with drug companies, drug prices are much higher than in the UK and are increasing more rapidly. The outcome is that, measured by a yardstick such as QALY, specialty drug prices in the US are not related to the medical benefits they provide.

Basic mainstream analysis of elasticity of demand (that is, how sensitive consumers are to changes in prices, depending on the characteristics of goods) is sufficient to explain the very high prices of specialty drugs, which makes pharma’s vague and rhetorical arguments about value all the more unconvincing. Specialty drugs like Sovaldi and Harvoni are covered by patents, so their producers are monopolists and competition does not constrain the prices they set. Normally, however, you would expect the elasticity of demand to be a constraint: the higher the price, the lower the demand for the monopolist’s product. But the elasticity of demand for specialty drugs is of course very low: peoples’ lives are at stake. They need these drugs to have some chance of surviving, and medical insurers, whether public or private, are under an obligation to pay for them.

The logical outcome of a combination of monopoly and rigid demand is sky-high prices, and this is precisely what is happening with specialty drugs. It explains why pharmaceutical companies enjoy absurdly high profit margins: in addition to the normal profit rate, they earn huge monopoly rents. 59A value-based assessment of the kind NICE carries out can be helpful because it reduces demand for the monopolists’ drugs and prevents them from charging whatever price they choose. The downside, however, is that increased elasticity of demand for drugs comes at the cost of leaving some patients without the medicines they need, because pharmaceutical companies may not cut their prices enough to treat everyone who needs the drug if doing so would reduce profit margins by more than the companies want. This is already happening in the UK, where NICE has rejected some cancer drugs for use in the NHS because of their price. It is also happening in the US, where some private and public insurers refused to provide Harvoni to insured patients until they reached a very advanced stage of the disease.

What is not being pointed out, however, is that the principle that a specialty drug’s price should equal the costs it saves society is fundamentally flawed. If we took such a principle seriously, basic therapies or vaccines should cost a fortune. For that matter, how high should the price of water be, given its indispensable value to society?

The con around drug pricing has created a constant battle between government-funded healthcare systems (where they exist), private and public insurance programmes, and the big pharmaceutical firms. Only by debunking the ideas about value underpinning these drugs can a long-lasting solution be found which results in access to genuinely affordable drugs.