Pharmaceutical Pricing: Competition and Market Demands

When the topic of affordability of healthcare comes up, people usually mean the price of healthcare, but there is a difference, said Tomas Philipson, PhD, of the University of Chicago, at the ISPOR Annual Meeting.

Another common misconception is the claim that the cost of research and development of drugs is driving the high prices. In reality, he explained, the cost of a drug is simply determined by demand and the question of how much can a company can raise prices before customers go away. So if a drug had massive side effects, it wouldn’t matter how much money a company had sunk into the treatment’s R&D because no one would be interested in paying that much for a drug with so many side effects.

“The problem with that is you can’t assess drugs in isolation,” Philipson said. “You have to think of a development portfolio."

However, Dan Ollendorf, PhD, of the Institute for Clinical and Economic Review, argued that the issue is not just high prices. The issue is that prices are continuing to increase after a product launches.

“There are certainly drugs that have revolutionized the care of certain conditions,” he said. “But we still have got to figure out how to fund them.”

He added though that the magnitude of net health benefit cannot be overlooked. For instance, if someone developed a cure for Alzheimer’s disease, then “all bets are off.” So what can be done? While there are bills in state legislatures trying to force pharmaceutical companies into being more transparent, Ollendorf believes that to be a fool’s errand. But there are other possible solutions, such as alternative financing, risk-sharing agreements, prioritized access to treatments, disinvestment, and price negotiations.

During the discussion period, it was clear that Ollendorf and Philipson were in disagreement about the level of competition in the market.

“I would argue that if we were in a truly competitors market I wouldn’t have a job,” Ollendorf said. “We wouldn’t have the situation where 2 similar products come on to the market within weeks of each other at the same price.”

However, Philipson pointed out that there is nothing forcing insurance companies to pay the prices set by companies. Perhaps, among public payers there is a role for a third party to advice on what prices should be paid, but in the private market competition and demand should prevail.

“There’s a big mismatch between value frameworks and patient behaviors,” Philipson said. “Patients are willing to go bankrupt for these therapies. How many products are you willing to go bankrupt for?”

The fact that patients are willing to pay the prices and go bankrupt is their way of saying that the treatment is valuable. Philipson said this shows that we haven’t figured out how to measure value properly.

Ollendorf countered by saying that houses and cars are expensive, but people have the option to not by them.

“If you have cancer and are dying, you will pay whatever you can to survive,” he said.