Understanding the explosion of health care cost isn’t rocket science. It is actually a trivial warm-up exercise for the mind: as we eliminated, at least statistically speaking, a growing number of once significant causes of death, more people reach an age where they become more cancer-prone because their genetic coding turns less stable, their immune system deteriorates, and mutations following from many causes are less manageable. Malignant neoplasms, also known as cancers, are the result. Although they account for only about 13% of overall causes of death and likelihood of cancer deaths does not increase with longevity – on the contrary, it declines significantly from a tipping point of roughly 55 years of age – those afflicted today not only stand better chances of successful therapeutic intervention but also are less likely to die of other causes, clearing the way for longer survival rates at significantly higher cost.
As the duration of our ability to control malignant tumor cells increases with the advent of various pharmaceutical and other therapeutic approaches, there is still no cure in sight and cancer has remained a highly complex systemic disease requiring multiple complex balancing acts.
These balancing acts quite often are to be taken more literally than society would like. A small group of specialty pharmaceuticals accounts for roughly 25 percent of all drug-related spending. A cancer patient in need of a few targeted therapies can quickly run up a monthly tab in the five digits.In 2007, the overall costs of cancer — including treatment and indirect mortality expenses (such as lost productivity in the workplace) — was estimated to be $226.8 billion. Pressure is likely to increase and will demand answers to questions society has long shirked as unethical – or, more to the point, politically inconvenient to almost everyone: What price human life? Who is to decide? And how to allocate the expense?
It is safe to assume that the number of potentially remaining fairly trivial pharmaceutical discoveries is rapidly declining. On the other hand, cost of regulation of a time-consuming bureaucratic review and approval process has mushroomed. There is political pressure to lower, certainly not to increase, the available period for patent protection. After a number of years even the most expensive drug is manufactured and sold as a generic at whatever cost-plus formula the market will bear, but, despite recent increases in the price level of generic drugs, sometimes but not always at a significant fraction of the sticker price afforded during patent protection. This is an aspect separate from increasing doubts about the equivalency of generic to branded drugs.
Because pharmaceutical companies set their prices in accordance with a country’s purchasing power and, basically, price elasticity, it is possible in some cases to source the same drug in an emerging market for 10 percent or less of its American price. The concept of parallel imports, of buying abroad, may be limited by customs regulations but will not be stopped altogether, except by driving up transaction cost.
All that said, while industrialized nations spend about 10 percent of GDP on health care, only about five percent of that accounts for prescription pharmaceutical expenses. While society may have a duty to reward fair value of effective pharmaceuticals, and needs to steer clear of disincentivizing investment in research, alternative billing models will become inevitable in the reasonably near term as innovative immune therapies are about to turn certain types of cancer into the functional equivalent of a chronic disease, stretching extreme therapeutic cost from weeks or months to several years.
We do not want insurers to determine access to proven but costly life-prolonging medication, because decisions would inevitably be made by accountants. Nor do we want pharmaceutical companies to abuse temporary monopolistic power to determine the price – and thus the value – of prolonged human life. Nor can we leave it to patients to decide how much to pay for added lifespans because, so long as they don’t pay, price does not matter to them. No stakeholder in this matrix is capable of deciding the appropriate price
The British NHS’s advisory body National Institute for Health and Care Excellence (NICE) has recently fired a warning shot by declining to cover about one-third of cancer medications on account of price. Because pharmaceutical companies, with profit margins between 25 and 50 percent, cannot afford the consequences to their public image from playing hardball, alternative pricing models will need to look at creative solutions such as contingency pricing tied to a therapy’s success and to quality of life changes. They may involve package deals or discounts in combination of various models.
One option sure to be popular among pharma investors for handling this was recently demonstrated by the head of Turing Pharmaceuticals who upped the price for its essential toxoplasmosis drug Daraprim by 5000 percent. While Daraprim is no cancer medication, toxoplasmosis can be life threatening to immunosuppressed individuals as cancer patients often are. This is a choice example of how to spawn ammunition for socio-political backlash by outdated definitions of ‘free market’ business judgment in an industry that never operated for a single day in a ‘free market’ but always depended on the artificial creation of temporary legal monopoly by political consensus.
But whichever way whoever wants to turn it, creativity has limits: just years down the road, even the most expensive cancer medication will have lost patent protection.
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