Is pharma industry too meek on pricing?

What were we thinking?

The biopharmaceutical industry has been under attack for some time for the high and rising prices of its products. Pressure has increased recently with the arrival of costly medications for oncology, hepatitis, high cholesterol and more. Expect even further pressure as more specialty drugs are introduced, and then really significant pushback once seriously costly innovations such as gene therapy come online.

I’ve noticed that the pool of people complaining about drug pricing is widening. Now, even doctors are picking up the megaphone. For example, the American College of Physicians (ACP) recently made the case for drug price controls in a position paper. Recommendations include requiring companies to disclose R&D and materials costs, allowing the use of Quality Adjusted Life Years (QALYs) in research funded by the Patient-Centered Outcomes Research Institute (PCORI), having Medicare negotiate prices, enabling reimportation of drugs from lower-priced markets, ensuring that restrictive formularies don’t price patients out of the market by requiring excessive cost sharing, etc.

For all its spending and glitz, the industry’s main lobbyist (PhRMA) hasn’t managed to stave off the attacks. In fact some of its past and current arguments are digging the industry into a deeper hole. Here’s what PhRMA said in response to a MedPage Today inquiry on the ACP position paper:

In an email to MedPage Today, a spokesperson for the Pharmaceutical Research and Manufacturers of America (PhRMA) called the recommendations “far-reaching,” and “driven by the false notion that spending on medicines is fueling overall healthcare cost growth.”

There are a couple of important things the industry is doing wrong:

PhRMA has placed huge emphasis on how expensive it is to develop a drug, and strongly implied that drug prices are based on the costs of R&D. The general public more or less accepted the old $1 billion per drug benchmark, but I’m not sure even the industry believes the $2.6 billion for a new drug figure PhRMA has been using since 2014. And –just like in other industries– manufacturers don’t set prices based on what they spent on R&D.

So while PhRMA may complain about requests for “transparency” on R&D spending –and I agree this information is worthless, not to mention time consuming and expensive to collect– the industry brought the issue on itself.

As the email to MedPage shows, PhRMA’s current argument is that drugs are not driving up total medical costs. In other words, money spent to pay for new drugs is saved elsewhere in the system, for example by reducing hospitalizations, doctor visits or surgeries.

This cost-saving/cost-neutral argument demonstrates to me that PhRMA has not learned its lesson from the failure of its R&D spending-based approach for sympathy. The R&D approach implies a willingness to live with “cost plus” pricing. And the cost-saving argument ignores the possibility that a drug is not just a cheaper alternative to existing approaches but actually a better one. For example, the value of a cure for Hepatitis C extends beyond the financial cost of a liver transplant.

Here are a few suggestions for PhRMA:

  • Embrace the concept of Quality Adjusted Life Years (QALY) to measure the value of an intervention. But don’t settle for the arbitrary $50,000 threshold that researchers often use to judge whether a therapy is worthwhile.
  • Push back against the ACP and other physician critics of pharma pricing by insisting that the QALY approach be used to measure not just pharma but the work that the rest of the healthcare system does. The QALY concept can be applied to procedures, devices and maybe to hospitalizations and office visits. A lot of what’s done in healthcare today can’t demonstrate any value on the QALY scale, so maybe those things should be eliminated or have their reimbursements cut in order to increase affordability or make room for better interventions.
  • Prepare the public for more costly innovations like gene therapy, which have the potential to be transformative for sick individuals but are very expensive. If I or someone else in my family is sick, I want the system to find a way to afford the innovation even if it doesn’t save costs anywhere else.

This is a tricky topic and I’ve just scratched the surface here. But bottom line PhRMA should at least prepare us for the possibility that its members will add to total costs, and that we should be ok with that outcome if the results are good enough.

Image courtesy of Stuart Miles at


By healthcare business consultant David E. Williams, president of Health Business Group.


April 1, 2016

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