Ten Percent of Cancer Drug Spending Wasted
A remarkable study published in the BMJ concludes that $1.8 billion of the $18 billion spent on the 20 most expensive cancer drugs in the U.S. is wasted due to cunning marketing by drug-makers. Chemotherapeutic doses are often adjusted by body weight. However, the drugs are shipped in vials containing doses appropriate to bigger people. Once opened, the drug that remains after an oncologist selects the does appropriate for a smaller or average-sized person has to be discarded.
The authors allege the drug-makers do this deliberately, to increase profits. Their proposed solution is that the Food and Drug Administration should regulate the size of vials!
There is a better way.
First, the FDA is not concerned with the cost of medicines. The proposed solution has nothing to do with safety or efficacy, so is not within the FDA’s purview.
Second, marketing cancer drugs is influenced by a uniquely perverse incentive. Medicare pays oncologists fees that include the cost of the drugs, because they are often injected. This has led to the controversial practice of drug companies’ salespeople “selling the spread,” which is the difference between the prices drug companies charge for their cancer drugs and the prices Medicare reimburses doctors. Medicare has tried to squeeze this spread over the years, but oncologists complain that Medicare’s fees for services only are not adequate compensation.
A better solution would be to give cancer patients more direct control over their medical spending. “Consumer-driven” health care is often confused with high deductibles. Truly consumer-driven health care gives all patients, from healthy to very sick (if mentally competent) control over their health spending.
If cancer patients controlled more medical spending directly, they would not tolerate paying ten percent more for excess doses that are discarded.
When I read this I was somewhat skeptical of the premise that drug makers purposely force doctors to buy more expensive cancer drugs than necessary. In reality, drug makers are earning money off cancer patients — not cancer drugs per se. Drug makers provide vials big enough for all patients(including large ones) knowing the residual will be thrown out. The argument that the residual from 10 used vials is akin to throwing away thousands of dollars is not really accurate. If regulations forced drug companies to sell chemo in large, multi-patient bottles instead of vials, drug makers would price the larger bottles in such a way to earn the same revenue as before.
I read another criticism that drug-makers are not going to make an infinite number of vials customized to each body size. I doubt the authors have expertise in manufacturing and bottling chemo drugs, just administering them.
I agree. The mechanical process of capping thousands of vials a day for many years will introduce wear — creating slight variations in the precision of the bottling/capping process. This is how microscopic glass shards get into injectable drugs (as is occasionally reported). The more variables, the more likely the production system is going to malfunction. The manufacturers would probably rather have small amounts of their product thrown out than invest in multi-vial production lines.
I can’t be sure, but for many drugs and I assume it is true for cancer drugs the actual cost per cc of drug is lower than the vial and filling it up, the packaging and advertising, and the distribution. If that is the case it wouldn’t make sense to sell the drug as an individual dose in different sizes as the overhead and administrative costs would increase more than the amount of drug that is so called “wasted”.
I didn’t read the article, but if they didn’t calculate the actual costs of producing the drug after all the research was done then I think their article wasted space.
Yes, I think you are right. The authors do not take into account the complexities of packaging and distribution, which does not surprise me in a medical journal.
John, this should surprise us when a medical journal can’t take into account such simple complexities. It is downright scary. Physicians rely upon medical journals for complex studies that tell them what to do in life and death situations. I think politics has entered into our most prestigious medical journals and that makes me not trust what is being published. There is an impetus to prove certain things in healthcare so money is being spent to do just that meaning that those already biased in a certain direction will do the study and will find what they are hoping to find.
“calculate the actual costs of producing the drug after all the research was done”
Allan (formerly Al etc) when we lived in NYC, my spouse was an accounting manager in Finance at Pfizer.
She explained to me how Pfizer can show a profit in countries with price controls, even when they sell the same medication In those countries at a fraction of US price.
You have stated the principle: Pfizer knows the cost of its research and of gaining regulatory approvals for each medication. Separately it also knows its actual production and distribution cost.
It is a simple accounting matter to allocate most research / development costs to the US market, while allocating mainly production and distribution costs (plus an appropriate share of development costs) to other countries – those that control prices. By setting different prices in each country to achieve target margins per unit sold, Pfizer is able to show a profit even where there are price controls.
It’s actually a lot more complicated, but that’s the concept.
The same concept also helps expose a fallacy of drug reimportation. If drugs sold outside the US and then reimported begin to reduce sales inside the US, the target margins are disrupted. In that case either prices or supplies (or both) must change. Since other countries have price controls, growth of reimportation would gradually force prices upward in the US. Pfizer could also respond by curtailing sales outside the US. That would curtail reimportation but at the cost of lesser international supplies and, inevitably, political problems.
Keep in mind that the apparent silliness of these financial acrobatics is arguably a rational response to government interference with the market.
John — I find it hard to believe that drug prices in foreign countries are determined arbitrarily. I suspect they are more likely to be determined by a combination of the drug company’s allocated costs and prices for competing drugs, including generics, if available, in the relevant therapeutic class.
In theory, if the U.S. adopted price controls, drug companies would allocate an appropriate share of R&D to all the other countries that are free riding now. There could also be a host of unintended consequences though that could wind up causing more problems than it solves.
Yes, that’s true. Your observation adds detail to the conceptual description I outlined, but doesn’t fundamentally change it. US patients and payers end up paying for most of the R & D, and suppliers like Pfizer end up showing a profit virtually everywhere they operate regardless of local price controls.
Keep in mind other countries regulate how much R & D they permit to enter the pricing calculations – and even how much manufacturing and distribution cost is permitted. The regulator in France, for example, is looking to ensure the least cost it can for France, in part by preventing Pfizer from “stuffing” its calculations. On the other hand, if Pfizer can gain more revenue from France, that extra revenue might be extra profit – or Pfizer might instead internally subsidize revenues from some other country where it is not achieving its target margins because that country’s whose regulatory climate is more severe. There are a lot of countries, myriads of drugs and – as you also point out – many other factors such as generics and patents and rebates and specialty drugs. Yeah, a lot more complicated in operation. But still relatively straighforward in concept.
In the end, if the drug company believes it can’t make an adequate return in a given country, it can refuse to sell its drug in that country. At the same time, if the country thinks the drug company is demanding more for its drug than the country is willing to pay, it can just say no and exclude it from its formulary. That’s basically what the UK does when it determines a drug’s value based on QALY metrics.
In the U.S. pricing at the end of the day is based on what the market will bear. If a drug company thought it could demand $5 million per year per patient for its drug and actually collect that amount, it would.
It would have to be pretty drastic for a company like Pfizer to exit, say, Germany. Or for Germany to exclude Pfizer. Besides marketing people want volume even when the return does not exist because that’s how they are compensated.
It’s always true that a market consists of a willing buyer and a willing seller. When that can’t happen, regardless of why, there is no market.
But that’s a little like saying office-holders are accountable to the voters because we can always vote them out. There’s a lot of real-life obstacles to realizing that ideal. In the same way, there are a lot of obstacles (many introduced by government interference in markets) that prevent the outcome you suggest – and especially when a government takes part in theeither the buyer or the “seller”.
John – I don’t think marketing people have pricing authority in most companies that I know of.
Second, I do know that in the hotel business, many of the better hotels will deliberately allow rooms to remain empty rather than sell them at the last minute for a deeply discounted price even though the marginal cost of filling the room is tiny. They do that because they don’t want customers to get trained to perceive that they can get a great deal if they wait until the last minute to book.
By the same token, if a drug company can’t strike a profitable agreement with a particular country and can’t get a specific drug on the approved formulary as a result, it at least sends a message to every other country that it won’t strike a bad deal with any country. If other countries perceive that the company means it and agrees to a price that’s acceptable to the drug company, it will have a more sustainable business in the long run.
Business 101: The four “P’s” of the marketing mix are price, promotion, product, and place!
Barry I don’t necessarily disagree with anything you said. Why does it feel like we’re bickering?
Also I had a pretty good source inside the industry. What’s yours?
John — I covered the publicly traded health insurance companies, drug retailers and PBM’s for five years before I retired from a large corporate pension fund and also had unlimited access to my colleague who covered the drug and device manufacturers.
I don’t think we’re bickering but just exchanging insights. I always appreciate reading your thoughts.
Thanks. Same here about yours. Maybe I was just having a bad day. 😎
There is another tension I did not mention: Patent law. If Pfizer is unwilling to supply Germany, Germany could invoke a compulsory license on Pfizer’s intellectual property. This threat is always there.
Not really, because the country could apply a compulsory licence, effectively stealing the intellectual property. India is renowned for this.
Of course, there would be a trade off, which is why Western European countries do not explicitly do this. The UK, Germany, France, Switzerland, etc. have research-based drug companies that sell in the U.S. Compulsory licencing could result in a trade war to the bottom.
I am not sure that other countries use R&D as a metric. Maybe some do. I am most familiar with Canada and the U.K, where R&D does not explicitly enter the price setting.
Price of competing drugs is the primary input. The question is: Are the two drugs perfect competitors? There will be differences, at least in side effects.
Quite right. Plus, drug companies are expert at international transfer pricing. Trying to regulate this would be absurd.
– and especially when a government takes part in the market, either as a buyer or a “seller”.
I am a spectator on the drug issue, with no inside knowledge, and I have no objection to companies recovering the cost of research.
What troubles me is the feeling that some companies seriously pad the cost of research….
Merrill Goozner wrote an excellent book about this called the $800 million pill,
http://www.amazon.com/The-800-Million-Pill-behind/dp/0520246705
and here is a piece by David Belk, who is a skeptical MD:
http://truecostofhealthcare.net/the_pharmaceutical_industry/