The Favors They Do Us: Charging Less in Other Countries Makes Drugs More Affordable in America
Peter Kolchinsky, Ph.D.
This is the sixth in a series of articles that aim to define the biopharmaceutical industry’s social contract with America, to examine practices that deviate from that contract, and to propose refinements to healthcare policy to ensure that our continued investment in scientific progress ultimately yields affordable, effective therapeutics for future generations.
Article 1: America’s Social Contract with the Biopharmaceutical Industry
Article 2: What happens when a drug won’t go generic?
Article 3: Protecting Off-Patent Sole-source Drugs from Price-Jacking
Article 4: Why wait for Generics? In praise of me-too drugs
Article 5: False Heroes — How PBMs Add Insult to the Injury of Insurance Cost-Sharing
Op-Ed: Let’s Throw a Patent-Burning Party
Article 6: The favors they do us: Charging less in other countries makes drugs more affordable in America
Article 7: Hard Negotiating Tactics: Compulsory Licensing and Willingness to Deny
Article 8: Unintended Consequences of “Fairness”: Critically examining the idea of the US referencing EU prices
Article 9: Direct-to-Consumer (DTC) Advertising: misnamed, misunderstood, and underappreciated
Article 10: The strange and special case of epinephrine
Please see Important Disclosures for Readers at the end.
Branded drugs cost less in other countries and, to some people, that’s evidence that pharmaceutical companies charge gratuitously high prices in the US and could charge less and still profit. A drug that may cost $1,000 in the US might sell for $50 in Mexico and indeed might only cost $20 to manufacture, making the drug profitable in either case. If $50 is fair in Mexico, why not in the US? To be fair, Mexico is not as wealthy a nation as the US. So let’s reframe the question: while one might justify charging so little for the drug in Mexico, what justification can there be for charging a lower price, say $700, in Germany, a country comparably wealthy to the US?
These are good questions that can most simply be answered as follows: for-profit companies attempt to maximize their profit based on all the rules they have to play by. But that answer begs the next question: why doesn’t the US just change the rules so that companies are forced to price drugs more evenly, so that all countries pay their “fair” share and comparably wealthy countries pay comparable prices? Such calls for fairness typically reflect the belief that a more uniform global price would result in lower price in the US.
To the extent that these views are reactions to the high branded drug costs paid by patients, the flagship article of this series points out that drugs are unaffordable to many Americans due to cost sharing, a tactic American insurance plans employ extensively to make drugs expensive and often unattainable to the sick patients who need them. One could cut the cost of all drugs by half or more and yet a 20% co-pay for many essential branded drugs would still be too expensive for many patients. Even when a drug that costs $100,000 in the US is priced at $70,000 in Germany, what makes it affordable to Germans is that they do not have a 20% co-pay; when a drug is covered there, it is covered. So the key to making drugs affordable for patients is to eliminate cost-sharing.
Yet, even if cost sharing were eliminated, it would still be true that, at a societal level, America pays quite a bit more for branded drugs than other countries, including the populations of comparably rich nations such as Japan and those of Western Europe. And therefore the indignation over global drug price disparities could be framed purely in terms of the seemingly unfair cost burden borne by America as a whole. To be clear, lower prices in other countries do not necessarily mean unfairly lower prices. In many countries, branded drugs are priced comparably to the US market when adjusting for wages and purchasing power (what a dollar can buy locally). For example¹, in 2016 the estimated adjusted price of Gilead’s HCV cure Harvoni in the US was about $73,000; in Portugal, the adjusted price was about $71,000 and in Poland, $119,000. Given all the secret rebates and discounts negotiated by governments and private payers, whether these prices truly reflect what is paid is another matter.
A recent study of global affordability of FDA-approved cancer drugs (see Figure 1) found that while those drugs were indeed more expensive in the US, they are also more affordable in the US (a conclusion that held firm when affordability was measured by either GDP per capita or average salary as a measure of a country’s wealth)². What Figure 1 essentially shows is that a drug priced at two months’ salary for an American might cost only 2 weeks’ salary in the UK and over a year’s salary in India.
And some of the difference in what the US spends on drugs versus other nations can be ascribed to Americans’ earlier access to innovative medicines³. Patients in many countries don’t get new drugs as quickly as patients in the US partly because approvals can take longer in some countries (one reason why: companies can’t justify prioritizing less lucrative markets, a logical consequence of tougher reimbursement policies). Having to wait longer for innovative drugs seems more of a cost than a savings, hardly something for the US to emulate.
These nuances aside, it may be true that some countries really could afford to pay more than they do for the drugs they get⁴, which then, according to one line of reasoning, would allow biopharma companies to reduce how much they charge for their products in America while retaining the same level of profitability. And yet some countries can’t or won’t pay more.
If what we want is lower prices in America, it’s not clear that we should insist on somehow “making” other countries pay what we might think is fair as opposed to simply letting companies continue to find the profit-maximizing price as they do now (which requires juggling a complex set of threats). We should consider that there are some non-obvious advantages to America encouraging other nations to participate in the pharmaceutical marketplace at whatever prices they can afford or are willing to pay, however low those prices may be. Furthermore, calls for other countries to pay their “fair share” and especially for US payers to link prices to those in other nations, a practice called reference pricing, need to weigh the possibility of such tactics actually backfiring by reducing international sales and causing drug prices to rise in America just to preserve the current level of profitability and incentives for new drug development.
America Alone
What if the US were the only market? Imagine a planet covered by a vast ocean from which only the US landmass emerges. Development costs would be higher, as companies would be forced to conduct all R&D in this one, expensive market. As it is now, the US accounts for roughly one third to one half of drug company revenues⁵ and more than half of its profits, so in a world in which only the US exists, companies would have to charge two or three times as much as they do today to generate the same return on investment, and then would have to charge still more to compensate for the higher development costs and longer timelines of an “America Alone” scenario. For example, clinical trial enrollment would be significantly slower and more expensive since companies could only recruit from the US population instead of a global one. After all, the FDA looks after the safety of the US population and would not require less data than it does now just because a drug were intended for the US market alone.
Americans value the benefits that drugs offer. They demand more innovation and don’t want to be ripped off. So if the world were just America, one might surmise that Americans would still demand that drug companies work on cures for cancer and Alzheimer’s and infectious diseases and that insurance companies find some way of covering these expensive drugs. In reality, all the other countries comprising the Rest of the World (RoW) participate in the drug development process, contributing a large fraction of patients to global clinical trials and half of the profits necessary to meet drug companies’ current return on investment targets, ultimately allowing America to enjoy lower drug prices than if it were the only country on earth.
One could take the view that these RoW countries are welcome to participate in drug development to make it easier for Americans to get the drugs they are willing to pay for, but if these RoW countries aren’t willing to pay the same price or some “fair” wage-adjusted price, then they can’t have these drugs once they are approved. But it is unethical to experiment on people who won’t then have access to the resulting drug. That’s one reason why drugs and vaccines developed for infectious diseases prevalent in many poor countries in Africa are sold very cheaply or donated to them once approved (another reason is that if they were not affordable, those countries would ignore companies’ patents and manufacture the drug for their populations, a practice called compulsory licensing⁶). For example, HIV medications are far more easily tested in Africa where the rate of infection is higher, but the drugs are sold at a large profit in the US and distributed very cheaply in Africa. So if we aren’t willing to sell drugs to countries at the prices they are willing to pay, then we have to consider the possibility that we may have to also stop relying on them for clinical trials, which would increase development costs and timelines.
Why do we pay more?
The US spends about twice as much as comparably rich nations on medical care. It’s not because Americans “consume” more care than citizens elsewhere. Rather, the main driver is that prices — for drugs, yes, but also for health care services and the professionals that provide them (doctors, nurses, specialists) — are much higher in the US. Furthermore, according to research published in the Journal of the American Medical Association in March 2018⁷, America’s complex healthcare system resulted in an astounding 8% of GDP spent on healthcare administrative costs, much less than the 1–3% of GDP that comparable nations incur, which explains a big portion of the gap between the total 17.2% of GDP⁸ that the US spent on healthcare and the mere 9% average of relatively wealthy European nations.
The price differentials for things like drugs and medical devices are largely due, in the US, to our unwillingness to outright deny patients access to treatment on the basis of cost, an idea I explore further here (though American insurers do what they can to deter use of expensive therapies, even when medically necessary, through tools such as prior authorization and cost sharing).
Other countries can play chicken with the industry and win price concessions from time to time precisely because the industry exists first and foremost to serve the large, price-insensitive US market, and companies have a reasonable expectation that almost any drug that improves on the standard of care will generate high-enough sales in the US to have made the effort worthwhile. If Americans accepted the idea that the US healthcare system should indeed deny them access to a new drug because its price is too high, then the US could join other nations in wielding a credible threat of denial, easily negotiating whatever prices it wanted from industry for drugs that have already been developed. US payers would then have to be quite clear about how they calculate “fair” prices to allow investors and drug developers to plan ahead. Funding would logically dry up for many programs in early development today, particularly for rarer diseases and certainly for a lot of personalized medicines, if companies had to assume much lower prices when making financial models. Yet such a policy would be short-sighted; these drugs are cost-effective if you look at them over time as only briefly expensive (for 10–15 years while they are branded) and then forever-after as inexpensive generics that permanently improve human health and well-being.
While some other countries appear to be willing to deny their citizens’ access to drugs to reduce their overall drug spending or stay within a set healthcare budget, they often aren’t forced to go entirely without. This is because companies are motivated to find a price in each country that maximizes their profits, minimizing what economists call “deadweight”; simply put, some profit is better than no profit. Essentially, companies appear to take whatever price they can get in the RoW, especially since they can count on America for high profits (e.g. America has ~5% of the world’s population yet contributes more than half of profits for many drugs). If anything causes companies to hesitate to price a drug low in a given country, it is the concern that the drug will be imported and sold in wealthier countries (a practice generally kept in check by international law and each country’s fear that it would be cut off from further supply).
Imagine the inverse of the America Alone scenario: what would happen if America didn’t exist. I believe that the modern pharmaceutical industry would dramatically shrink or essentially cease to exist because it wouldn’t be able to generate a sufficient return on investment from developing products for countries that are willing to deny treatments to patients on account of cost. In response, collectively, other wealthy nations might discover that they really are willing to pay more for drugs than they do now rather than watch their citizens continue to suffer and die prematurely of diseases that biotechnology could address.
Fortunately, America leverages a vibrant generics industry to constrain overall drug spending while getting the fastest access to the widest variety of new medicines of any country. Furthermore, as the industry’s productivity has increased to the point where multiple comparable drugs launch within a few years or even months of one another, America benefits from price competition between similar branded drugs long before any one of them has to compete with its own generic copies (and typically before such competition exists in other global markets). The choice to use that power rests with American payers, who appear increasingly willing to employ the bargaining tactics available to them (though their perverse incentives and paradoxical cost sharing tactics sometimes result in patients paying more rather than less for what is actually a cheaper treatment).
It’s worth weighing all of what works in the status quo, both the obvious and subtle, against the unintended consequences of radically changing how we handle branded drug pricing to make sure that we don’t accidentally give up more than we stand to gain. By contributing patients to trials at lower development costs than in the US and contributing at least some of the industry’s profits, the RoW does enable faster, less expensive drug development and lower prices in the US. Some countries may be inspired to pay more, possibly through trade diplomacy, but merely dictating higher prices to them could reduce their utilization and make industry even more dependent on generating profits in the US, raising drug prices for Americans.
Acknowledgements: I’m grateful to Chris Morrison for his invaluable and substantive thought-partnership and drafting/ editing, to everyone who engaged with me in the constructive debates that led up to these articles, and to Erin Clutter and the RA Capital graphics team for creating artwork that so astutely captures the essence of each core concept.
Sources
¹ https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4886962/pdf/pmed.1002032.pdf
² https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5641070/
³ https://www.healthaffairs.org/doi/full/10.1377/hlthaff.2012.0920
⁴ https://www.ispor.org/research_pdfs/40/pdffiles/PHP44.pdf
⁵ http://thehill.com/opinion/healthcare/369727-us-drug-prices-higher-than-in-the-rest-of-the-world-heres-why; http://static.correofarmaceutico.com/docs/2016/12/12/qiihi_outlook_for_global_medicines_through_2021.pdf
⁶ https://www.ncbi.nlm.nih.gov/pmc/articles/PMC2893582/pdf/nihms204056.pdf
⁷ https://jamanetwork.com/journals/jama/article-abstract/2674671
⁸ https://data.oecd.org/healthres/pharmaceutical-spending.htm#indicator-chart
Peter Kolchinsky, Ph.D.
Peter Kolchinsky is a founder, Portfolio Manager, and Managing Director at RA Capital Management, LLC, a multi-stage investment manager dedicated to evidence-based investing in healthcare and life sciences. Peter is active in both public and private investments in companies developing drugs, medical devices, diagnostics, and research tools, and serves as a Board Member for various public and privately held companies, including Dicerna Pharmaceuticals, Inc. and Wave Life Sciences Ltd. Peter also leads the firm’s outreach and publishing efforts, which aim to make a positive social impact and spark collaboration among healthcare stakeholders, including patients, physicians, researchers, policy makers, and industry. He authored “The Entrepreneur’s Guide to a Biotech Startup”, written on the biotech social contract, and served on the Board of Global Science and Technology for the National Academy of Sciences. Peter holds a BS from Cornell University and a Ph.D. in Virology from Harvard University.
Important Disclosures for Readers
The contents of this publication are intended for informational and educational purposes. The views and opinions expressed are those of the author and are subject to change. They do not necessarily reflect the views or opinions of RA Capital Management® or any other person the author is affiliated with.
Nothing of the content should be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security or product. The author and/or RA Capital Management® may hold or trade securities of the companies named in this publication or that manufacture the drugs discussed.
Designations used by companies to distinguish their products are often claimed as trademarks. All brand names and product names used in this article are trade names, service marks, trademarks or registered trademarks of their respective owners.
The author’s opinions are based upon information he considers reliable, and there is no obligation to update or correct any information provided.
© 2018 Peter Kolchinsky, Ph.D.
