Tag: Pricing

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I’m confused (perhaps not a difficult state to achieve). The New York City Council passed a bill that allows (but does not require) restaurants to charge a 10% “Covid fee” surcharge. The stated purpose of the permitted surcharge is to allow restaurants to recover revenue lost from being shut down for months, and from now […]

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Drug Pricing Made Easy

 

President Trump was both lucky and smart this week in his approach to the thorny issue prescription drug pricing. Lucky, because a district court threw out on First Amendment grounds his executive order that drug companies supply list prices for all the drugs that they produce. Smart, because at the eleventh hour he decided against issuing an executive order that would have required pharmaceutical companies to offer a system of “most-favored-nation” pricing, which would cap the prices that drug companies could charge in the United States to the lowest price charged for that drug in any country outside the United States. Eliminating poor price signals is a modest benefit. But the implementation of the executive order would have slashed revenues, putting pharmaceutical companies at serious financial risk and perhaps ruin.

The basic flaw behind both proposals is that they assume that there is a unique “price” at which pharmaceutical drugs sell. That assumption often works in competitive markets in which the costs of development are low relative to the marginal (i.e. additional) cost of production for each unit. But so-called marginal cost pricing does not work for new pharmaceutical drugs whose development costs are already high and getting ever higher. Companies are constantly researching and trying to develop new drugs with strong therapeutic properties and tolerable side effects. They also face huge costs in shepherding promising drugs through three stages of clinical trials, each one more complicated than the last. Many promising new drugs wash out in these clinical trials, which means that a pharmaceutical company can remain solvent only if its blockbuster drugs yield enough revenue to offset the costs of its duds. And finally, companies incur huge financing costs as they bring drugs to market. Development and clinical trials take years to complete, and drug companies have to find ways to finance expenditures made in year one with revenues that will only start, typically, some eight to 10 years later.

So how are these costs best recovered over the relatively short period during which the drugs receive patent protection, which today works out to around 11 years, give or take, for a major blockbuster drug? The common suggestion is that each purchaser should only be required to pay for the marginal cost of producing the drug that he or she consumes. This was the idea behind Trump’s aborted executive order. In a market that is characterized by high fixed costs of development, that strategy offers favorable prospects for all customers but one—the first. So if a drug takes one billion dollars to research and develop, but only $10 to produce each unit, the marginal cost formula says that the first consumer has to pay the billion dollars so that the other consumers can get the favorable deal. That formula guarantees that no drug will ever make it to market.

To Be an Informed Healthcare Consumer

 

shutterstock_93062659I cannot imagine how it is even remotely possible to be an informed healthcare consumer under the current system. With some effort and a helpful provider, one can accumulate useful knowledge about diet and exercise, the effectiveness of various treatments, etc., all of which is well and good. But when it comes to being a consumer in a supposedly capitalist system, one cannot operate as an informed consumer. Throw in government regulation, and all bets are off.

My recent travails with obstructive sleep apnea provide a perfect example of this. I’ve had the study done because I must in order to remain employed but — were this merely a matter of personal health — I would be lost in a raging sea of costs on a night darkened by ignorance. Though I have tried to determine the out-of-pocket costs for this simple procedure, the data is simply not available. In short, I could not (and cannot) use cost as a determining factor. Allow me to explain.

As with pretty much any medical procedure these days, I needed a specialist — in this case, a pulmonologist — to conduct the test and interpret the results. I met with him a few weeks ago for about half an hour. He asked all the same questions I’d already answered in a questionnaire and took a peak in my throat to see exactly what two other doctors had already seen and documented. This short chat was billed for $558. Of course, this is not what the interaction costs or what the doctor expects to be paid for services rendered. No, the actual price of this consultation is $255.51; at least this is the price negotiated between the insurance network and the provider. The baffling part is that I can only discover this actual cost when I receive the explanation of benefits from my insurance carrier.