Why Pharma Must Change Its Model

Last week, the Food and Drug Administration approved the first in a new class of drugs intended to treat high cholesterol, called PCSK9 inhibitors. Many experts are predicting it will prove to be the most expensive class of drugs ever. The companies developing these new products stand to make billions of dollars.

By all appearances it stands to become the greatest financial success in the industry’s history. In fact, the cost of these drugs threatens to undermine the health care system upon which the drug industry relies.

America’s expectations of its healthcare industry have changed dramatically. Consumers expect us to deliver high quality care more efficiently and affordably. We must eliminate waste and coordinate care to ensure better outcomes for each patient. The average American family pays the health care industry about $25,000 every year. In return, they expect us to deliver all of their care – including medical advances. It’s a more than reasonable expectation. There is no question that we should be able to solve our healthcare problems for well within the 18% of GDP that goes towards it.

Every part of the industry has been shaken up by this new era of doing better for less. Countless industries outside of health care have already gone before us, understanding that technology and productivity gains must be passed along to the consumer for businesses and our nation to remain competitive. The pharmaceutical industry remains our lone holdout, and we cannot succeed without it. If the cost of new drugs continues to rise at this rate, any progress we make in other parts of the health ecosystem will be irrelevant.

Recently, I’ve been thinking about the transformations that have occurred in other industries — both the companies that have adapted to changing times and those that have been left behind. It’s with this business history in mind that I offer this advice: the companies that proactively rethink their pricing models will be better positioned for long-term success in an economy that expects innovation to deliver lower prices, not higher ones.

Without truly innovative treatments emerging from a successful pharmaceutical industry, our hopes for a 21st century healthcare system will be dashed. Yet, those innovations will be lost to history if they are not affordable to the patients who need them and if the pressure they put on the system is too great to withstand.

For some years now the prices of drugs have been increasing to unsustainable heights, and the spiraling costs are expected to continue. By one estimate, specialty drug spending in the United States is expected to reach more than $400 billion by 2020, a number that stood at $87 billion in 2012.

Last year, new life-changing treatments for hepatitis C became available. These treatments are truly remarkable, and very, very expensive. The prices were so high that some professional organizations recommended treatment only for the very sickest patients, an unthinkable step for many in the industry. This is just one example. We have seen these sky-high prices with cancer drugs, new treatments for rare diseases, autoimmune disorders and more. Yet what we have experienced to date could look like only a blip compared to what’s coming.

The potential patient population for these new high cholesterol treatments is huge, and they will require patients to continue taking them on an ongoing basis to retain the health benefits. By one analysis, the launch of this new class of drugs could add anywhere from $50 billion to as much as $200 billion annually to our health care system for the foreseeable future. Even if we use the low end of the estimate it is a staggering figure.

Today, pharmaceutical companies name their price tag for drugs, and that’s that. The price tag they set anticipates any necessary market-driven or legally required discounts to ensure their targeted revenue expectations are met. It’s a pricing model that only exists because of government protections that we, as Americans, granted the industry to ensure innovation. But now those laws are being used to shield drug makers from pricing their products responsibly.

Clearly something has to give. The idea that we provide families high-quality and affordable health care is at odds with the price trajectory of these new drugs.

So what does a new pricing model look like?

In an integrated system like Kaiser Permanente we see the entire health care dollar, so we can assess the outcomes of new drugs and related costs over time. To help us further assess the value of these drugs we have put in place a system to track the efficacy and real world impact of treatments. I expect to use that data, which is non-patient specific, as part of the conversation with my peers in the pharmaceutical industry.

Second, I expect any new pricing model to encourage pharma companies to invest in developing new treatments that make a real difference on the consumer health outcomes we care about, rather than incremental benefits that amount to wasted dollars in the system. It needs to also drive an emphasis on identifying the right patients, instead of searching for the largest – and therefore most profitable – patient population.

At the same time, let’s begin a conversation around a policy framework that rewards innovation in the midst of shifting healthcare demands. Current regulations were developed before the realities of 21st century care became clear.

I suggest we begin with a comprehensive re-examination of how the prescription drug market is operating, and particularly how law and regulation impairs the effective operation of market forces to ensure appropriate pricing levels. For example, the so-called Medicaid “Best Price” rule, in trying to protect Medicaid, undermines our ability, on behalf of our patients, to drive down manufacturers’ arbitrarily set prices. I believe Medicaid can be protected without destroying market forces.

This is just a start. The conversation should include ways we can reward the value these companies bring to our members. At the same time, our goal should be to incent new innovation rather than reward yesterday’s advances.

The choice is clear. The focus on providing value to each and every consumer means embracing reform and setting prices that reflect what’s truly needed to optimize innovation. The reward would very likely be sustainable success over the long term for everyone in healthcare.

Regeneron and Sanofi make the PCSK9 inhibitor recently approved by the FDA. Amgen is developing another such drug.

Bernard J. Tyson is the chairman and chief executive officer of Kaiser Foundation Health Plan, Inc. and Hospitals. Known as Kaiser Permanente, the $60 billion organization is one of America’s leading integrated health care providers and not-for-profit health plans. Kaiser Permanente serves more than 10 million members in eight states and the District of Columbia to deliver better health for all.

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Source: Forbes