Value does not always mean lower prices

Value based pricing means we should be willing to pay for things that work and not pay (much) for things that don’t work. It does not necessarily mean that all prices nor net expenditures will decrease.

Rectal NSAIDs for preventing post-ERCP pancreatitis: <$10/dose at end of trial (https://t.co/scaPU4CoYz), now >$150. How can we fix this @IrokoUSA & G&W laboratories? #drugpricing pic.twitter.com/0998a2SPEy

— Joe Elmunzer (@JElmunzer) June 9, 2018

The linked study establishing the new standard of care is from a 2012 article in the New England Journal of Medicine** and the differences in complications are significant:

The primary outcome was post-ERCP pancreatitis, which was defined as new upper abdominal pain, an elevation in pancreatic enzymes to at least three times the upper limit of the normal range 24 hours after the procedure, and hospitalization for at least 2 nights.
Results

A total of 602 patients were enrolled and completed follow-up. The majority of patients (82%) had a clinical suspicion of sphincter of Oddi dysfunction. Post-ERCP pancreatitis developed in 27 of 295 patients (9.2%) in the indomethacin group and in 52 of 307 patients (16.9%) in the placebo group (P=0.005). Moderate-to-severe pancreatitis developed in 13 patients (4.4%) in the indomethacin group and in 27 patients (8.8%) in the placebo group (P=0.03).

There was a 45% decrease in the primary outcome of pancreatitis. The study defined the outcome as something that required at least 2 nights in the hospital because of the undesired complication. Hospital days are expensive. An extra hospital day can lead to an average of an extra $2,200 in expenses. Avoiding at least 2 hospital days avoids at least $4,400 in expenses.

And the study shows that the indomethacin performed a very valuable function that saved society $100,000+ in claims expense while leading to higher quality of life for the patients who were not hospitalized under the new protocol and who would have been hospitalized under the placebo.

A sole source supplier of the drug has new information showing that the drug has a lot more value than they previously thought. Our economic system gives an extraordinarily strong incentive for the supplier to raise prices as they see that the willingness to pay is a lot higher than previously thought.

Value based purchasing means we should pay for things that work well. Avoiding hospital days is valuable so we should expect to pay a good amount for things that avoid numerous hospitalization days. It is not a panacea for price cuts, it is a system of avoiding doing dumb things by lowering the willingness to pay for ineffective treatments while increasing the incentives for price increases for effective treatments.

Now if we are concerned about the significant increase in effective sales price of a generic drug there are a few policy options available. The first is a cap on prices. The downside is that the sole source supplier has a strong incentive to pull the drug from the market until patients and doctors start crying on TV for the drug at the previous price plus 20%. The second option is to make it easier for competitors to offer more generic versions of the drug. This could mean importing the drug from countries with similar regulatory regimes or streamlining FDA approval processes or a number of other things.

Finally, this could be a good case example for the new non-profit generic drug manufacturer that a number of large hospitals have funded. I anchor on the Friedman and Weiner brief on 5 stories of drug costs as my primary analytical framework. Story #3 is relevant as I discussed last February:

Story 3: Cheap generics get expensive fast — the Martin Shkreli story and the Epi-Pen story. Here the exploit is a lack generic manufacturers that can quickly shift to produce near substitutes. The time and cost of other manufacturers to set up a production line to make a cheap competitor won’t ever return a profit as the original manufacturer/distributor will drop prices to or below marginal cost as soon as they see a threat.

The recent agreement by a number of large hospitals to set up a non-profit generic manufacturer is a response to this story. The new entity would be willing to lose money to set up a production line for a generic drug that just saw its charged price increase by 1,000%. I think the entity’s leadership would be totally happy to certify the capability to get a few simple drugs and one complex generic approved as a demonstration of capability and then just use their capability as a looming threat to tamp down on these pump and dump schemes. That would be a stunning success even if the entity never ships a single pill for anything other than demonstration purposes.

In this story, the ability of a new manufacturer to produce the generic at a cost somewhere between the current incumbent’s marginal cost and the current sales price would see a significant price snap back and then a transfer of more surplus value to the patient or the risk bearing entity instead of the generic drug manufacturer.

The key thing to remember though is that paying for value sometimes means paying more when new information shows more value unless there is a robust and well functioning market that can produce low marginal cost inputs.

** April 12, 2012 N Engl J Med 2012; 366:1414-1422 DOI: 10.1056/NEJMoa1111103