Value-based drug pricing is a popular idea, but an incomplete one.
“What happens if all the drugs are tremendous?” asks Harvard Kennedy School Professor Amitabh Chandra.
Thanks to advances in precision medicine, genuinely curative therapies may soon be within our reach, as treatments from CRISPR-Cas9 technologies enable the editing of defective DNA. “In our lifetimes, we could be in a world with not just one or two or three cures, but 30, maybe 300,” says Chandra. “This is not fragile science or science fiction.”
Pricing the Priceless
If priced by their value, the cost of these cures would be quite expensive. A treatment that generates 80 years of life, for example, could have a value-based price that exceeds $5 million — the value of life multiplied by the 80 years of life that cure generates. And value-based pricing requires us to walk away from drugs whose price exceeds their value. “It’s really all about pricing the priceless,” explains Chandra.
In this system, if we don’t get the value-based price, we let patients go untreated. “Will we be willing to do that with cures?” asks Chandra. “There’s going to be pain, anxiety, and anguish when a parent sees the potential of their child being cured but can’t have the cure because we couldn’t afford the value-based price.”
High premiums for treatment would only harm the insurance market as they hammer those who lost the genetic lottery with diseases like cystic fibrosis. Chandra calls for a more aggressive approach to this problem: enforcing the same premiums for precision medicine regardless of disease risk, and spreading risk across more people. This would mean moving away from employer-provided health insurance as better drugs arrive, and to a much bigger insurance pool.
For example, if one child in America needs access to a $3 million cure, and the cost of that cure is spread across 1,000 people, their premiums would increase by $3,000. But with an insurance pool of 1 million people, the price per person is only $3. And an insurance pool of 300 million drops the price of that cure to 1 cent per person.
A NASA for Drug Development
Chandra proposes a second approach to making curative treatments more affordable: government participation in research and development — a NASA for drug development. Just like NASA paid Rockwell and General Dynamics to build a space shuttle, this drug R&D agency would use private contractors, including universities and existing drug companies, to develop and manufacture the drugs and run clinical trials. But we would own the intellectual property associated with discovery. And if other nations partake in that research, they would also own the intellectual property and have drugs for cheap. The agency could also buy patents or announce prizes for them.
“Just to be very clear, this fund would be very different from the NIH. The NIH does basic science research. It doesn’t develop drugs, so it doesn’t own the patents,” Chandra explains. Because drug development is long and costly, the agency should also be like the Federal Reserve, says Chandra, independent of Congress. “We have built these agencies before. Innovation will force us to build them again.”
Advantages of this program include:
- Society owns the patents. This enables the sale of drugs for a very low price, or even for free.
- Control over which medicines are developed. Directed strategy could channel R&D into areas of medicine where profits are small but where prevalence and suffering are high.
- Reduced R&D costs by learning from failure. The NASA approach would allow for shared information, making the entire drug development enterprise more successful.
However, there are some potential disadvantages:
- Lack of financial discipline for a government agency tied to the U.S. Treasury
- Slow pace of R&D
- Potential “stupid bets” made at taxpayer expense
- Unwillingness to take big risks
Expense is another potential barrier. “It’s a way of getting cheap drugs; it’s not a cheap way to get cheap drugs,” says Chandra. Biopharma companies invest $150 billion a year doing R&D. To duplicate half that effort, the government program would need $75 billion, raised via taxes or other foundations’ and nations’ support.
If this program were a 10-year experiment, it would only be worthwhile if it generated therapies equivalent to the $75 billion investment. “That’s like saying give us therapies that generate $75 billion worth of life.” According to Chandra, this is equivalent to 500,000 life years, or reducing 1% of 1% of the global burden of disease — a goal that lies within the grasp of today’s science.
“The larger point is that this can be done. It’s a big idea. Its orders of magnitude are bigger than what the largest private foundation have been doing,” says Chandra. “But it’s still way, way less than 0.5% of our annual GDP. It is within our economic grasp. Am I crazy? Well, yes. But that is really what pricing the priceless is all about.”
From the NEJM Catalyst event Navigating Payment Reform for Providers, Payers, and Pharma, held at Harvard Business School, November 2, 2017.