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What Is Your Health Worth to Your Bureaucrat?Guten Abend. Thank you for having me here tonight to discuss the fundamental relationship between government pricing regimes and pharmaceutical and device innovation. Our topic could not be timelier. The importance of innovation and the harm that can be caused by misguided-albeit well-intentioned-government policies is brought into stark relief as we consider the looming threat of pandemic avian influenza and the challenge of preparing our nations for that possibility. Though we hope the next pandemic is years away, history teaches us that it will come someday. What do Americans and Germans wish we had in our medicine cabinet today? We wish both of our neuraminidase-inhibitor antiviral drugs, not just one, were available in pill rather than inhalation form for personal use and in injectible forms for hospital emergency use. We wish we had more than two such drugs. We wish we had next generation influenza antiviral drugs that were effective longer with different mechanisms of action to reduce antiviral drug resistance. We wish we had a rapid, cheap, portable, and more sensitive diagnostic test available at doctors' offices. Most important, we wish we had greater domestic capacity to manufacture pandemic vaccine for all of our citizens. We wish we had the next generation cell-based influenza vaccines for our people. We wish we had dose stretching products and techniques that would expand our H5N1 vaccine supply capacity by 6 to 10 fold. We wish we could invent a single universal cross-protective influenza vaccine that would be effective against all strains of flu for seasonal and pandemic usage. When people read about avian influenza, they demand quick innovations like these to fight it. And when the next public health threat comes around, they will demand quick innovation for that, too. But the vaccine, drug, and device industries are not floodlights that can be switched on when you hear a noise outside. They are more like gardens that with constant tending yield an abundant harvest every year. Why is the world not prepared for a pandemic influenza outbreak? Why will it probably not be prepared for years to come? Because we have all neglected the garden of innovation. In recent years, building factories for flu vaccines and antivirals has been considered a reckless investment because the market is so uncertain and the prices have been too depressed to reward investment. For the same reasons, companies didn't invest as much as we now wish they had in research and development of cell-based vaccine, adjuvants, and next generation antiviral drugs. It's not just about pandemic avian influenza. These factors affect investment in other new drugs and medical devices. Every year, researchers make advances in medicine-advances that can improve human health, cure or mitigate disease or suffering, and even prevent disease. But with new technology comes new cost-and costs are becoming harder to bear as our populations age. Americans and Germans want the best medical care money can buy, but we want someone else to pay for it. And we both face the fiscal challenges of a rapidly aging population that will be supported by a proportionately smaller workforce. So, we face many of the same challenges, and can learn much from each others' experiences. The challenges are real and the temptation for political leaders to pursue short term cost savings at the expense of future innovation and health, is immense. It takes strong and visionary leaders to withstand the tide and support research, development, and innovation. The United States government does not take this challenge lightly, nor, I know, does the German Government. Recently I have been meeting with health, trade, and economics ministers and other senior officials from the wealthiest nations to discuss the challenges that we face, to try to build a consensus on the need for all of us to ensure that our reimbursement or pricing systems foster long-term innovation for the health of our people and for all the people of the world, and to share ideas with each other on the means to accomplish these noble goals. Most recently I had the privilege of discussing these matters with Chancellor Merkel during her visit to Washington and with Minister Schmidt as a precursor to my visit here to Berlin. In a recent address to the World Economic Forum, Chancellor Merkel talked about her commitment to fostering innovation. To paraphrase her remarks, which were in German: “We must invest in the future. I believe that means that we should invest in research and development, because innovation is the key…We can hold onto…[our] prosperity only if we place a high priority on innovation.” I would like to thank Chancellor Merkel for her vision and her commitment to innovation. The Benefits of Innovation I'd like to begin by discussing the critical role that innovation plays in health care and in improving the human condition. My message is simple: Government actions affect prices, prices affect investment, investment affects innovation, and innovation affects health. The more free competition there is in the pharmaceutical and medical device market and the more barriers to innovation governments remove, the more innovation and health the world will enjoy. Let me offer a few examples.
We're seeing the practical benefits of genomic inventions-engineered just a few years ago-in the form of new drugs and new diagnostic tests. Our understanding of the genome is creating many opportunities both to cure diseases and to prevent them. Investment Affects Innovation The development of new medicines and new technologies is an expensive, complicated, time-consuming, and risky process. Fewer than one in a thousand new molecules created by researchers survive clinical trials and make it to the market. Today, by some estimates, it costs between $800 million and $1.3 billion American dollars of private investment on average-and between eight and twelve years-to develop a new drug, to demonstrate its safety and effectiveness, and to comply with regulations just to bring it to market in the United States. The cost of developing new treatments has more than doubled over the past ten years, while success rates in developing new products remain as low as ever. As we all know, a great portion of these costs to develop a new drug are amortized costs of all the drug product failures that never make it to market and never turn a profit, but which must be incurred to get the drugs that work. The Problem of Cost Controls As I mentioned, the tension between meeting rising costs and investing in innovations for tomorrow is one of the most intractable questions political leaders face. Too often, in trying to strike this balance, governments lean too much toward short-term savings and succumb to the temptation to control expenditures through direct price controls, cuts in reimbursement rates, delayed market access, and other subtle and not-so-subtle practices that either restrict the amounts paid for innovative products or reduce consumption of innovative medicines and devices. Why does this matter? Because there is a direct relationship between these types of cost containment measures and innovation. A recent study by the U.S. Commerce Department evaluated cost controls in a number of industrialized countries and found that lifting cost controls could increase revenues for patented products by as much as $18 billion to $27 billion annually-something that would greatly foster innovation. This translates into as much as $5-8 billion of lost global research and development as a result of cost controls. Because each $1 to 2 billion reduction in investment prevents the development of about one innovative drug per year, this means the people of the world are denied the benefits of 3 to 4 useful new molecular entities each year. In a time when our Food and Drug Administration approves approximately 30 new drugs and biologics annually, this is a direct and vital link between price, innovation, and human health. The seeming attractiveness of cost controls can cross borders. People paying market prices compare notes with people in regulated economies and put pressure on politicians to import price controls. And sometimes politicians yield to that pressure. Already, there are troubling signs in the U.S. Some state and local governments in the United States are unfortunately currently debating taking action to control prices. Recently, the City Council of Washington, D.C. tried to impose price controls. The more governments do this, the more innovation is put at risk. Instead, consumers are served best by free competition. Strong competition creates choices and better prices and benefits everyone. And it encourages sustainable innovation. Government Reimbursement Decisions Can Harm Innovation and Health It has been said to me, “Ah, but Germany does not have price controls.” In the sense that the German government does not set maximum prices paid by patients out of their own pockets, this is a correct statement. But Germany does use all three other forms of cost containment that I mentioned, and each of these mechanisms has a direct effect on the utilization of innovative products, the price paid for these products, and hence the return on investment in innovation. As a cost containment measure, Germany in 2003 adopted “jumbo class reference pricing.” Drugs are grouped into large classes, such as statins, sartans, and triptans. For example, all cholesterol lowering statins are presumed to offer roughly the same benefits to patients and be worth the same reimbursement for both the old generic and the new patented drug. A central panel fixes a reimbursement rate for all products in that class based on a volume based average price in the class. The result of course is that some products are reimbursed at less than the market would bear and others including generics have an incentive to rise toward the reference price. But it is said that Germany still has a competitive market for drugs that allows innovation to be rewarded because patients may buy a more expensive innovative product by paying the difference between the reference price and the retail price out of their own pockets. That ignores the fact that 90% of German citizens are in the state health insurance system subject to the reference pricing policy. The German health system is in effect a monopsonistic purchaser. It holds all the cards. The market power exerted by the government system is demonstrated by the fact that with only one exception in the two and half years of the reference pricing regime, every manufacturer has cut the price of new drugs to match the reimbursement rate. That lone exception is a cholesterol-lowering statin sold by Pfizer under the name Sortis in Germany, and Lipitor in the United States. Pfizer was told that Sortis wasn't innovative enough to be excluded from the statin reference price in Germany. Pfizer said that in order to match the reference price, it would have to lower its price by an average of 38% in 2005 and by a further 41% in 2006. Over a year ago, Pfizer decided that this was unacceptable, and that it would not reduce its asking price. To get Sortis, German patients must pay the difference between the reference price and the market price. And so far, sales in Germany of Sortis have fallen by 60%. If all of these other manufacturers have been willing to accept the reference price, doesn't that demonstrate that it is a fair and sustainable price? If Germany had (1) a truly competitive health insurance system with (2) a free flow of health information to patients and beneficiaries, this might be the case. But it is not. First, the government-run system covers 90% of the German citizenry and determines reimbursement on behalf of that block. Failure to agree to accept the reference price as complete reimbursement significantly impairs a pharmaceutical company's access to the bulk of the entire German market. We see the effects of this type of market power in many other European nations as well. This has a particularly strong impact in systems where significant cost-sharing by patients is not part of the culture. Second, neither the existence of a small private market for insurance nor the ability of patients to pay the difference out of pocket for reference-priced innovative drugs serves as an effective check on the market power and control of the government system. This is so for one simple reason: patients aren't permitted to learn what they aren't getting. What makes a competitive market for insurance work, what makes consumer-driven health care with out-of-pocket expenditures for health goods work is informed, health-literate patients. But in Europe, most patients are denied full information about alternative treatments, as the government restricts and funnels information manufacturers provide. The result is a two class system where some patients are knowledgeable enough to demand prescriptions for products they believe would best serve their health needs (even with cost sharing), and others who take what the system offers them, unaware of the choice they supposedly have. Given the central importance that both of our societies attach to access to health care, there is a great temptation in every country to forget that health care goods are also economic goods and that economic goods obey economic laws. In a free market, companies allocate money to develop new products. If they invest wisely, their product will have advantages over older products, and many consumers will be willing to pay more to enjoy those advantages. In fact, that's how you know if a product's features have value: people buy them. When businesses gauge the market successfully, everyone wins: consumers, investors, and researchers. Competition also relieves suffering by allowing patients to enjoy the benefits of new drugs quickly. Their choices reward quality, value, and promptness. Of course, for this process to work, consumers need to hear about the new product and its new features. Only informed consumers can make rational decisions. A free market automatically balances consumers' demand for immediate consumption-such as low-cost older drugs-against future consumption-such as access to innovative newer, better drugs or devices. Everyone wins. As consumers become increasingly savvy, they expect more choices, more responsibility, and more control in every aspect of their lives. When it comes to their health care, engaged consumers demand and get higher quality health care at better prices. Informed consumers identify symptoms earlier, when treatment is easier and cheaper. Or they prevent disease entirely through healthy practices. Ironically, in countries that restrict access to such information, it is easier for a tobacco company to reach a consumer with information about cigarettes than it is for a drug manufacturer to reach that same consumer with information about smoking cessation products. Health literacy creates engaged consumers, and health literacy depends on adequate access to information. As the European Commission's G10 medicines high level group concluded, “[h]ealth literate citizens are an asset to society. . . . Providing information to patients improves communication between doctors and patients, encouraging better compliance with medicine use and dosage instructions ensuring safer and more successful outcomes and will lead to more efficient use of healthcare resources.” The free flow of information is critical to the whole process. If communication between producers and consumers is suppressed or distorted, consumers won't understand the value of new products, and won't make rational purchases. Consumers will suffer, today and tomorrow. Less money will be invested in innovation, and fewer new drugs will be developed. Everyone loses. This health literacy problem is compounded by the third approach used to control costs: physicians face limits or “guidelines” on the volume and expense of drugs that they prescribe. Physicians who want to be able to treat patients in some state systems must agree to curb their prescribing practices, to drive patients to lower cost, older, less innovative drugs. In extreme cases, doctors can and have been penalized for exceeding these quotas. This practice directly interferes with the professional judgment of physicians. It impairs their ability both to prescribe the product they believe will best serve the patient and deters the physician from educating the patient about the comparative benefits of various products so that patients can make rational, personalized cost effectiveness determinations in deciding which drug to use. These policies taken together have a real impact on choice, freedom, and health. How to Value Innovation As I discuss various countries' cost-containment mechanisms and lay out their impact on future innovation and health, the most common response I receive from my counterparts is: “Yes, we favor innovation, and our systems allow for market returns for those products that are truly innovative; what you are talking about are so-called ‘me-too' drugs that offer only incremental innovation.” That is exactly what one hears about the German system. It is said to reward innovation. Indeed, the new pricing law in 2003 permitted the GBA or Joint Federal Committee (the Gemeinsamer Bundesausschußder Ärtze, Zahnärzte, Krankenhäuserund Krankenkassen) to exempt so-called “truly innovative” products from the reference prices if the GBA deemed the drug to be both novel and a therapeutic improvement over existing drugs in the jumbo class. This system has been faulted by many for applying too strict a standard, for failing to permit full participation of the innovators who know their products best, and for failing to ensure a transparent, science- and evidence-based process. The results speak for themselves: In two and a half years, only two drugs have been declared to be truly innovative in Germany. Only two. Legislation is currently pending in the Bundestag regarding this system. Time will tell whether the final amendment will open up and clarify the definition of innovation, broaden public and industry participation before the GBA and the IQWiG (Institut für Qualität und Wirtschaftlichkeit im Gesundheitswesen, the board that is to provide evidence before the GBA), and increase the transparency of its processes. They would all be positive steps. They would constitute good “incremental innovation.” This however, is what economists call the law of the second best: creating solutions and work-arounds for an underlying first premise that is itself fundamentally flawed. In my view, that flaw is the fundamental fallacy of the entire concept that so-called incremental innovation is not true innovation. Drug and device innovation most often moves in small steps. And many consumers value these small steps in themselves. Which innovations are incremental and which are transformative? That's not a question that can be decided by bureaucrats, even scientifically-trained bureaucrats. Bureaucrats might try to mimic the preferences expressed in markets, but they can never do so as exactly as patients themselves. The value of any product depends on the consumer. When you go to the drugstore, or any store, you want to make the purchase you prefer, not the one other consumers prefer. I might have an apple and prefer an orange. You might have an orange and prefer an apple. A trade would benefit both of us. Which is worth more? The only answer to that question is “worth more to whom?” The value of any given innovation to a patient depends on his situation. Consider heat-stable insulin. Government health boards would certainly see it as only incremental innovation over regular insulin. But in Africa, where good storage is expensive and rare, heat-stable insulin would save lives. And in the West, it would save money, because expensive refrigerated shipping would not be needed. Another example would be new drugs to treat tuberculosis. The current drugs are effective but must be taken for several months, and some patients must be supervised or they forget to take them. New TB drugs could shorten the treatment time, improving patient compliance and saving money on directly observed therapy. Now, if you're a very responsible patient who needs no supervision, you won't pay much more for that innovation. But if you value the ease of taking fewer pills, then maybe you are willing to pay more. Is that merely incremental to the regulators? Why should anyone make such a personal choice for someone else? We recognize the commonsense importance of incremental innovation in our daily lives. Would I seriously consider walking into a dealership and offering to buy a 2006 BMW [bay emm vay] 7 Series for the same price as a 2002? Of course I wouldn't. Then why would I think I have the right to pay the price of an old-fashioned drug and expect to receive a shiny new drug with better features? Some new drugs, just like some new car models, aren't sufficiently new that it's worth paying more for them, or even switching from your existing product. But who is best positioned to make that decision for a patient? Bureaucrats needing to make a decision for all their citizens on a one-size-fits-all basis? We think only the patient and her doctor can assess her unique needs and resources. When I was in the Netherlands recently, people were discussing Concerta, a time-release capsule version of methylphenidate, or Ritalin, used to treat attention deficit disorder. Concerta improved upon Ritalin in that consumers could take it once a day, instead of the thrice a day dosage schedule of Ritalin. When it was developed, some government regulatory bodies-such as in the Netherlands-called it an insignificant improvement over Ritalin, a mere “incremental innovation.” They decided to reference price Concerta at the price of Ritalin, one-seventh the market price. What happened? Over 10,000 Dutchmen and women are paying over 600 euros a year for that innovation that bureaucrats deprecated as incremental. Imagine how many more would choose this option if they had information about it as a health option. If a drug company develops a new product whose advantages are so trivial that no one wants it, no one buys it. No one suffers but the company. In fact, however, even a trivial innovation, or what some call a “me-too” drug, benefits consumers by creating more competition, driving down the price of drugs in its class. A recent study has shown that new drugs entering existing classes of drugs in a market environment are most often priced at a discount off existing drugs. If anything, similar drugs help reduce drug costs by increasing competition. Shouldn't we do everything in our power to increase this type of competition? We must remember that when new classes of drugs emerge, many drugs within the class are developed at the same time or as improvements on earlier versions. For example, in the United States, there are 7 different drugs in the same class-called triptans-used to treat migraines. They were all developed concurrently, and though some were approved before others and were on the market first, the competition for market share between so many on-patent, brand-name drugs has resulted in their prices all being around the level of generics. If more countries encouraged the development of “me-too” drugs and permitted competition, we could see more savings and more clinical, social, and economic benefits. Another advantage of having a large number of slightly different drugs is that it offers doctors a greater ability to treat different patients. The first drug in a new class to make it onto the market breaks new ground, but ten years later it is rarely the safest and most effective of its type, or exactly what all consumers want. If you look at the World Health Organization's Essential Drug List, you will see that half the drugs listed are the result of incremental improvements on older drugs. Everyone responds to a drug in a somewhat different manner. It depends on a variety of factors such as the patient's genetic makeup and lifestyle. For example, as few as 50% of patients may respond to any single drug related to the central nervous system. Beta-blockers are another example of a class of drugs where no single one works well for everyone. The more drugs available for a physician to treat his patient, the more likely the patient will respond to one. Different drugs may not offer a novel or therapeutic improvement for everyone, but they may for different individuals. Look at HIV and AIDS drugs. As soon as the first anti-retroviral drug had been created, a bureaucrat opposed to incremental innovation would have decreed that additional anti-retroviral drugs were unnecessary me-too products. If all the world had adopted this approach, we might have been left with only one anti-retroviral drug. Fortunately freer markets were available. More drugs were developed and in 1996, researchers recognized the outstanding benefits of combining multiple anti-retroviral drugs into a so-called “cocktail.” This research finding-itself an incremental innovation over how the drugs were previously taken-has changed an HIV diagnosis from a death sentence to a condition with which many people are able to live long, relatively normal lives. But none of this would be possible if we decide that once a first-in-class transformative drug appears, further drugs in that class aren't “worth it.” Further, when taken all together, the small improvements that each incremental innovation offers can result in lower treatment costs, shortened-or eliminated-hospital stays, increased worker productivity, and less absenteeism. Take controlled-release formulations of cardiovascular drugs. The relatively small development of a once-a-day version of the calcium channel blocker nifedipine, or the once-a-week version of the previously twice-a-day transdermal clonidine, led to more people taking the drugs properly, since it was so much less of a hassle. The overall cost of treatment has declined. A study examining the effects of different antihistamines found that productivity losses in America due primarily to the sedating effects of antihistamines ranged from $2.4 billion to $4.6 billion a year. Newer non-drowsy antihistamines such as Allegra have had a dramatic impact on reducing these costs. Because new drugs extend and improve the quality of our lives, any actions or inactions that hamper innovation in the pharmaceutical industry have an adverse effect on people's health and well-being. Moreover, not every drug can be a first-in-class blockbuster innovation. The drug and device research and development business is one of the riskiest on earth. Companies can only afford to make the risky long-term investment in potentially transformative products if they have the revenue generated by smaller, more incremental innovations. The impact of these policies is particularly disconcerting because there may be other ways to control costs while still providing for market rates of return for innovative products. One way to do this is through increasing competition between same molecule generic and brand-name drugs. Some countries actually use price control systems to prop up local manufacturers, retarding generic substitution, discouraging entry of multiple generics, and increasing health care costs. It is hard to imagine that such a situation is sustainable in the long run as national health policy. Not surprisingly, generic prices are lower in the United States-with its vigorous competition among generic drugs-than in Europe. Americans pay about half what Germans pay. Though 53% of prescriptions in the United States are filled with generics, they account for only 12% of drug spending. When there is full generic competition, the price plummets to about 20% of the branded price prior the expiration of the patent. Here is the bottom line: It's possible to redirect billions of dollars in drug spending, through greater use of less expensive generic drugs, permitting greater financial rewards for developing and providing access to valuable new drugs quickly. According to the Commerce Department report, if OECD countries removed price controls from generic drugs and increased generic utilization, they could save $5-$30 billion annually. This suggests that health systems could reimburse patented drugs at competitive market levels while at the same time significantly or fully offsetting the cost through a more competitive generic market. Conclusion In sum, a vigorous and profitable drug industry is not a problem to be solved, but a goal to be encouraged. The future need not be a binary choice between each government doing the best it can on its own to lower drug prices, choking off medical innovation in the process, or raising health care costs still further to pay for medical innovation that our nations cannot easily afford when we act alone. But I am confident that, given the great potential for worldwide improvements in medical care in the coming years, we can find ways to bring safe new cures to patients, while making medicines more affordable. Working together, we can set an example for a world that is getting smaller every day-and that should be getting healthier every day as well. Thank you. Last revised: July 5, 2007 |
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