Beware of doomsday scenarios for health care spending
Fair pricing activists applauded the news earlier this month that the FDA approved another drug to cure hepatitis C. That this new medicine is cheaper and treats people quicker than the existing hepatitis C drugs goes to show how fast healthy competition can change the outlook on health spending.
Not long ago, health economists were promoting a doomsday scenario that the new crop of hepatitis C drugs would break the bank. To be sure, these drugs were a huge advance, offering cures for hepatitis C rather than holding actions against this potentially disabling and even deadly liver disease. But they were expensive, and the costs would be felt over short time frame rather than be spread out over years.
Predictably, health care systems struggled to cope with the immediate budget impact, not least because health budgets operate in silos — the hospital budget, medical fees, drug budget, and the like. So there was an outcry about the increase in the pharmaceutical bill, with little acknowledgement of the future benefit of fewer hospital stays and reduced medical costs. Extrapolating the financial impact of these drugs on the basis of initial price and the potential number of patients that could be taking them was vastly exaggerated. Market dynamics came in, prices dropped, and patient numbers did not go up and up.
I believe that doomsday predictions should carry a health warning because they can mislead policy makers to make wrong decisions.
Take this famous prediction. Back in 1972, the Club of Rome’s book “The Limits to Growth” foretold that natural oil sources would dry up within 20 years and that reliance on fossil fuel was unsustainable. People took the forecast seriously. Yet here we are, 45 years later, knowing that the scenario was wrong, in part because it failed to predict that the United States would become one of the world’s largest oil and gas producers.
The problem with such doomsday predictions is that they make extrapolations based on static thinking, such as using consumption growth rates and reserves of finite resources known at the time.
Looking at today’s debates on health and pharmaceutical policies reminds me of the Club of Rome’s doomsday scenario. Predictions abound, warning that the health system budget is about to explode or that access to innovative medicines is unsustainable.
I have been hearing such predictions for more than 20 years. Don’t get me wrong: thinking about the sustainability of our health systems is legitimate, important, and necessary. Demographic trends on the one hand and achievements in biomedical research on the other offer considerable challenges for health systems, even in wealthier countries.
But the discussion isn’t really new. In the mid-1990s, the Danish government feared that a highly effective anti-migraine drug would break its health care budget. Based on an extrapolation of the price of the medicine and the potential number of migraine patients, some experts reckoned that the medicine would consume a significant chunk of Danish health care spending, not just pharmaceutical expenses. Such extrapolations were spectacularly wrong, which was fortunate for the Danish health care budget.
We are having a similar discussion today about the financial consequences of new hepatitis C medicines. These drugs are a demonstration of disruptive innovation at its best.
Before these medicines were developed, the heavy cost of treating hepatitis C complications, such as liver transplantation and liver cancer, was spread over many years. Then along came a disruptive medical innovation in 2014 that quickly cured this serious liver disease. That sea change has both immediate and long-term effects on health care costs. The immediate effect is the need to treat a large number of patients, while over time an increasingly smaller number of patients need treatment as the disease becomes rarer. In the United States alone, the long-term effect is that the use of these new medicines is predicted to prevent by 2050 more than 126,000 liver-related deaths, 78,800 cases of liver cancer, and nearly 10,000 liver transplants.
The FDA’s recent approval of glecaprevir and pibrentasvir (Mavyret) with a wholesale acquisition cost of $26,400, compared with $74,760 for the first similar curative treatment regimen for all forms of hepatitis C, launched in 2016, shows how quickly the situation can change.
Similar to the extrapolation of the drying up of oil reserves or the “budget-busting” migraine treatment, making projections based only on the current price and sales underestimates the dynamics of the pharmaceuticals market. Yes, the immediate budget impact in most countries is a matter for concern, in particular as budgeting generally looks at drug expenditures in silos and does not take into account the savings in hospital costs or increased productivity.
But what such extrapolations fail to take into account is that market dynamics can work quickly and effectively. As new competitors enter the market with other cures, prices come down. Regardless of administered pricing and tough negotiations in many countries, new competitors nowadays often enter the market within a few months of a first-in-class innovative medicine, leading to healthy price competition. The result: Doomsday scenarios of drug spending out of control prove to be exaggerated.
We certainly spend far more on cancer treatment today than we did 20 years ago but, in return, we have new medicines that have transformed cancer care. Between 1991 and 2014, the death rate from cancer dropped by 25 percent in the United States. This means 2,143,200 fewer cancer deaths occurred than if rates had persisted at the 1991 level. France spends almost five times more on diabetes medicines than it did 20 years ago, but the treatment for patients is like night and day for a much larger number of patients.
In comparison, costs for cardiovascular drugs have shrunk dramatically. In Germany, 12 percent of overall drug spending in 1995 went toward agents for lowering blood pressure or cholesterol; today it is 4 percent of drug spending. This is a significant change, especially since it has accompanied an equally dramatic reduction in deaths from heart disease.
The hepatitis C scenario shows how competition among innovative companies can bring costs down while the patent is still valid. The reduction in costs of cholesterol-lowering agents highlights another dynamic that takes effect when patents expire and these effective and therapeutically important medicines become considerably cheaper, often being sold for a few cents per pill. The expiration of drug patents is expected to reduce overall spending in the U.S. $143.5 billion in the next five years.
Medical progress clearly has its price, but doomsday scenarios based on simple extrapolations of today’s numbers are out of touch with reality.