Is it time to nationalize the drug industry?

Novartis to test new pricing model with heart failure drug

By Ben Hirschler
Reuters, June 30, 2015

Novartis plans to test a novel pricing model with some customers when it launches its keenly awaited new heart failure drug Entresto, the Swiss company's head of pharmaceuticals said on Tuesday.

Entresto, also known as LCZ696, is the first new drug in decades for helping patients whose lives are in danger because their hearts cannot pump blood efficiently. As a result, it is widely expected to generate billions of dollars in annual sales.

How the product should be priced, however, is a dilemma for Novartis, since the company wants to reach as many patients as possible and it knows it will be competing with very cheap - though less effective - older medicines.

David Epstein said he was talking to several healthcare customers about a system under which they would get the drug at a discount but then pay Novartis more if, as expected, it successfully reduces the need for costly hospital visits.

"We are beginning to share the risk," he said in an interview.

The idea of moving from a simple pay-per-pill model to one based on clinical outcomes is being considered by several drugmakers, and Novartis already has such a system in place for one customer using its multiple sclerosis drug Gilenya.

But Entresto could be an important test case because the drug will push up immediate drug costs markedly for a large number of patients, while having the potential to reduce their long-term medical bills.

The issue of drug pricing has come to a head recently, thanks to the launch of extremely expensive new medicines for cancer and hepatitis C, which are straining healthcare systems and adding to co-payment costs for patients.

Epstein, whose team is in the final stages of deciding the price for Entresto, declined to detail a likely cost per pill. But he said it would take into account "cost offsets", such as fewer hospitalizations, as well as the value added from improving patients' lives.

"We going to try and be fair and reasonable," he said.


Cost-Offsets of Prescription Drug Expenditures: Data Analysis Via a Copula-Based Bivariate Dynamic Hurdle Model

By Partha Deb, Pravin K. Trivedi and David M. Zimmer
Health Economics, October 2014


In this paper, we estimate a copula-based bivariate dynamic hurdle model of prescription drug and nondrug expenditures to test the cost-offset hypothesis, which posits that increased expenditures on prescription drugs are offset by reductions in other nondrug expenditures. We apply the proposed methodology to data from the Medical Expenditure Panel Survey, which have the following features: (i) the observed bivariate outcomes are a mixture of zeros and continuously measured positives; (ii) both the zero and positive outcomes show state dependence and inter-temporal interdependence; and (iii) the zeros and the positives display contemporaneous association. The point mass at zero is accommodated using a hurdle or a two-part approach. The copula-based approach to generating joint distributions is appealing because the contemporaneous association involves asymmetric dependence. The paper studies samples categorized by four health conditions: arthritis, diabetes, heart disease, and mental illness. There is evidence of greater than dollar-for-dollar cost-offsets of expenditures on prescribed drugs for relatively low levels of spending on drugs and less than dollar-for-dollar cost-offsets at higher levels of drug expenditures.



By Don McCanne

With the marketing success of outrageously priced drugs, the pharmaceutical industry is now devising schemes to be sure that their new products that are protected by patents will continue to be introduced with similar outrageous prices. This concept of adding “cost offsets” to the pricing is not new, but it now has a label that supposedly legitimizes its inclusion in pricing decisions.

In the past, pharmaceutical firms have cited the high costs of drug research as an excuse for high prices of new products (though the high prices of the past were nothing compared to the five and six digit prices of today’s new products). As the public discovers that the drug industry's advertising budgets are typically three times their research budgets, and much of the research is funded through government programs such as those of the NIH, the firms apparently have decided that this argument is no longer as persuasive, and so they have to find another reason to justify outrageous pricing.

“Cost offsets” is a convenient label for adding to the the research, marketing, administration and profit costs of the products. These “cost offsets” include such concepts as money saved by fewer hospitalizations, fewer expensive interventions for progression of disease processes, and for the added value of prolonged lives or the added value of higher quality lives.

Think about that. What gall it takes for these pooh-bahs of the pharmaceutical world to suggest that they are entitled to capture, for themselves, not just the costs and legitimate profits, but the value of the benefits of their products, through higher consumer prices, whether paid individually or through some form of public or private insurance.

This perverse type of thinking is not limited to Novartis’ David Epstein. Bayer’s Marijn Dekkers 18 months ago said, about their expensive cancer drug, Nexavar, “we did not develop this product for the Indian market - let’s be honest - we developed this product for Western patients who can afford this product, quite honestly.” 

Perhaps more despicable is this entry from a draft of the infamous Trans-Pacific Partnership Agreement, which contains the following in its statement of principles: “(d) the need to recognize the value of pharmaceutical products and medical devices through the operation of competitive markets or by adopting or maintaining procedures that appropriately value the objectively demonstrated therapeutic significance of a pharmaceutical product or medical device.”

Not only did the pharmaceutical industry buy off Congress when they went the route of the market-based Affordable Care Act instead of an efficient single payer Medicare for all, they have demonstrated to us that their primary goal is to achieve the greatest returns for their executives and shareholders no matter the cost to the ultimate consumers - the patients.

There could not be an industry that cries out more for government intervention to protect consumers than the pharmaceutical industry (oh wait, the private insurance industry, of course, but that's another topic). Many suggest that it is time to demand negotiation of drug prices, or even to dictate fair prices. But should that be our opening position? How about calling for nationalization of the industry, at least their U.S. subsidiaries. That should get their attention. They have to know that we're serious about wanting relief from their greed.