Should we pay for drugs like software?
The most recent issue of Health Affairs (subscription required) has an intriguing proposal on how we might pay for drugs to maximize the number of people who need drugs actually taking them while minimizing cost. (“Drug Licenses: A New Model For Pharmaceutical Pricing”). The authors introduce the problem:
High drug prices are a major barrier to patients’ access to drugs and compliance with treatment. Yet low drug prices are often argued to provide inadequate incentives for innovation.
While their analysis of whether prices really influence R&D is, in my opinion, flawed, their underlying point is accurate: High drug prices reduce patients’ compliance (i.e. whether patients actually take the drugs they’re prescribed). For conditions where drug treatment has a significant impact, that can affect the patients’ health and also increase health costs overall. The drugs the authors focus on are a good example: statins for high cholesterol. Ensuring that patients who actually needs statins can afford to take them can prevent heart attacks and hospitalizations, which are of course far more expensive than the drugs. The authors point to studies showing that even modest increases in the copayments that patients have to pay for statins under their insurance can significantly reduce patient compliance.
The authors’ proposed solution is to change how we pay for drugs like these. The main costs associated with a producing a drug are upfront: the research, the clinical trials, the steps to get the drug approved, etc. Once approved, the cost of producing each tablet or capsule is, for most drugs, very low. Thus, paying by the pill it is not necessarily the only, or the best, way to compensate the drug company. We already pay for certain products the way the authors propose, the most familiar example being computer software and cable TV:
The licensing model we propose is referred to by economists as “two-part pricing.” Numerous examples of this exist in the nonmedical world, including Internet service, cable and satellite television, all-you-can-eat buffets, country club memberships, and cell phone plans. But perhaps the most relevant example is software. Instead of charging a fee every time a person starts his or her computer, Microsoft charges a one-time fee for the use of Windows. What makes pharmaceuticals similar to these products—and distinguishes them from other health services—are the very low costs of production and the existence of few good substitutes.
Uncoupling the cost of the treatment from each pill (or each monthly supply of pills) ensures that patients won’t stop taking the drug, or stop filling the prescription because of the cost of a particular bottle of pills.
It’s an interesting model to consider: That patients purchase not the pills themselves, but the right to as many pills as they need for a given year. Whether this is the right model, or whether there are others that are better, remains to be seen. But our current system in which drug companies hyper-market drugs to consumers regardless of whether those drugs are truly needed, in which many consumers are shielded from the true cost of those drugs, and in which ironically many patients who actually need certain drugs can’t afford them, clearly isn’t working. This is one alternative worth considering.