Just as the price of a Rolex™ watch is not solely determined by the cost of its materials, the cost of a prescription drug is not simply the cost of its ingredients.
Like other products resulting from research and creativity, medicines are really made of knowledge–a kind of intellectual property capable of preventing and curing diseases as well as relieving the pain of a headache or hip transplant. This knowledge does not come cheap. Discovering, developing, testing, and gaining regulatory approval for new medicines is expensive, time-consuming, and risky.
For every 5,000 medicines developed and laboratory-tested, only five, on average, make it to clinical trials. Only one of those is eventually approved for patient use. Revenues from the one successful medicine must cover the research and development costs of the 4,999 that don’t make it to your medicine cabinet.
The average cost of bringing just one of those new medicines to market was recently pegged at $1.7 billion by Pfizer CEO Dr. Hank McKinnell.
Discovering and developing a new class of drugs now takes between 12 and 17 years. Much of that time is spent complying with self-imposed quality procedures, government regulations, and a series of strictly controlled clinical trials designed to ensure safety and effectiveness.
On average, only three of every 10 prescription drugs marketed to patients generate enough revenue to exceed the average cost of research and development.
While the cost of research and development is increasing, the amount of time brand-name drug manufacturers have to recoup their investment under patent protection laws is shrinking due to stepped-up competition from generic drugs. The clock starts ticking on patent protection when a drug first goes into research and development. For a drug taking 12 years to develop and bring to market during a 15-year patent agreement, the pharmaceutical company has just three years to recoup its investment and make a profit for shareholders.
Companies fund research on future medicines and improvements to existing medicines with revenues from medicines currently in the marketplace. On average, and according to annually published shareholder data, one dollar out of every five earned in revenue is reinvested back into research and development.
Pharmaceutical companies are currently working on more than 1,000 new medicines–for Alzheimer’s, stroke, cystic fibrosis, arthritis, and many other diseases. For cancer alone, more than 400 medicines are in the pipeline.
The Value Factor
Focusing too narrowly on cutting the cost of prescription drugs may cause us to lose sight of their real and future value.
We can’t easily calculate the value of a smile on the face of a child who doesn’t have to feel the pain of cancer, or the stamina delivered by two hip replacements for a grandfather who delights in camping with his grandson. We can, however, quantify some of the value pharmaceuticals bring to patients, to society, and to the health care system.
A study sponsored by the National Institutes of Health found treating stroke patients promptly with a clot-busting drug nets an average savings of $4,400 per patient by reducing the need for hospitalization, rehabilitation, and nursing home care. According to NIH, greater use of this medicine could save the health care system more than $100 million a year.
Increased use of asthma medications resulted in fewer emergency room visits for Medicaid asthma patients and a major cost savings for the Virginia Health Outcomes Partnership program. For patients in the demonstration program, emergency room and urgent care visits dropped by 42 percent.
A study published in the American Journal of Managed Care reported the total costs of treating patients for migraine headaches declined 41 percent as the result of a new drug. Another study showed the drug saved employers $435 per month per employee due to a reduction in lost productivity costs. The monthly cost of the drug per employee was only $44.
Congestive Heart Failure
In a year-long disease management program for about 1,100 patients with congestive heart failure, Humana Hospitals found pharmacy costs increased by 60 percent while hospital costs dropped 78 percent–for a net savings of $9.3 million. The patients’ ability to perform the activities of daily living went up 15 percent, and the death rate dropped from the expected 25 percent to 10 percent.
More than four million Americans suffer from Alzheimer’s disease, which is estimated to cost society $100 billion a year in medical care alone. A significant part of the cost is devoted to nursing home care. A recent study showed patients treated with a new medicine were only half as likely to require costly nursing home care as patients who didn’t get the medicine.
Diabetes and Depression
According to a study published in Health Economics in 1996, prescription drugs helped reduce absenteeism in employees with several diseases, resulting in significant cost savings. For depression, the annual savings was $822 per employee, and for non-insulin dependent diabetes, the savings was $1,475 per employee.
A study by the consulting firm William M. Mercer found non-sedating prescription antihistamines, though more expensive than over-the-counter medicines, cut down on lost productivity and accidents. The study found every $1 invested in non-sedating prescription medicines yielded a $3.07 return to the bottom line of a corporation due to increased productivity, decreased sick time, and reduced accident costs.
Some 30 million Americans are at risk of developing osteoporosis, and more than 300,000 hip fractures occur every year because of this disease. Fortunately, several types of medication are available to help prevent osteoporosis and reduce the human and economic toll.
My own hip replacement surgery cost about $30,000 a little more than a year ago. A leading hormone replacement therapy, which I’m using to treat the other hip, costs about $1,500 a year.
It’s not always possible to put a price tag on the value of pharmaceuticals, but experts and patient organizations have calculated the cost of leading diseases. As the population ages, the costs of caring for people with these and other diseases yet unknown will escalate–unless we come up with more cures and better treatments.
Every government proposal that impacts health care policy should be judged carefully on whether it would nurture or hurt the environment needed to continue the remarkable progress brought about by drug research.
Conrad F. Meier is managing editor of Health Care News. His email address is [email protected].