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FORUM When It Comes to Drugs, Price Is Not the Real Problem Renee Hsia Photo by Jeff Cleary One of the most publicized issues for health care consumers in the United States is the pharmaceutical drug benefit of government programs. The media have produced hundreds of stories on the increasing number of patients buying lower-cost drugs in other countries, a practice known in the pharmaceutical industry as "arbitrage" or "parallel trade." The high cost of drugs here at home has led to a huge push for the federal government to adopt this practice as a policy for its programs. Though at first blush, the idea seems attractive (except, of course, to the pharmaceutical industry), it may not be the most desirable solution, even for patients and payers. What's Good for the Patient Parallel trading can essentially be seen as an attempt to eliminate price discrimination. Contrary to popular belief, price discrimination is actually a welfare-maximizing stance in pharmaceuticals. No matter what the pharmaceutical pricing structure is, development costs must somehow be recovered. It is widely understood that the expense of pharmaceutical research and development is astronomical, standing at 15.6 percent of global sales compared with R&D costs of about 3.9 percent of sales across other U.S. industries. Recent estimates for the costs involved in developing a new drug total $802 million. Addressing the core problem--widespread difficulty in accessing needed medications--and not just the symptoms is still the primary goal. --Renee Hsia Theoretically, in capital-intensive industries like pharmaceuticals, hospitals, and hotels, price discrimination is necessary since it is economically inefficient to set a single price. Forcing companies in these industries to comply with a single regulated price would mean that those consumers who would have been willing to pay only the incremental cost of production might completely drop out of the market since they cannot afford the higher uniform price. Consider Priceline.com as an example. Those who depend on finding less expensive airline tickets or hotels would likely drop out of the market for travel if Priceline.com or similar agencies did not exist. If airlines were forbidden to offer certain seats at this price and instead decided to offer seats only to business travelers whose companies paid for their flights, there would be far fewer passengers in the air. Sure, the airline would find an equilibrium to maximize volume and price, but if they were forced to have a single price, that amount would undoubtedly be higher than what the lowest fares are now. Empirically, history, too, shows that uniform price may actually hinder access since manufacturers may prefer to delay launch in a less profitable country rather than accept a price lower than what they could receive elsewhere. Glaxo, in fact, did exactly this in France, where the company postponed its launch of the migraine medication sumatriptan (Imigran, Imitrex) for several years in order to harness profits from larger markets. The other possibility is that pharmaceutical companies would simply withdraw from R&D investment, which also could have harmful long-term consequences. Adjusting the Market If it is not in the best interest of patients to be buying drugs across the border, what are the options? The current climate seems to indicate that some form of price regulation is inevitable since it is unrealistic to expect that Medicare--or any payer--can purchase drugs at any price a manufacturer may set. Direct price regulation or profit regulation (as used in the United Kingdom) is likely to be politically unacceptable. There are, however, many different proposals about how to influence prices in the pharmaceutical industry while adhering to market principles. Health policy experts like Joseph Newhouse, the John D. MacArthur professor of health policy and management at HSPH and professor of health care policy at HMS, maintain that pharmaceutical-benefit managers who are contracted by insurance companies are a potential source of negotiating power. Haiden Huskamp, HMS assistant professor of health economics in the Department of Health Care Policy, et al. have suggested a system in which drugs could be classified under broad categories of therapeutic objective, and individual health plans could reimburse the lowest-cost drug in each category. Health care economist Uwe Reinhardt adds to their proposal by introducing a cost-sharing component that is not simply a copayment, but rather a coinsurance based on cost-effectiveness criteria. Since copayments shield patients from the true cost of drugs, implementing a coinsurance policy would allow patients to act in ways that improve the "signaling" effect of prices, but not radically reduce access to drugs. Each of these possible policy options has the potential to be regressive, so consumers with the least financial resources would pay a higher percentage of their income for drugs. This inequality would remain no matter what the price of drugs is. In the end, pharmaceutical prices in and of themselves are not the real issue. It is much broader: finding ways to expand insurance coverage for pharmaceuticals. Solving the core problem--difficulty in accessing needed medications--and not just the symptoms is still the primary goal. --Renee Hsia, a fourth-year medical student at HMS The opinions expressed in this column are not necessarily those of Harvard Medical School, its affiliated institutions, or Harvard University