This blog was written and first published by Dr Ian Tidswell, a 15-year pricing expert and Co-Founder of een Consulting. een Consulting is focused on helping to improve B2B pricing.

With healthcare costs absorbing an average of 10% of OECD country GDP and projected to continue to increase faster than GDP, this can’t continue for much longer.

Narrowing the focusing to pharma and medical devices, total spending on these categories has been increasing at 8-12% per year for the last 15 years and is projected to continue. 

Anger at pharma companies is increasing, with egregious price increases from companies like Valeant and Turing capturing the headlines, new life-extending therapies often costing $25,000-$100,000 per year (thanks to “value pricing”), and big pharma companies making around 20% profit margins.

Market forces don’t work well here: health is a “public good” with individual risks covered by public funds (in most rich countries).  Treatments are developed based on societies priorities to address public health issues and not individual willingness to pay. 

In my opinion, there are three special features of healthcare. 

1. Our health and life is so fundamental to us that individually we would pay whatever it takes to fix it.  If you have cancer, you want the drug that has the best chance to extend your life.  You will pay literally whatever you can afford to get it.  So the drug manufacturer’s “pricing power” is off the charts from the patient’s perspective.  Even when there is competition, we want the best, distorting pricing differentials.  Individuals, with the support of the manufacturers, petition the healthcare system to have their treatment funded making it tough to balance societies needs with the individuals.
2. Most of us pay only a small fraction of the direct cost of the most important treatments and drugs.  The rest of the costs are picked up by insurance or the government.  We complain about insurance premiums and taxes, but once we get sick, we want unlimited access to the best care.
3. We have a lack of information.  Healthcare is complicated: we need specialists (health care providers, e.g. doctors) to help us understand what’s best for us, but the information they have is of uneven quality and availability.  Furthermore, they are not immune to marketing messages that are designed to help the for-profit manufacturers, not societal outcomes.  In some countries (e.g. the US, Switzerland) more treatment = more income for them. And that’s without getting into the multiple diverging incentives of hospitals, governments, insurance companies and administrators.

Add on top of this the huge time and cost to develop new drugs, the great need not do harm with unanticipated complications, patents that reward innovation while stifling competition, and so much money sloshing around that bends ethical standards and it’s a big mess.

To be clear, I don’t blame drug and medical device manufacturers for most of this issue.  They are for-profit companies owned by shareholders with a fiduciary responsibility to maximise long-term shareholder value. 

It’s just that the profit incentive doesn’t work well with this market given all the above features (unless you have a hard-core libertarian viewpoint that places the individual’s choices over societies overall well-being). 

The pricing tools used in other markets when applied to healthcare work well at maximising profits but can further distort the market (I’m thinking of “value pricing”, segmentation, discounts and rebates to healthcare system participants, etc.). 

Fundamentally the challenge is that as a society we need to decide how much we are willing to pay for healthcare, and then allocate those resources in the most efficient and effective way to maximise outcomes. 

That’s difficult involving explicit “rationing” decisions and trade-offs between treatments now (with available treatments) and investment in R&D for future treatments.  Patients and the industry naturally push for their self-interest, and society struggles to balance those competing needs. Pricing has a role to play here, but it needs to be a very carefully crafted role.

So what to do?

Well, I certainly don’t have the answers, but the pharma and medical device manufacturers and their pricing and health economics experts owe it to society and to their companies to be part of the answer. 

The industry risks governments implementing populist measures that could make things worse, particularly in the US where almost half their revenues come from.  Prudence suggests they need to participate in conversations to come up with sustainable solutions that limit overall costs while promoting innovation in areas that do the most good. 

It’s going to be a long and difficult conversation, but pharma and medical device companies need to take a longer-term perspective, have the tough conversations now so that when the inevitable change, they can influence the direction taken for the good of us all.

This blog post was written by Dr Ian Tidswell. If you want to find out more about the great pricing work at een Consulting, you can read additional blog posts here.