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Lower drug prices do not necessarily stand in the way of innovation

08-05-2018

The minister must use the gains for society as the guiding factor when neogtiating drug prices

Lowering the prices of expensive, innovative prescription drugs can actually boost the incentives to innovate. This view contrasts sharply with the current debate about high drug prices.

Whenever a new drug is considered for inclusion in the basic health insurance package, we often end up having the same discussion. The prices are incredibly high, people get upset, hospitals and insurers bitterly complain, patients can do nothing but hope for the best, but, in the end, we almost always pay anyway. The discussion about the drug Spinraza, for people with a rare muscle disease, is a good example.

The one argument that ‘wins’ the debate, time and time again, is that these high prices are allegedly necessary for producing the drug: without those high prices, there would be no incentive to invest in the necessary R&D. Although it sounds logical, this argument is not always correct.

In the Netherlands, we have created a committee of independent experts, the Insured Package Advisory Committee (ACP), whose job it is to assess how gains for society relate to the price. By looking at, among other aspects, the effectiveness of a drug, the price, and various ethical and social factors, the ACP advises on whether or not the inclusion of the drug in the basic package is justified.

It is not uncommon for the ACP to conclude that the inclusion of a certain drug in the basic package is indeed desirable, but that the manufacturer’s asking price is far too high. The ACP’s recommendations are passed on by the National Health Care Institute (Zorginstituut Nederland) to the Minister of Health, Welfare and Sport (VWS), who subsequently enters into negotiations with the manufacturer. On average, the Minister’s negotiating team manages to reduce the price somewhat (up to an average of 30% a year), but it is impossible that the paid price is always in proportion to the benefits. For example, the manufacturer of Spinraza asks approximately ten times the price of what ACM considers acceptable.

Because of the secret nature of the negotiations, we cannot say with certainty how much the Minister overpays for what drug. However, it is a mathematical certainty that, in a number of cases, the Minister pays more than what ACM considers socially justified.

To be fair, we understand the difficult position the Minister finds himself in. He suffers from what in the literature is referred to as the ‘identifiable victim effect’, which means that visible patients are given more weight than anonymous future patients with other conditions. From a political point of view, it is very difficult to leave patients in the cold when we know who those patients are, whereas we do not know who will be hit in the future. And since you cannot spend the same euro twice, you know that some people will surely be hit at some point.  

But understanding alone does not mean that society is well served. If the Minister pays more than what the ACP considers justified, the incentives for manufacturers to invest are disrupted. Manufacturers will then anticipate that they will be paid too much for drugs that have no competitors. It should come as no surprise that, over the past few years, the number of orphan drugs has dramatically increased. Orphan drugs are drugs for rare diseases. Their prices are no longer determined by the gains for society, but by the degree to which manufacturers are able to complete secret negotiations with the Minister successfully.

These perverse incentives stimulate manufacturers to invest too much in these drugs, at the expense of drugs that offer more benefits to society but fewer benefits to the manufacturer. In such cases, lowering the prices of those unnecessarily expensive drugs will actually result in a strengthening of the incentives to innovate. Manufacturers will still get a good price for their drugs, but even more so if they benefit society.

The innovation argument works so long as the benefits for society are in proportion to the price. But if not, we as a society pay too much, in every respect: too much with respect to other patients and too much to stimulate the innovation that society desires.

Marcel Canoy and Jan Tichem work at the Netherlands Authority for Consumers and Markets (ACM) and in addition, Mr. Canoy is a member of the ACP.