Monday, November 16, 2009

The Pharma Pricing Dilemma

How to Rebalance the Picture
There’s front page outrage in today’s The New York Times. The pharmaceutical industry is roasted again in “Drug Makers Raise Prices in Face of Health Care Reform.” How much of the criticism is deserved, and how much is a result of poor communications or inadequate reporting?

The article cited several studies that link big increases in drug costs to legislative efforts – like bumping up carpet prices just before the big sale, or the rush to raise interest rates and fees before credit card reforms become law. The most recent study was conducted for the AARP by Stephen Schondelmeyer, a professor of pharmaceutical economics at the University of Minnesota. It concluded that drug prices increased approximately nine percent in the face of an overall decline in the Consumer Price Index of 1.3 percent. He told the Times, “When we have major legislation anticipated, we see a run-up in price increases.”

Not so, said Merck spokesman Ron Rogers. “Price adjustments for our products have no connection to health care reform.” But Joseph Newhouse, a Harvard health economist, said he found a similar pattern of stiff increases after Congress added drug benefits to Medicare in 2006. He said, “They [the industry] try to maximize their profits.”

No kidding. Of course the industry, any industry, wants to maximize their profits. Indeed, there’s an obligation to employees and shareholders. The problem is one of perception. What is smart business that helps to guarantee the long term success of the enterprise, what is abuse or greed, and what is corporate desperation?

The other side of this story is not told particularly well, and it’s hard to determine if it’s the lack of space accorded the pharmaceutical industry by the Times, the lack of a compelling message by the industry or both. The article states that “Drug makers say they have valid business reasons for the price increases” but then fails to explore it further.

Ken Johnson, senior vice president of the Pharmaceutical Research and Manufacturers of America (PhRMA), does manage to get a shot in by criticizing the study methodology and its sponsor. “In AARP’s skewed view of the world, medicines are always looked at as a cost and never seen as a savings – even though medicines often reduce unnecessary hospitalization, help avoid costly medical procedures and increase productivity through better prevention and management of chronic diseases,” he said.

Yes, good points, but readers are still left with questions and concerns. And, what about the cost of failure – the part of the price increases that are necessitated by the sheer difficulty of bringing new, differentiated medicines to the market? The reality is that, without the ability to replace innovative products lost to generic competition, outsized price increases will continue to play an outsized role in pharmaceutical profitability.

So, what needs to be done in order to achieve some balance, some greater understanding of the complexities in healthcare costs?

Provide proof. The industry must deliver concise, compelling and understandable information. Any spokesperson should be able to recite at least three pieces of evidence to support their position. And, if you believe the methodology of the offending study is flawed, develop your own bullet proof information.

Utilize credible supporters. The extreme pricing contention was delivered by two academics, a consumer group and an industry analyst. The industry’s position was staked out by the pharmaceutical trade association. It’s clear where most readers will place their trust.

Strike the right tone. Lashing out may be tempting but it could have the effect of creating sympathy for your adversary. And, in this case, the object of PhRMA’s annoyance – the AARP – represents millions of the industry’s customers.

Think about the timing. It may be that, as Catherine Arnold of Credit Suisse said, “If you’re going to take price increases, here and now might be the place to do that, because the next year and the year after that might be tough.” But, if these price increases cancel out some of the savings promised by the industry during negotiations over health insurance reform, don’t be surprised if some legislators attempt to exact new concessions with renewed determination.
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