Yesterday, I went to the Digestive Health Institute at Carle for a breath test to see if I have SIBO, small intestinal bacterial overgrowth. The test is administered over time. I would blow into a tube connected to a collection device. The tech who administered the test would take the collection of my breath and feed it into some machine. The first time this was done, it was to establish a baseline. Then I was given a bit of sweet fluid to drink (Lactulose). There were subsequent readings every twenty minutes, for two hours in total.
I was told they were very busy when I was there. Indeed, after the first reading and drinking the fluid, which happened in an examination room, I was then ushered back to the waiting room. All subsequent collections of my breath happened there in the waiting room. The technician came out to get it. I remained seated as she did this.
There were several other people in the waiting room who were also having breath tests. The technician told me this was a scheduling issue. But it also must be that many people have similar symptoms to mine and the breath test is a first step at diagnosis, since it is comparatively inexpensive to administer and benign for the patient, except for the time commitment.
At the conclusion of the test, I was told by the technician that it could be up to 2 weeks before I would get the results. In fact, It was only a few hours later when I got a message from the APRN who ordered the test. I had tested positive, not really a surprise given my symptoms. She recommended that I get a prescription of Xifaxan and she said she'd work with my insurance to get it approved. Apparently there is no generic version and only a couple of reasonable alternatives, one of which is currently in short supply. I wrote back to her saying it would be ironical if my insurance didn't give its approval, as I pay an IRMAA for Medicare Part D.
The pharmacy called earlier this afternoon saying the prescription was ready. I went to the drive-through to pick it up. My bill was $713.63 for two weeks worth of pills (taken 3 times a day). I would have exploded at this, except that the night before I did a little research online about the cost of Xifaxan and thus knew it was well over $2,000. The invoice from the pharmacy confirmed this. The full price was $2,442.89. So I agreed to pay my share. And as of now, I've taken the first of the 42 pills.
I can afford this and after today probably won't lose any sleep about it. But what about the others who tested positive? I can only guess at the income of others who were sitting in the waiting room yesterday. Given that, I can imagine that some, in a similar situation, would say that $700 is too much to pay for the pills and therefore go without. How can that make sense, especially for retirees on Medicare?
Prescription drugs for more esoteric illness coupled with how health insurance now works has become a royal pain in the ass.
We've known that for some time, but this is the first time in my own experience where that stared at me straight in the face, as I've only once before received medical attention in the waiting room and that time my situation was unique. This time, it applied to several other patients as well.
*****
Most readers can stop after reading the above. Below I want to discuss the underlying economics a little, and suggest a possibly better way for conducting government policy about drug pricing.
Fundamentally new drugs that offer the promise of improved health for many receive a patent, or possibly several different patents. The patent protection means the drug company faces no competition in the market for this drug during the patent term. The patent term is the greater of these two: (1) 20 years after the patent application has been filed, or (2) 17 years after the patent has been awarded. There will be competition from generic alternatives after the patent term has expired. That competition should bring down the price.
During the patent term, there will be monopoly pricing. Of course, this price depends on the demand for the drug. Pharmaceutical companies try to increase demand by marketing their drugs to doctors. Doctors have incentive to recommend the best drug for treatment, regardless of cost. So the aforementioned marketing focuses on drug effectiveness. Of course, the doctors and other health professionals do understand the affordability issue for their patients.
Patients who have their drug costs insured 100% don't care about the price at all. It's the insurance company that cares. Even when the patient has a co-pay or a deductible, the concern about drug price may be minimal as the insurance company bears the lion's share of the cost. Thus the system has evolved so the insurance company has to approve the prescription beforehand. If the insurance company doesn't approve, the patient can't get the drug unless the patient is willing to pay full price for it. This is the same mechanism at work with expensive diagnostic procedures. (A quick aside here, my experience recently, meaning over the past 5 years or so, is that doctors and other health professionals are intimidated by this approval process. They resent that their judgments are challenged by the insurance companies.)
With this as background as to what determines demand for a new drug, there will be monopoly pricing . The price of the drug will be set to maximize the profit of the pharmaceutical company. As any student of microeconomics should be able to tell you, the monopoly price is socially inefficient. There is a deadweight loss. (This is sometimes referred to as a Harberger triangle, after the U Chicago economist Arnold Harberger.)
Social efficiency is obtained with marginal cost pricing. For this discussion the price of a generic alternative gives a reasonable approximation of marginal cost pricing. The proposal I will offer here is that this be the pricing that is used even near to when the drug is introduced in the market. The pharmaceutical company will be rewarded another way, by government paying it an amount equal to the monopoly profits in that market.
That would produce the efficient solution and still reward the pharmaceutical company for its innovation with the new drug. If the demand for the new drug was known up front, this would be the sensible solution.
Of course, it's not that simple. The demand for the new drug isn't known so readily. Have doctors been convinced by the marketing they've received or not? Even with that, there will be inertia as to whatever was prescribed before the new drug hit the market. The demand is apt to grow over time for this reason. And perhaps other uses for the drug are found after its release. That too would increase demand. This will be learned over time and won't be fully evident at the outset.
So let's imagine bargaining between the government and the pharmaceutical company happening on an annual basis. They are to bargain over drug price and the lump sum the government will pay the company. They will use the past experience of price, volume of drug use, and the company report on profits of the drug to help determine this year's bargain. The government will understand that the drug company has incentive to overstate profits from last year, to inflate the lump sum payment this year. Likewise, the government has incentive to lessen the lump sum payment somewhat, in anticipation of the drug company's behavior. But to the extent that transaction prices and volume of transactions can be accurately measured, the profit assertions will have be brought in line with that.
Over time the hope would be that the drug price falls to near marginal cost. (What a name brand would charge as a premium in the presence of competition from a generic alternative means it won't fall all the way to marginal cost.) And the drug companies are happy with the lump sum payments they receive from the government while the drug is under patent.
Could this actually happen? If only wishing would make it so.
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