PwC Report: 2017 Will Be Year of Equilibrium for Medical Costs

By Donald Zuhn –-

A report issued by PwC's Health Research Institute (HRI) in June projects next year's medical cost trend (i.e., the projected percentage increase in the cost to treat patients) to be 6.5%, which is level to the medical cost trend for 2016 and comparable to the medical cost trend for the past three years.  According to the report, entitled "Medical Cost Trend: Behind the Numbers 2017," the projected increase in the medical cost trend for 2017 will be due to increases in access to care, particularly primary and behavioral health services, and not to increases in drug spending.

With respect to drug costs, the report notes that by employing more aggressive strategies with drug makers, pharmacy benefit managers (PBMs) will help keep overall drug cost trends in check in 2017, and that "political and public pressure will tamp down the largest drug cost increases."  In addition, the report points out that "[m]any of the new prescription drugs that are coming on market are not arriving alone but at close to the same time as competitors' drugs," and that such competition will help to keep drug prices down.  The report also indicates that specialty drug costs, which outpace traditional drug spending, are not expected to grow as fast as in previous years.

Of significance to the pharmaceutical and life sciences industry, the report states that "[d]rug spending is still a relatively small portion of overall health spending and, as such, concerns of ever-increasing cost growth from new cures may trigger false alarms."  More specifically, the report indicates that approximately half of all medical costs come from hospital spending, about 30% comes from physicians, and 17% from prescription drugs.  The report notes that:

It is important to understand the weight of these components to put health spending in context.  Prescription drug spending is a prime example since individual drug costs can be high enough to garner national media attention but, as a whole, are a relatively small portion of total health spending: a 10% jump in the growth in prescription drug spending would increase the overall medical cost trend by about 1.7%, for instance.

In explaining what the projections mean for various sectors of the health care industry, the report suggests that for the pharmaceutical and life sciences sector, "[t]he need for innovative, cost effective medicines continues to rise as regulators, payers, healthcare providers and patients demand greater value for money."  The report also states, however, that "[t]he reputation of the pharmaceutical industry has been weakened as a result of the high-profile pricing strategies of some manufacturers during the past few years."

The full report can be obtained here.

Comments

[David Steve Matthe]

In June projects next year's medical cost trend to be 6.5% which is level to the medical cost trend for 2016, comparable to the medical cost trend for the past three years. The projected increase in the medical cost trend for 2017 will be due to increases in access to care. The significance to the pharmaceutical and life sciences industry the report states that drug spending is still a relatively small portion of health spending.
Original industrial biotechnological research for discovery of new biodrugs and manufacturing of the proprietary medicines may be the lowest of the cost trend and will be better for the pharmacists and hospitals and affordable for the patients. The lowest cost trend for innovation and manufacturing of new biodrugs facilitates the pricing strategies of the pharmacists and hospitals leading to affordable health care.

[Paul Cole]

The risk-aversion of the public in relation to new drugs and the high costs of testing to meet regulatory requirements places extreme pressure on those seeking to develop new medicaments and other life science products.

Howard Florey and Ernst Chain, searching for potential antibiotics at Oxford University in 1940, used a mouse protection test to investigate the properties of penicillin. In the test, Florey and Chain injected eight mice with a lethal suspension of bacteria, and four of these were also given penicillin. The four mice which received penicillin lived and the rest died, indicating that penicillin could be effective against serious bacterial infections. The effectiveness of penicillin was recognised without a huge and elaborate trial followed by painstaking statistical analysis. In early 1941 penicillin was given at the Radcliffe Infirmary to a policeman called Charles Fletcher whose bacterial infection was greatly ameliorated within 24 hours, although he later relapsed and died. Of the next seriously ill patients, four made recoveries thanks to penicillin.

What chance would there be nowadays of conducting a similar experiment almost immediately after discovery of the effectiveness of a new medicament? Anyone in the bioscience industry would tell you almost nil, notwithstanding the potentially life-saving quality of the new medicament. Nowadays a medicament has to run the gauntlet of the Phase I, Phase II and Phase III trials and to present the results to slow-moving bureaucratic bodies before it can be prescribed for humans.

The reasons for careful testing and proportionate regulatory procedures are well-known and not in serious dispute. But especially in the case of third world countries and orphan diseases, it would not be inappropriate to consider whether their elaboration, which delays the introduction of new drugs for years if not decades, is always in the public interest.

Irrespective of such considerations, inventors following in the footsteps of Florey and Chain now find themselves in a situation known in economics as the "tragedy of the commons". If the new medicament is made available to everyone as penicillin initially was, then nobody will incur the cost of developing it and obtaining regulatory approval because all profit and even recovery of research costs would be nullified by unlicensed competition. It will be recalled that Sequenom was in that position with regard to its ante-natal tests as documented in the amicus brief filed by the Chartered Institute of Patent Attorneys in support of a petition to the Supreme Court for certiorari. That brief explains that bringing the invention to market as a viable medical test, clinically validating it and obtaining regulatory approvals cost Sequenom some $70 million, and price and market erosion from Ariosa’s competition had prevented recovery of this investment. Innovation in new pharmaceutical and other life sciences products is now practical almost exclusively as a result of patent protection and other allied rights such as data exclusivity.

The sad fact is that life science innovation is very expensive and has to be paid for. And eventually the exclusivity expires and the product becomes a generic, freely and inexpensively available to all.