- Michael Seto/Business Insider
Drug companies are everyone’s favorite punching bag.
Some of this – like when the price of a 60-year-old drug is hiked by 5,000% – is arguably deserved. Of course, drug makers are easier to blame for rising healthcare costs than say, the pharmaceutical benefit managers and other middle men that operate behind the scenes.
But a lot of the criticism is misplaced, says Jonathan Bush, CEO of AthenaHealth, a healthcare cloud IT company. It’s because people aren’t thinking about the total cost of treating a patient when they’re ranting about high-ticket drugs.
He didn’t name names, but Bush’s defense applies to new innovations that are coming to market with many thousand-dollar price tags. For example, Sovaldi, a hepatitis C cure approved in 2013 has an $84,000 list price (roughly $1,000 a pill) in the US that drew a lot of heat.
If new drugs are keeping people out of the hospital, and offsetting the much higher cost of surgery, then they’re worth it, he said.
Getting drugs to replace hospital beds
This thinking is underpinned by what’s called ‘value-based care’, a way of paying for healthcare that aims to improve the quality of care and cut costs.
In essence, payments to providers – be they doctors, hospitals or pharmaceutical companies, for example – should be tied to the effectiveness of the treatment. The primary beneficiaries, in theory, are patients and insurers. The latter, for example, are in some cases negotiating to pay for a new drug only if it works for a particular patient.
“The only legitimacy of pharma in this next wave of healthcare is its ability to replace – to more than replace – hospital costs,” Bush said. “I think if we get to a fix, if we get to more Medicare Advantage and more risk contracts, the opportunity for pharma is specifically measured by their ability to replace surgeries or hospital beds.” If, for example, a patient can take a new, innovative pill instead of coming in for a procedure, that can end up saving the healthcare system a lot of money in the long run.
This isn’t necessarily the case for many of the drugs that have been called out over the past year for price hikes, since drugs like the EpiPen have been available for decades. It’s more about new medicines that have just been approved that may be costly, but also could make it easier to treat a certain condition. And that has everything to do with how drug companies profit.
“This notion that the problem with the cost of medicine relates to profit is not just wrong, it’s almost completely upside down,” he said.
But it doesn’t have to be this way, he said, if you think about it in the context of the entire healthcare system.
“To me, if you make a 99% profit on a $80,000 drug, and you take $120,000 of 2% profit margin hospital cost out of the system, God bless you, you just took $40,000 of cost out of the healthcare system,” he said.
Bush said doctors also need to become more aware of costs, because they’re the ones making the decision to buy one drug over a nother.
“There is no consequence to bad shopping decisions, which is the fundamental reason why you have such a sloppy fat supply chain,” he said.