Congratulations! You’ve made it to the end of this course. All that awaits you now are some optional overview quizzes and — if you’d like to earn your certificate — the final exam. As we wrap up this course, we want to leave you with a quick recap.
We’ve explored the complex journey of drug development, from initial research to regulatory approval. You should now understand some of the scientific and logistical challenges involved, including the dedication required to bring new therapies to market.
We took a look at drug development through the financial lens of an investor. You’ve learned that a lot of investment is necessary for the costly and risky path to creating new drugs and that such investment is incentivized by the expectation that a successful drug will have a good shot at being very profitable from earning a market-based reward for a patent-defined period of time. We also explored how drugs with temporarily high list prices eventually go generic, becoming low-cost treatments for the rest of time. We compared the temporarily high price society pays for branded drugs to a mortgage, and the point when a drug goes generic to being like paying off the mortgage and owning a house. Nothing else in healthcare — not hospitals nor doctors nor nursing homes — ever goes generic. In that regard, in the long run, medicines are a uniquely cost-effective way to deal with diseases.
Speaking of list prices we examined the role of insurance companies, large self-insured employer plans, PBMs, and government programs in shaping drug pricing and access. We learned that affordability is a function of insurance and specifically what plans charge patients out of pocket before letting them access a prescribed medicine. We learned PBMs can put a low-cost generic drug out of reach of patients by charging a high price (milking patients for their out-of-pocket dollars is a practice known as reverse insurance) and can make an expensive drug affordable, if they decide to. We questioned the whole notion of skin-in-the-game and whether OOP costs are needed to deter over-utilization (who fakes cancer to score chemo?).
We considered that insurance plans usually aren’t obliged to cover a drug and therefore are in a strong position to negotiate prices with drug companies. But it’s the fact that plans are competing with one another for premium-paying members (both individuals and large employers) that forces plans to actually offer good insurance. That means that a plan has to cover things that its members value if it wishes to win their business. That’s why plans don’t just save money by refusing to pay for any novel drugs. They have to be mindful of what people want.
Ultimately, insurance is peace of mind and many people would rather pay a little bit more in premiums for a plan that covers more than to pay less for less. But when a drug just isn’t worth its price, plans don’t pay and those drugs sell poorly. Investors learn a lesson and don’t fund development of more such drugs. That’s how market-based innovation works. It’s an inscrutable calculator that reveals society’s preferences for the kind of innovation it wants investors to pursue through the pricing signals generated by the market.
We discussed that some patients can’t afford their out-of-pocket costs. While price controls might seem like an easy solution, they’re likely to significantly hinder investments in new medicines. We explored alternative strategies, such as capping out-of-pocket costs, to address drug affordability without compromising the incentives for innovation. We also recognized the importance of drugs going generic without undue delay as a source of tremendous value to society and that, if a drug doesn’t go generic due to competition after a patent-intended period of branded pricing (typically around 14 years post launch), then price controls to bring its price down make sense and wouldn’t deter investment in the development of novel medicines.
We discussed that other countries freeride on the U.S.’s willingness to pay market-based prices that incentivize the development of novel medicines and that, through the lens of Generalized Cost-effectiveness Analysis, it’s clear that even our seemingly high prices are a bargain compared to the even higher societal value these medicines offer. And while such prices are high to patients, they add up to only 8% of all our healthcare spending and are readily affordable to all of us if we pay for medicines and incentivize all this innovation through our premiums, not out of the pockets of the few of us who are patients at any one moment in time.
As you move forward, whether into careers in healthcare, pharmaceuticals, policy, or any related field, we hope you carry these lessons with you. Remember the complexities and challenges of this industry as we strive to sustain innovation while making healthcare accessible and affordable.
Thank you for your engagement. We hope you reach out with any questions at RAU@racap.com.