The Price of Living

Continuing from my last post about the cost of drugs (and by extension, health care in general), I left off with the question: why is the cost of the cancer drug cocktail mentioned in that BusinessWeek article $250K/year?

Certainly marginal cost is a lower limit, and microeconomics tells us that in the long term, competition will drive price to equal marginal cost. However, these new drugs are not even remotely close to the "long term" yet. Rather, these drugs are priced to match a customers' "willingness to pay" at a level that maximizes profit. Microeconomically speaking, this is monopoly pricing since at this early stage of a product's life, there are few to no competitors. It is the ability to skim this surplus profit during the period between pure monopoly pricing and pure competitive pricing that usually spurs people to do new and innovative "stuff."

So, who out there is really willing to pay $250K/year? Are there really that many super-rich people out there who can afford this? Well, from the 3rd paragraph in the article, obviously not. Most people who get these drugs have insurance. It's the insurance company that really is the first line when it comes to willingness to pay. Why will an insurance company pay a certain amount of money for an expensive drug? Well at the core, an insurance company will pay if its subscribers are willing to pay the shared cost of the drug to counterbalance the risk of their needing the drug. But also, in most circumstances, if the drug is approved by the FDA for a given live-saving purpose, insurance companies will be required to pay for it, and thus subscribers will also be required to pay for the shared cost of the drug. Under these circumstances, it seems that an insurance company would end up with a price that would be a combination of several factors:

• Cost that subscribers are willing/able to bear
• Cost to put up hoops to make subscribers jump through to get the drug
  
  • Including the related cost of bad press, government sanctions, etc...
    
• Cost of alternative treatments with similar efficacy
• Level where reasonable third parties (e.g. voters/government officials) would consider the drug companies to be charging an unreasonable price

This turns out to be quite a cost. There are so many people afflicted with illnesses and are desperate to live coupled with pricey drugs and procedures able to meet their needs. This would lead to tremendous pressure on insurance companies to spend. In this environment, the insurance premiums can quickly be pushed up right to the edge of what subscribers are willing and able to pay. So how much life are we buying?

Well, I did some google searches and pulled up some OECD (Organization for Economic Co-operation and Development. Prof. Azis, my macroeconomics professor, called it the "club of rich countries.") data about health care spending. Let's take a look at how much we spend and how long we live compared to other developed countries:

Well, from this data it looks like we spent a lot more money than anyone else, but aren't really buying much (or any) life. Now, there are other data axes that I'm not examining. For instance, most of the spending in the US is private (e.g. individuals or insurance companies), whereas in most other countries (which have nationalized healthcare), the majority is public (e.g. government). These expenditures also include elective procedures (e.g. cosmetic surgeries, sports injuries), which are also more prevalent in the US than elsewhere.

Why is this the case? Well, that's a complex issue. There are many policy arguments over this data, and I don't really know how conclusive any of it is, since this topic is heavily politicized. I do recall one guest on NPR a few weeks back talking about this subject. I can't remember who it was, but she looked over spending, life expectancy, and customer satisfaction data across different wealthy nations, especially comparing nationalized health care to the private system we have in the US. Her conclusion was that the reason the data comes out the way it does is because in most European nations, the budget for national healthcare is fixed. Thus, patients whose illnesses have progressed beyond a certain point will no longer receive treatment, and expensive diagnostic technology (like MRI's) are applied in a more judicious manner. This is in contrast to the US, where treatment is typically provided (by an insurance company or by Medicare) for as long as the condition persists or the patient dies.

Recall the second paragraph of the article excerpt where a Belgian study notes the high cost of Herceptin treatment. The implication here (in line with the guest on NPR) is that cost is a factor for whether or not a treatment is adopted for use within the national health care system there. In the US, treatment is dictated primarily by the efficacy of the procedure. Certainly, it's not absolute. Because of the issue of co-pays and off-label usage, there are many situations where an American patient may choose not to receive a certain treatments because the cost is too high. To a large extent, though, it is the entity that bears the smallest fraction of the cost (e.g. the individual with the $30 copay) that makes the decision rather than the entity that bears the largest fraction (e.g. the insurance company or Medicare with the remaning $5000+ bill). Still, who wants to be the person who has to choose who lives and who dies? Isn't it much more comforting to let everyone have their chance, slim as it may be? And politically, who would withstand the cries of hundreds or thousands of widows, widowers, orphans, etc... whose loved ones were denied treatment? In a nation of hundreds of millions, this may seem to be insignificant number, but politically incensed individuals are potent beyond their statistical representation.

And really, what is better? If we need to spend more to save just one, ten, or a hundred lives, who can say that it is or isn't worth it? America is a very wealthy nation with an extremely strong economy. If any nation can shoulder this burden, it is the United States. But of course, there is no easy or definitive solution to this issue. The best I can hope to do is just understand it better.

The Cost of Living

Several weeks ago, I stumbled across an issue of BusinessWeek left behind by a previous passenger on a plane. The issue was dated Jan. 30, 2006, and I came across an article about the high cost of medicine and copied down this section:

Dr. Leonard Saltz of Memorial Sloan-Kettering Cancer Center in New York says that 10 years ago the drugs used to treat colon cancer cost about $500. Today, the tab is $250,000. Over the same 10-year period, the average life expectancy for colon cancer patients increased from 11 months to a little more than two years.

Doctors say many breast cancer patients routinely refuse a new class of drugs known as aromatase inhibitors, which prevent the disease from recurring, because they can't afford them. Herceptin is also effective at preventing recurrence, but a Belgian study released last month calculated that Herceptin would cost European governments $42,000 per patient if used for that purpose.

H. Wayne Thornton of Albuquerque, a supervisor with the U.S. Forest Service, was shocked when he was diagnosed with breast cancer in 1996. The 59-year-old has gone through surgery and numerous rounds of chemo. He is now trying to survive on a combination of Herceptin, Avastin, and Abraxane, a new chemotherapy from American Pharmaceutical Partners Inc. -- at a cost of about $25,000 a month. Thrornton pays a premium of $388 per month to cover his wife, Betty, and himself. Still, his co-pays total hundreds of dollars each month for these three drugs.

It's that first paragraph that really caught my eye. 13 months of life = $249,500. That's a lot of money. Google says there are 9496.3 hours (395.68 days) in 13 months. That means the cost comes out to $26.27/hour ($630.56/day). This is so much money that even at 1/2 or 1/4 the cost, we're still in a position where most people would not be able to pay.

So is someone out there making obscene profit? It's not that hard to check. The Herceptin and Avastin mentioned in the article are both made by Genentech, a public company that goes by NYSE:DNA. Public means I can pull up their 10-K annual report and see what they made. From there we get:

• Revenue: $4.6 billion
• Expenses: $3.5 billion
  
  • R&D: $945 million
    
• Profit (before taxes): $1.2 billion
  

That's a lot of money they're making. But $250K a year is a big sum to chop down in order to be affordable. Let's say they halved all their prices. That would give us:

• Revenue: $2.3 billion
• Expenses: $3.5 billion
  
• Loss: $1.2 billion

Well, there can be some argument here over whether or not expenses would decline as prices decline, since you might not need as much sales and marketing if your product were cheaper. But even if you assume that this price is sustainable, we're still talking about $120K a year. That's still mad expensive. So let's chop it in half again:

• Revenue: $1.15 billion
• R&D Expenses: $945 million
• Cost of Goods Sold (e.g. manufacturing cost): $672 million
• Loss: $467 million
  

Whoops, although all we're doing now is manufacturing and research drugs, we're losing money. And it still costs $60K/year ($157.64/day).

But that leads to a more basic question. Why is the price set at $250K/year?

Goal Setting

Dan covered (as part of today's training) a piece on goal setting. Seemed better and more detailed/specific than SMART.

7 steps/parts, order matters:

1. What do I want?
2. When will it be done?
3. What are the obstacles? List them.
4. What do I need to know?
5. Who do I need to know (and what do you need to get from them)?
6. Lay out the game plan - milestones on the way to the goal.
7. What's in it for me?

What I liked about this set compared to SMART (specific, measurable, achievable, realistic, time-bound) is the better transition to execution. The difference rings particularly true with respect to my missteps doing the CJAS re-org thing. It's funny that as a more execution/implementation-oriented guy, my main error was not an inclarity in setting the goal, but rather a failure in following through. It feels like this model fills a lot of the gaps from back then.

We'll see..