This is perhaps the most counterproductive approach imaginable to controlling drug costs.
At its essence, it is a return to the concept of a “just price” [1] , the idea that there is a fair price for every good and service, one that can be ascertained a priori. This was a dominant economic philosophy of the European Middle Ages, one that contributed to poverty rates of > 95% [2] . We don’t want to go there.
This is not to say that the pricing of drugs has not sometimes been unjust – or in fact outrageous. The examples of Turing, Valeant and Mylan are proof enough of that. There is definitely a problem that needs to be addressed here.
But an a priori pricing scheme would create more problems than it solves. It would place a premium on gaming the system – all of the base costs of R&D and manufacturing are ill-defined and subject to interpretation. Rather than hire more scientists, pharmas would hire more accountants to provide justification for charging the highest prices possible.
Worse, since profits would be limited to a fixed percentage, pharmas would focus exclusively on therapies aimed at mass markets – 10% profit on a billion patients is a lot more money than 10% profit on a hundred thousand patients. R&D efforts aimed at these niche markets would cease immediately.
There is a better way to address the problem of overpriced drugs. Although complex in practice, in principle it is relatively straightforward. We would simply set a threshold price for clinical effectiveness, as measured by the Quality-Adjusted Life Year [3] provided by a therapy. If your drug extends a patient’s disability-free life by one year, you can charge $X dollars for it. A year of life at 50% disability justifies a price of $X/2, etc.
Obviously, the value of X is arbitrary. It sets a monetary value on human life and health, an exercise that most of us find distasteful. But I submit that it is far less distasteful than letting unscrupulous pharmas create monopolies and proceed to gouge their customers (and the taxpayers via Medicare and Medicaid).
The UK uses this system, and sets a threshold value for a QALY at about $40K. Pharmas can price their drugs above this threshold, but the National Health Service will not pay for it. In the US, Medicare and Medicaid are required to pay for all FDA-approved treatments, regardless of cost. Rescinding this requirement, and allowing these agencies to set a QALY threshold (it could be higher than Britain’s) would create a functioning price cap – one that relates, however imperfectly, to clinical value rather than ability to create a monopoly. It would also incentivize pharmas to direct their R&D efforts to drugs that create the greatest clinical value, as these would command the greatest profit margins.
The QALY is not without its problems. But the concept does seek to connect drug prices with clinical effectiveness. This is right philosophy for drug pricing.