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Drug Prices

The Drug Abacus

How much should drugs cost? That question can be answered in a lot of different ways, and at many levels of economic literacy. But the Wall Street Journal is reporting on a new comparison tool from a group at Sloan-Kettering, the “Drug Abacus“.
As you will have already guessed, under many plausible assumptions (such as a year of life being worth $120,000, with 15% taken off for side effects), the model reports that many cancer drugs are overpriced. The two worst are Blincyto (blinatomumab) and Provenge. On the other hand, the nitrogen mustard derivative Treanda (bendamustine) comes out as worth nearly three times as much as Teva is charging for it. Your own mileage will vary, of course: some people will regard a year of life as worth substantially more than $120K. Note that as you get closer to $200,000 for a year of life, the majority of the drugs in the calculator become relative bargains. Now, most people will find the whole process of arriving at any such figure to be distasteful and disturbing (an understandable emotional response that underlies a lot of wrangling about the drug industry, I think). As I mentioned in that post, the English language has an entirely different word for “customer of a physician” than it does for a customer of anyone else providing any other service.
The Drug Abacus is an attempt to bring the various factors of oncology drug prices into view: how much extra lifetime a given drug can provide, what the side effects (and thus quality of life) might be, and larger factors like how novel the medication is and what the overall population burden of that indication is. That mixture, actually, is one of the problems I have with this idea (which in principle I think is worth doing). An individual patient is not going to be deciding the price they’re willing to pay for a new drug based on its overall effect on the population, or how it fits into the therapeutic landscape. They want to know if it will help them, personally, and by how much
Another one of the sliding factors in the model, development cost, I don’t think should even be in there at all. Drugs should be evaluated by what they do, not how easy or hard they were to find and develop. That factor can end up being misused in many ways: people can complain that Drug X had a faster path through the clinic, so it should cost less, and companies might turn around and argue that Drug Y had to go back for another Phase III, so therefore it should cost more. Neither of these make sense. Each company has to look at its overall R&D spending and its success rate and adjust its pricing based on the whole picture.
As I did in that post I linked to a couple of paragraphs ago, I’m going to use the always-annoying car analogy. What would a “car abacus” site look like? The various sliders would represent things that people take into consideration when they buy a car: its utility, its stylishness, its repair and upkeep costs, its resale value and expected lifetime. I don’t think that there would be a “development costs” slider, would there? Or one for the car’s overall use to society? But no matter what, some cars would certainly come out looking overpriced, unless you attach a large value to something like “prestige” or “stylishness”, and even then, I’m not sure that the numbers would come out right. Manufacturers, though, charge what people are willing to pay, and if some people are willing to pay what seems like an irrational cost for a car, then so much the better.
The same principle operates at a coffee shop. You’ll be charged extra for some foamed milk in your coffee, or a shot of hazelnut syrup or some “pumpkin spice”, if it’s November. That extra price, it has to be noted, is way out of all proportion for the cost of ingredients or the extra labor involved. The coffee shop is differentiating its customers, looking for the ones who have no objection to paying more for something different, and making sure to offer them something profitable when they come along. (And a chi-chi coffee shop, to extend the analogy, starts differentiating its customers even before they walk in the door, by the way it’s decorated and the signals it sends).
But purchasing better health is, in the end, not quite like purchasing a car or even a FrappaMochaLatteChino. Thinking of it in those terms, I believe, can illuminate some aspects that otherwise get obscured, but in the end it’s a much more basic and personal decision. And as for personal decisions, Milton Friedman divided expenditures into four categories: when we spend our money on ourselves, when we spend our own money on other people, when we spend other people’s money on ourselves, and when we spend other people’s money on other people. Since he was famously libertarian, it will come as no surprise that he regarded the first category as the one where people were most likely to make better decisions (and it should also come as no surprise that government spending lands, as it would have to, in the bottom category). There are objections to this classification – you could say that the first category is also the one in which we might allow our emotions to override rational decision making, whereas the last one has the greatest scope for calm cost/benefit analyses.
Those objections are at the heart of the debate about drug costs, because there is nothing that we are more likely to become irrational over than our own health or that of someone close to us. An extremely uncomfortable thought experiment is to imagine a close family member becoming gravely ill, and then figuring out what you would be willing to pay to make them better. (You can extend your discomfort by imaging whether or not you’d be willing to pay that same cost, out of pocket, to extend a similar benefit to someone on the other side of the world whom you’ve never met and never will. That’s the line of reasoning taken by Adam Smith in The Theory of Moral Sentiments, subject of a recent popular exposition.). OK, back to your close family member. Got a figure in mind for a cure? How about an extra year of life, then? After all, that’s the unit of the Drug Abacus calculations. What about an extra year, but they can’t get out of bed? An extra month? How about everything you have, house and all, flat broke for another ten minutes? Ten seconds? At some point, Homo economicus gets up off the floor, having been clubbed over the head at the beginning of this exercise, and says “Hmm. Maybe not.”
But it takes a while for that to happen, understandably. And the whole thing, as mentioned, is wildly unpleasant even as a thought experiment, so going through it in real life is an experience you wouldn’t wish on anyone. The debate on drug pricing, though, grabs us by the backs of our heads and forces our noses down into the subject.

49 comments on “The Drug Abacus”

  1. anon says:

    These analogies make no sense. People don’t pay for drugs; insurance companies do.

  2. A Nonny Mouse says:

    Or Governments through health systems (in the more civilized parts of the world!).

  3. Morten G says:

    Really nice post. That’s all I wanted to say today.

  4. John Wayne says:

    Everybody pays for all drugs, you usually don’t see it directly in your monthly bills.
    The characters in Kim Stanley Robinson’s ‘Mars’ trilogy had a conversation about alternate economic models that captured population control. One suggestion involved the idea that everybody was born with the right to have 3/4 of a child. Thus, any couple could have 1.5 kids. After you had the first, you could either purchase the right to the other 0.5 kids from other people, or sell your remaining 0.5 kids to others to help support the family you have. This would establish a market price for life directly, and I’ve always been fascinated (and mildly disturbed) by the idea.

  5. Some idiot says:

    @1,2: oh yes, they do, and we do…
    Regardless as to whether or not it is an insurance company or a government that apparently pays, it is still us, the consumers/patients who pays, whether or not we have medication. The higher the drug prices, the higher insurance premiums/taxes you have. Don’t want higher premiums? Sure… do without coverage. Don’t want higher taxes? Sure… What are you going to cut? Schools? Roads? Defence spending?
    Yep, we all pay for all medication one way or the other, and this is a debate we all need to take part in, since rising drug costs is already an important issue. I absolutely hate the concept of putting a value on a year of someone’s life, but I’m damned if I can think of a better way of approaching the subject which is realistic…

  6. Magrinho says:

    @1 – huh?!

  7. Hap says:

    @5: Assuming you can legally avoid paying for insurance, eventually we will have to pay for it, unless we allow hospitals to refuse service to those unable to pay. (Hospitals will simply pass the costs of unpaid service to someone else – either the government or insurers and patients.) Since I’m not sure we’re willing to countenance that, we’re all going to pay for health care somehow.
    It doesn’t change your point (it strengthens it); it’s just a pedantic addendum.

  8. Some idiot says:

    @7: Good point… And don’t worry, I am a pedant too….! (-;

  9. Mucco says:

    I quite like this as an attempt at communicating the value of drugs, though note that a recent publication (link in handle) suggests the QALY threshold in the UK should be GBP 13,000: nowhere near the prices here.
    What this means is, with a fixed pharmaceutical budget, if you spend more than this, you are actually reducing the overall population health outcomes. Needless to say, this publication was not well received!

  10. Biotech Capitalist says:

    I definitely agree that development cost should not be a factor.
    To the posts about costs being so much lower in other areas of the world: your drugs are cheap because we pay for it. What happens if American payers stop subsidizing the world’s drugs? If drug prices are cheaper in Canada or the UK, that means the US is subsidizing their drugs (you’re welcome). What if we also put a ceiling on drug prices? Would it stop some drug programs from advancing?

  11. Vader says:

    Putting a price on a year of human life is problematic in any absolute sense. One way to get around the problem is to look at it in a relative sense, by casting it in terms of opportunity cost: How much does a year of life granted by the drug cost compared with other ways of granting a year of life?
    By this standard, automobile air bags fall colossally. It has been calculated that air bags cost about $1.5 billion per life saved. Assuming that the average person so saved lives another 35 years, that’s still hideously expensive compared with a year of life granted by the cancer drug.
    On the other hand, it costs about a dollar to save a Third World infant dying of rotavirus by providing rehydration salts and clean water. And that’s probably 50+ years of life.
    I have seen this kind of opportunity cost analysis since I was a teenager. when Petr Beckman used it to argue for nuclear power. I don’t understand why it doesn’t bring more rationality to these kinds of discussions … unless it’s that people don’t like the conclusions that come out of such analysis, such as the conclusion that we should build more nuke plants.
    Or perhaps it’s that we value some lives more than others.

  12. Sam Weller says:

    I think that factoring in the development cost does make sense for rare diseases. It’s like buying custom made clothes if you are exceptionally tall, for example. You know that the clothes manufacturers won’t maintain a line for people of your size, because it will never be profitable for them, so your choice is either go naked, or pay some extra money for someone to make you clothes.
    That said, it clearly adds a lot more fuzziness to the calculation.

  13. sir dingle says:

    Merck’s Keytruda $150,000/year
    Brisol-Myers Squibb Opdivo $150,000/year
    Pfizer’s Ibrance $118,000/year
    AMGN’s Blincyto $178,000
    Alexion’s Soliris costs $450,000 a YEAR!!!!
    But Dendreon’s Provenge at only $93,000 for a series of only 3 infusions (one time) was too expensive?

  14. Anonymous says:

    @9 13k per year of life is way undervalued. Just as a rule of measurement, the per capita GDP in America is abut 35-40k meaning each person on average generates 35-40k of economic activity. Not really an exact measurement but I don’t see how the dollar value of life could go below that lower bound.

  15. Eric says:

    Excellent post, well written! My only disagreement is that I believe health care (in the US anyway) is exactly like buying a car or a latte. Is your arthritis really bothering you enough that you want to spend thousands on a TNF inhibitor or do you stick with cheap methotrexate? Same question about whether you want a Mercedes or a Chevy. The discrepancy is really just that people enjoy buying a new car and dislike purchasing health care. Perhaps a better comparison is when you have to call the plumber to fix an overflowing toilet. If it smells bad enough, you’ll spend the money but you won’t be happy about it.
    Some commenters have argued that it’s not a fair comparison because of the insurance middle man. That’s not true. You still have to make the decision, it’s just that you are choosing between an expensive plan that covers prescriptions or a cheap plan that doesn’t. Either way, it’s still a matter of personal values. What’s your health worth? What’s a fair price for a latte?

  16. Bob says:

    I hate this slippery slope attitude. The only reason “we all pay for all medication one way or the other” is because we set up a system that allows this. As soon as you mandate hospitals and pay people’s health insurance directly from the government’s budget, you give the general population a say on how much I can pay and have to pay for health care.
    Health care is like a finite resource (not really finite, but highly inelastic). So the question really is how should we divide the resources we have. I have never understood why people have a problem with dividing health care based on money (like we do with all our other resources). I know this sounds callous, but does age, class, current health, etc. sound any less callous? If prices are symbols why not allow them to do their job and tell us how much a year of life is really worth?

  17. Anonymous says:

    In the end the company is just trying to either recoup costs of developing the drug and hopefully turning a profit.
    It will be interesting to see the price point on the CF therapeutics as it is a fairly limited market but one which will be dependent on the treatment for the rest of their lives (which will only increase with treatment). It will be entirely understandable if they cost a fortune but at the same time the patients need access.
    I think it comes back to should big pharma be a capitalist company based system or should we maybe rethink the whole thing and make it a public endeavor with established national research facilities.
    The question is would “removing competition” cause stagnation or would it increase collaboration and a pooling of resources to streamline the process.

  18. CMCguy says:

    While the individual development cost of each particular drug being applied due to variability makes less sense (partly because is typically already paid for out of revenues of existing products and not itself) as suggested there does need to be factors for covering cost of sustaining R&D plus the other burden’s associated with maintaining compliance. Of course this is not a simple and straightforward value in most cases, especially when accounting for feasibility and failed projects, and the fact that certain area’s and diseases do indeed take diverse levels of effort to run trials and obtain approvals so any sliding scale would have to be overloaded with bumps, turns and side pathways it might look like a 3-years old crayon drawing.
    #10 BT Cap it’s hard to say but if US does follow the lead of most other nations on drug price controls the advancement of new drugs may not halt completely but would remove the majority for private industry incentives, while some may think that governments/academia and non-profits might fill the void surely that would be messier and slower than the present inefficient and less-than idea situation that is going now.

  19. Anonymous says:

    I think leave the discovery to private enterprise. I don’t see how you can ask taxpayers to assume such a huge risk of failure for each program. Private capital can price in these risks for the promise of higher returns.

  20. Anonymous says:

    I don’t think that government can assume the mantle of private drug discovery anyway. I estimate the market cap of all the drug discovery companies is worth about 1.5-2.0 trillion. The total budget of the U.S. Government is less than 1 trillion. There’s no way the government can assume an industry of that size. Of course it could buy all the companies fire the MBAs and the. Pay everyone a post doc salary, but then they would quickly find that nobody wants to work at those slave wages.

  21. DVanBaak says:

    @11: Freakonomics.com quotes airbags at $1.8 million per life saved, vastly less cost-effective at life-saving than seat belts, but also far less expensive than the number you quoted.

  22. anon says:

    I disagree with the ‘car abacus’ statement that there is no “development costs” slider or one for the car’s overall use to society? That is exactly what you see with new car technologies, eg the hybrid car and now the electric car. We pay a premium to be the first to own these new technologies usually with some consideration for the overall use to society.

  23. anon says:

    I disagree with the ‘car abacus’ statement that there is no “development costs” slider or one for the car’s overall use to society. That is exactly what you see with new car technologies, eg the hybrid car and now the electric car. We pay a premium to be the first to own these new technologies usually with some consideration for the overall use to society.

  24. anon1234 says:

    I disagree with the ‘car abacus’ statement that there is no “development costs” slider or one for the car’s overall use to society. That is exactly what you see with new car technologies, eg the hybrid car and now the electric car. We pay a premium to be the first to own these new technologies usually with some consideration for the overall use to society.

  25. NateSnyder says:

    How about YPLL (Years potential life lost) or QALY (Quality-adjusted life year)? New CF drugs have to be worth the cost, right Derek? Low side effect targeted chemo vs kill everything that divides chemo, even at equal Kaplan-Meir curve survival, might get a bump?
    Somewhere in the algorithm for my abacus, I would value these but I suspect market incentives (rich older people can afford more expensive drugs) run counter. Thoughts?

  26. RLee says:

    So how do price in drugs that are curative? For instance how much for an antibiotic that treats a life threatening infection and provides many years of added life benefit.
    $5-10K is currently though of pricing point for this therapeutic class.

  27. anon says:

    The bulk of drug purchases are in the aged, retired populations. FICA taxes (over 40% of all federal tax monies collected from all workers, but only on the first ~$116K of income) should accrue enough interest over all the years collected to cover all drug/medical costs of the retired, which is subject to negotiation at many levels. Cars, coffee and bombs have no such tax scheme support.

  28. M says:

    @20: The federal budget is $4 trillion, not $1 trillion. And the annual cost of drug research is of course not related to the market cap of the companies, but annual research spending. I’d guess (wildly) that you’re looking at something like 5% of the budget to nationalize drug R&D. Add in that payments that currently go to fund R&D also go down, and this is certainly affordable if we thought it was a good idea.
    There are many, many other reasons not to do it, of course (not to mention my self interest at not wanting the industry I work in crowded out by the government.)

  29. M says:

    @13 sir dingle: Provenge’s expected expectancy increase was 4 months, so triple it to get the “per year” rate that you are quoting for the others. This puts it as the second most expensive drug in your list.

  30. Anonymous says:

    UK NICE currently works on a 40000 GBP per QALY when deciding whether to approve drugs for use in the NHS. The key issue is using clinical endpoints that give indication of value in the clinical outcome. Thus Healthcare Technology Assessment is born….

  31. PS says:

    Why does health care in US always boil down to “Your money or your life”? Are we trying to take care of sick people or to pick most vulnerable victims so we can rob them blind?

  32. Vader says:

    @31,
    Because health care costs money, and there’s no way around that. And there’s only so much money. Which really means that there are only so many resources, for which money is an accounting and signaling system.
    So what it’s really about is: How many resources do we have, and how do we distribute them? How many of them should go to health care, versus, say, better food, better clothing, better housing, police protection, fire fighting, road maintenance, or getting to have a weekend to relax? (Time spent relaxing on weekends is time not spent generating more food, etc.)
    It would be easier if it really was as simple a binary decision as “your money or your life.” But different illnesses have different effects on quality and duration of life, and treatments have varying efficacy and costs.
    I am diabetic, Type 2. The best treatment is losing weight and getting regular exercise, and I do those things. A surprising number of diabetics won’t, and I think one reasons is that they’d rather have a shorter life where they do what they want (and don’t do what they don’t want to) than a longer life with some burdensome diabetes management. Are they wrong? Who is to say?
    The next best treatment is metformin. That’s an incredible stroke of luck for Type 2 diabetics, because, as drugs go, it’s dirt cheap, effective, safe, and has no known long-term harmful effects. But suppose this was not the case. Suppose there were only two drug options, Gluconudge and Gluconuke. Gluconudge costs $10 a month (rather like metformin) and extends life by ten years. Gluconuke extends life by twenty years, but costs $100 a month. One way of comparing is that Gluconuke costs five times as much per year of life extension as Gluconudge, so it’s not cost effective and we should only provide Gluconudge. I suspect there are insurance companies that would be glad to apply that logic to their customers. I would definitely choose Gluconuke given those numbers, personally.
    @21: I’m an astrophysicist by training. Off three orders of magnitude? Meh.
    Did you hear about the astrophysicist who was arraigned for bigamy? The judge asks him, “Sir, just how many women are you married to?” “Your Honor, just one … plus or minus two.”

  33. peter bach says:

    I am the researcher who developed the DrugAbacus. I really appreciate this discussion. Couple thoughts. Derek does not agree with the inclusion of research costs. The DrugAbacus allows him to apply that view as that slider can be set to zero (functionally to 1, as this is multiplication). Another poster wants to credit rare diseases: there is a slider for that. On the question of the various drugs and prices, DrugAbacus incorporates the typical treatment duration to achieve the benefit, not a year in most cases.

  34. Anonymous says:

    @10: I’m not sure the economy works on a single-factor basis. Any evidence?

  35. Thomas says:

    I don’t think it is distasteful. Phrase the subject like this:
    “Would you rather get an extra week of holidays every year for your working life, or instead get a chance at a medical treatment when you are old and tired that will keep you alive for a year longer at the end of your life”
    That is also what ‘cost’ means. It is something people have to work for.

  36. anon says:

    Of course, there is always CRISPR. I think I’ll sign on for that one. Genetically edit all my disease causing variants and none of my family members will ever be sick again. Oh, yeah and put in some longevity variants. Is there any way that I could monetize this infinity of positive results?
    Oddly, the world scientific community wants a global moratorium on CRISPR.
    The notion that spending on these expensive medications is a signal to the pharmaceutical companies to continue to develop breakthrough medicines was somewhat obscured in this conversation. In effect, all the people who are healthy are free riding on those who are sick. People with illnesses are generating the positive externality of an expanded range of pharmaceutical choices for everyone else (When these drugs go off patent, people will then be able to access them at close to their marginal cost.) Seen from this perspective, it is unfair that society does not compensate those who are sick for the positive externality they have generated.
    It is a fallacy adopted by some government decision makers and others that these medications can be understood purely as costs. Spending this money is a signal to the biotechs. There is no great signal sent when someone buys a generic priced at marginal cost.
    It is also instructive to remember that economic systems that did not an incentive structure (such as communism) often never saw any particular reason to help their own people with the biotechnology products they developed.

  37. David Cockburn says:

    I agree with you argument that development cost is not relevant to drug prices.
    Now however development cost is high because money is wasted on ineffectual bureaucracy, as a result there are fewer new drugs, so less competition, so higher prices. So development costs are not totally irrelevant after all.

  38. Bagnar says:

    @37 – David Cockburn
    Can’t agree more with the second part of your answer, despite I consider for any invention / product the investment costs MUST be part of the price. No investment, no product. That’s a golden rule. After that, the percentage of this cost involved in the product’s prices is subject to caution.
    Back to “bureaucracy” for a second. In a big pharma, do you know the percentage of non-scientist employees ? Basically, these companies of science-driven companies, but heads are always far from science, isn’t it ? That could be an explanation and it could lead to profits-driven companies instead.

  39. sepisp says:

    Putting a monetary value to a year of life isn’t and shouldn’t be any moral issue, since the *cost* is there, whether you wanted or not. That’s the definition of a hard science: analyzing facts that exist regardless of your opinion.
    With emotional issues like this, people often confuse elementary things like what is a cause and what is an effect. The excess in the economic output people produce is scarce; that means it must be divided somehow. Putting 100% of your disposable income into medical research is not something most people would want to do. There are other factors weighed in than just the length of life. And people do and logically must do this comparison.

  40. Biotech VC X says:

    Great post. The drug abacus is a great website…
    Two questions for Peter Bach (if he is still reading):
    1. Would it be possible to add a “design your own drug” feature — that is, stipulate the inputs to see how (for example) a enzyme replacement therapy for disease X would be worth?
    2. I suspect Herceptin and Rituxan were excluded from the analysis beacuse of date of launch. But it would be great to see how those drugs stack up in terms of cost-effectiveness. I suspect Herceptin in the adjuvant setting looks like a bargain compared to the various late stage focused TKIs…

  41. Flem says:

    I agree with the need for a tool such as this. However I would first delineate between patented and off patent drugs. Patented drugs should be priced based on “value proposition” (not cost of development), however off-patent should be priced based on manufacturing cost.
    Priority should be to first squeeze out as much profit out of the off-patent products as possible.
    Perhaps we should consider starting a government subsidized generic drug enterprise (along lines of USPS – maybe they can be used to deliver cheap drugs to all Americans)

  42. Anonymous says:

    Expected economic value of drug = exp. increase in lifespan x [(exp. wage x exp. % of time able to work) – (exp. cost of care x exp. % of time in care)]

  43. Anonymous says:

    @14: “Just as a rule of measurement, the per capita GDP in America is abut 35-40k meaning each person on average generates 35-40k of economic activity. Not really an exact measurement but I don’t see how the dollar value of life could go below that lower bound.”
    Why not? Some people *take* net value from society rather than contribute. For example, if the patient is a criminal, then the drug company should pay society for saving the patient.

  44. Anonymous says:

    @18: “there does need to be factors for covering cost of sustaining R&D”
    No there doesn’t. If the cost of developing a drug is more than the drug is truly worth (in terms of added patient benefits), then drug companies shouldn’t develop it in the first place. But subsidizing innefficient innovation (paying to prop up supply when there is imited demand) destroys value.

  45. Trevor says:

    Would be curious to hear your thoughts on the Trans-Pacific Partnership (TPP) that’s trying to get pushed through right now.
    The conspiracy sites are all up in arms about big pharma being the treaty’s “puppet master”:
    http://www.zerohedge.com/news/2015-06-10/profits-over-public-health-big-pharma-revealed-puppetmaster-behind-tpp-secrecy

  46. Sympa says:

    One pays. But it does not make sense to pay X for a year’s extension to life if you could gave gained enough quality of life, for example taking holidays instead of not – for less than X,

  47. Economizt says:

    > “…the English language has an entirely different word for “customer of a physician” than it does for a customer of anyone else providing any other service…”
    How about student, parishioner, citizen, client, fan?
    Medicine is special, in important ways that other professions are, too.

  48. Derek Lowe says:

    #47 Economist – what I meant was that “patient” is used only for that purpose, and no other. You can be a student, even if you’re being taught just by reading a book, and “client” can refer to all sorts of services. I admit that I didn’t think of “parishioner”, though!

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