Michael Milken’s piece in Wednesday’s Wall Street Journal, “Health Care Investment: The Hidden Crisis,” makes a number of good points about the challenges the pharmaceutical sector faces. It omits a critical issue, however, one we’ll need to recognize and discuss as our aging population continues to demand more spending on medicines.
Milken makes the case that the pharmaceutical industry is undervalued in the U.S. today, both financially and in our day-to-day thinking. He points out that companies that sell eyeliner or beer have a price-earning ratio of almost twice that of pharmas. In addition, he details a number of legal and bureaucratic tangles that have the industry slumping, and shares public policy steps that can be taken to “remove some of the barriers to growth in medical research.”
Milken’s take is insightful, but there’s more to the story. Pharma is struggling because physicians are no longer the central decision maker in the industry – the payer is.
This is huge. And we’re paying the price in ways that go far beyond the profitability of Merck or Pfizer (though Aetna seems to be on the right track). No longer is a really good, innovative medicine – well, good enough. There has to be economic value as well, which is determined by a different set of instruments and of decision makers.
Historically, this trend began in the socialized healthcare countries of Europe, where fiscal budget challenges led country after country to save money by innovating with policy instrumentation, not on driving new biomedical discovery. The National Institute of Clinical Excellence (NICE) in the U.K. led the way. They decided they would only pay for an innovative, more expensive medicine when a diabetic patient was at risk of losing not one, but two, legs because of diabetes complications. Why? “Cost effectiveness.” The drug was more expensive than long-term treatment for a one-legged patient, but cheaper than the treatment for a patient with no legs.
A few years later, the Germans went one better. They announced they’d pay for an innovative patented medicine if, and only if, it were the same price as an older generic.
Two unavoidable conclusions come from payer-driven decision making. One, there is less incentive for innovative biomedical research. Two, it is price and not patient care that rules the day.
In the U.S., we’ve become efficient at driving down prices through various policy initiatives. But the consequence is that we also drive down innovation (and pharma stock valuation). As we can see right now, FDA officials and cancer-drug innovators are butting heads over what counts as sufficient follow-up study.
In some ways, this is what the current healthcare reform debate in the U.S. is about – or at least it’s what it ought to be about. Americans’ interest in health care will explode as our population ages, and we will not be satisfied until there is a better balance on health decision-making.
We would achieve the prevention and wellness Mr. Milken adeptly highlights if we used America’s aging population as the prism through which to frame our debate. Instead of a view of old age that merely equals sickness and care, we should ask ourselves: How can we keep people healthier longer? After all, it’s the over-sixty set who will be the primary consumers. And if our debates and reforms lead to incentives for innovation and increase in stock valuations, all the better.
Michael W. Hodin, Ph.D., is managing director, the High Lantern Group, and an adjunct senior fellow at the Council on Foreign Relations.
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