Patent Law and Health Care Cost

Today’s Managing Health Care Costs Indicator is $3.5 billion

While I wasn’t paying attention late this fall, Amgen succeeded in getting a new patent for Embrel (entanercept), an injectable biologic medicine used to treat rheumatoid arthritis and other immune diseases.   Patent protection for Embrel was expected to end in October of this year. This new patent means “follow-on biologics” (the equivalent of generics) will in this instance be delayed for as long as 17 years. The new patent was issued in 2011 because previous patent applications had been flawed. Current law would set the expiration date based on the initial application, but Amgen is benefiting from previous law which started the patent expiration clock ticking the date the new patent was issued.

Embrel had sales of $3.5 billion in the US and Canada, and costs about $20,000 per year. Forbes Magazine suggested that this patent decision could be worth $6 per share, but that seems quite low (there are ~800 million outstanding shares;  this would have suggested the new patent has less than $5b in market value)    Amgen stock was trading at under $55 in November. It’s over $67 now.  That’s $10 billion in shareholder returns for this patent victory.

We think of patent law as a way to protect innovation, and encourage investors to put their capital into risky businesses like pharmaceuticals, where many promising drugs fail after large investments. 

But I’d argue that in this instance patent law prevents, rather than promotes, innovation.   What rational pharmaceutical chief would prioritize investing scarce resources in research and development when there are such high returns available from investing funds in lobbying and legal schemes to extend patent protection?  As long as Amgen can count on Embrel as a cash cow, the need to find the next big drug is diminished.   

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Generic Medications Make Prevention More Cost-Effective

Today’s Managing Health Care Costs Indicator is 98%

 Click to enlarge. Source 

Prevention saves lives – but it’s often stated that preventing disease can save money.   It’s intuitive – a mammogram costs far less than treatment of metastatic breast cancer, and a statin medication costs far less than bypass surgery or a stroke.

However, there are historically few medical interventions that are cost saving.  Childhood vaccinations save more money than they cost.  Preventing medical errors can certainly improve care and lower cost, although this is an internal quality improvement as opposed to a new medical procedure. 

But most prevention efforts can improve health care quality and lengthen life – but often at a considerable cost.

Researchers in this month’s Health Affairs reanalyze earlier research on cost-effectiveness, substituting current generic prices for the brand name prices used in past years when there were fewer effective generic medications available.

The good news – the cost per quality adjusted life year in this new analysis goes down between 58% and 98%.   Although the title of the article implies cost-saving, there are no “negative” costs for Quality Adjusted Life Years (QALYs);  a QALY can be purchased in some instances for as little $1022.

Further good news is that there are a number of “blockbuster” drugs going generic in the next few years.

Click to enlarge. Source above. See also article in today's Boston Globe. 

There are still challenges, though.  Many states have less effective laws promoting generic use, leading to higher use of more expensive brand name medicines when they offer little incremental benefit.   Many physicians still object to generic drugs, although laws limiting and/or disclosing pharmaceutical company gifts might change this over time.  Patients aren’t sure, either, and the different colors and shapes of generic medicines diminish their acceptability. 

We need to push hard for the most cost-effective approaches, so that we can better use our limited health care dollars.  This article shows the importance of promoting use of generic medications.

Past relevant  Managing Health Care Cost Posts:

Cost savings with generics, March, 2011

Senators Try to Undermine Generic Bioequivalents  January, 2011

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Prescription Abandonment on the Rise

Today’s Managing Health Care Costs Indicator is 86%

That’s how much the rate of prescription abandonment rose over the last four years, as reporting on public radio's Marketplace this afternoon. 

More and more Americans are in health plans with higher member cost share, and people are going into the pharmacy expecting to pay $20 for a prescription, and discovering it’s $40 or more.  For many Americans, this is just too much to pay.

One of the interviewees noted that he also saw his patients deciding to skip physical therapy because of high copayments.

This is one of the bitter ironies of the increased coverage of health care reform.  More Americans will be insured (mostly starting in 2014), but even those with “full” coverage often find that their insurance doesn’t cover them as it once did.

This is bad news for health.  The pharmaceuticals introduced over the last decades represent quantum leaps in the treatment of HIV, depression, ulcer disease, asthma, diabetes, cholesterol and many cancers.  However, these innovations are no good if people can’t afford them.

The answer for consumers is often generic medications –which can be purchased at a fraction of the cost of brand name medicines.  Generic prescribing rates are currently around 70% in states with ‘mandatory substitution,’ where a physician must explicitly demand the brand or else the pharmacist must use a generic.  However, closed health care systems can achieve an 80% generic rate, which dramatically lowers overall costs.

The public policy answer to high pharmaceutical costs is less clear.  Possible answers include

1. Price Controls: Most industrialized countries have some form of price control.  As a result, drug costs are dramatically higher in the US, which helps attract additional capital into the pharmaceutical industry. Price controls are politically difficult in the US – and unlikely to be implemented. 
2. Antitrust enforcement:  Consolidation in the industry leads to less price competition. (Pfizer just shelled out $2.6 billion for a generic drug maker, King Pharmaceuticals).  Even more important in terms of promoting sane prescribing would be prohibiting cross-promotion of medications.  This is when a company allows discounts on a popular medicine only if the pharmacy benefit manager (or health plan or employer) agrees to put other company products on a preferred list.  This process helps keep actual prices opaque, and leads to higher costs.
3. Patent Vigilance: Patent protection is why brand name medicines are so expensive.  Congress has periodically offered further patent protection to the industry, and limiting patent protection would make the industry less profitable and less attractive to new investors while it would lower costs.

The rising abandonment rate is further indication we need to lower the costs of prescription medications.  It won’t be easy to do so, but there are a lot of people wheezing away who can’t afford their asthma inhalers.  We don’t want them to be hospitalized, and an inhaler is a good deal compared to an emergency department visit

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