Perspective: The perils of value-based pricing for prescription drugs
By Robin Feldman Robin Feldman is author of the new book"Drugs, Money, & Secret Handshakes: The Unstoppable Growth of Prescription Drug Prices.
In a surprising twist, however, one approach is drawing support from across the political spectrum: value-based pricing. This concept suggests that a product’s price should be based on the value that the customer perceives from a product. The focus on customer perception makes value-based pricing particularly handy for industries in which demand can be driven through emotion, such as fashion.
Consider, for example, the marginal cost of making a drug in the factory, which is quite low. In fact, as explained by Neeraj Sood at University of Southern California, the gross profit margin for pharmaceutical companies is 76 percent on brand-name drugs. Of course, the cost of producing the medicine in the factory is only a small piece of the overall drug manufacturing puzzle. Profits and patents form the pillars of an incentive structure that is critical for fostering innovation.
R&D for such treatments — including creating the medication, stabilizing it for mass production, going through extensive clinical trials and obtaining approval from the Food and Drug Administration — takes time, patience and money. Patents then protect this investment, as companies would be unlikely to invest in such an arduous process if the resultant drug could be immediately copied.
Additionally, companies frequently argue that the “cost of producing a drug” should include the cost of failed attempts to produce other drugs. This argument is used to justify the various ways in which companies extend their patent protection, lengthening their periods of monopoly pricing. Including the cost of failed attempts is a strange concept, however, when the patent system is designed to reward success.
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