Can the European scorpion hold its sting?

On deadly math, freeriding etiquette, and turning toward a more complete accounting of medicines’ value.

By Peter Kolchinsky, Ph.D

Photo by Leon Pauleikhoff on Unsplash

November 22, 2023

I attended ISPOR Europe in Copenhagen this past week to remind a room full of European health economists that the US pharmaceuticals market supplies the lion’s share of global pharmaceutical profits to the world’s drugmakers – which keeps medicine cabinets stocked with important new drugs on both sides of the Atlantic. Unfortunately some of the world’s central planners only used the occasion to discuss which formulas are better at overriding what economists call the revealed preferences of the hundreds of millions of people whose values inform the actual market.

I joined the meeting to argue against people who believe the US market pays too much for drugs and that its government should force our market-based prices down based on cost-effectiveness math, like the UK does. Because if investors’ expectations of future US profits erode too much, then we won’t be able to justify funding R&D with the capital entrusted to us. And we’ll all get fewer medicines, unless of course European countries suddenly started paying more (it’s hard to believe that they would). With hospital care costs rising, not investing in new medicines is no way to save. Most economists I know recognize this and the math actually isn’t hard to follow. 

But even so, at ISPOR, one panelist asserted that it would be better if the US didn’t incentivize the development of new drugs so other countries’ central planners didn’t have to look like the bad guys when they decided not to pay for them. When I offered that the public had a stake in the decisions its government was making and a right to express their values, the speaker responded that the public can be manipulated into wanting things they shouldn’t – that when newspapers publish stories disagreeing with the UK’s decisions not to cover certain medicines, they were failing to toe the line for the country’s expert decisionmakers, who know best.

At a plenary session, a European regulator un-ironically said ​“We’re not going as far as the Soviet Union.” 

That’s true. After all, these central planners are merely expressing annoyance and not sending anyone to the Gulag for voicing discontent with the state’s edicts. 

There were quite a few attendees from industry, primarily professionals specializing in functions like Health Economics and Outcomes Research (HEOR) and Market Access. I also counted about a dozen leading economists I know personally who have a good understanding of how the market really works to incentivize development of valuable medicines. But I did not hear many speak for the merits of the market or the importance of market-based pricing for incentivizing investment. This was not their home turf. They were in the realm of central planners, and I imagine there was only so much objecting any of them could do without being disinvited from future meetings.

Speaking of people who aren’t at these meetings, I think I was the only investor there. At least I didn’t meet another one. That didn’t stop panelists from discussing how investors make decisions or will respond to changes in incentives, such as Europe considering cutting its years of market exclusivity from 10 to eight. At least I was invited, and I am grateful to have had the opportunity to present my perspective.

Maybe it’s the start of real dialogue, but it definitely can’t just be with me. This is going to take many more investors and members of industry engaging with policymakers. It’s going to take leaders of US commercial organizations understanding why they should care about how their European (and specifically their UK colleagues) in HEOR handle market access and cost-effectiveness analysis (CEA). And, crucially, it’s going to take patients speaking up, as Gunnar Esiason once addressed Australia.

With hospital care costs rising, not investing in new medicines is no way to save.

Photo by Nick Karvounis on Unsplash

What’s our message?

Europe might be afraid that we will tell them that they should pay more. It’s true. I would certainly like to deliver that message. But that wasn’t my message this time. Instead, I simply argued that they should stop talking the US out of incentivizing the development of better medicines that then also help Europeans and the rest of the world.

If a child is drowning in a lake and you don’t feel like getting wet to save her, then just say so. But to do math that willfully undervalues that kid’s life and declare that she’s not worth saving is worse than distasteful. Maybe the UK can’t afford to get wet, but the US can and does jump in to save the kid. Medicines incentivized by potential profits in the US help Americans and help patients all over the world. But if you keep declaring how little drugs are worth, which is another way of declaring how little people’s lives are worth, you might actually eventually talk the US into passing drug price control policy that removes incentives for investing in R&D; defund the lifeguards and then everyone’s kids drown. 

Things probably won’t change in Europe, where shortsighted health system budgets dictate austerity. But it’s one thing to argue that any one country can’t afford to pay more for new drugs. It’s another thing entirely to put new drugs in jeopardy for everybody by exporting that thinking to the one country whose market-based system has underpinned the last several decades of pharmaceutical advances.

And yet, instead of acknowledging this, European countries that freeride on US biopharma innovation funding scoff at Americans’ willingness to pay. They’re like avid library users who think it’s silly for anyone to buy books, and are saying so loudly. But when everyone switches to reading in the library, they will someday come to wonder where all the new books have gone.

Undervalue anything by declining to pay enough for it – books, drugs, whatever – and you’ll get less of it because investors will turn elsewhere for their investment returns. That’s economics 101. That’s the market.

Who are these investors who would dare turn away from funding biomedical innovation? They are teachers and engineers and firefighters hoping to retire securely and university endowments hoping to pay for building maintenance and new scholarships. Should one have a thing against billionaires, know that their money makes up a small fraction of the world’s investment capital.

It’s one thing to argue that any one country can’t afford to pay more for new drugs. It’s another thing entirely to put new drugs in jeopardy for everybody by exporting that thinking to the one country whose market-based system has underpinned the last several decades of pharmaceutical advances.

Photo by Malaya Sadler on Unsplash

The market works when the drive to generate an investment return aligns with a social good, like making a medicine that improves lives, keeps people out of hospitals, and then eventually goes generic, becoming inexpensive while still saving society money by keeping us healthier, productive, and out of hospitals. And the math that Europe and especially the UK use to justify how little they will pay for medicines is willfully undervaluing those medical advances. We’ll all be sorry if the US follows their lead.

Bad math can be deadly

For example, the UK’s National Institute for Health and Care Excellence recently issued draft guidance that said life-saving cystic fibrosis drugs including Trikafta (called Kaftrio over there) aren’t worth paying for at their current prices. NICE’s math fails to consider key real-world, quantifiable elements of drugs’ value (and costs) over time. It ignores that after about 14 years, those drugs will go generic and likely fall in price by more than 95%. It fails to account for the drugs’ myriad benefits, including liberating caregivers and boosting the productivity of not only the patient but also their whole family.

If that guidance stands, people with cystic fibrosis and their families will continue to suffer and the NHS will continue to pay for all the costly healthcare services necessary to provide them with what everyone acknowledges is an unnecessarily substandard quality of life.

Adding in the known values that NICE ignores shows that the drugs are not only cost effective, they’re actually cost-saving for society. It’s as obvious as recognizing that, when living in a crummy apartment with rising rent, paying more for a mortgage can be a wise investment since a mortgage is finite. But short-sighted budgetary math would talk you out of paying for the mortgage and the drug.

When NICE undervalues Kaftrio and justifies the UK government blocking access, UK patients suffer. But the UK knows that, worst case, if it waits long enough, its patients eventually get generic Kaftrio. It’s like the UK waits for the US to pay off the mortgage to a new house and then moves in. 

Vertex, the company that discovered, developed, and manufactures the drug, like all drug companies and their investors, counts on the US market for the lion’s share of the profits that justify their funding of R&D. And the fact is that UK patients don’t actually have to wait for generics because Vertex and other companies nearly always settle with the UK, as they do with other countries, on a lower price; no sense missing out on some profit, and no one wants to see any patient suffer.

So the UK, the rest of Europe, Canada, Australia, and all other countries that undervalue medicines haven’t ever really risked going without any drugs because the US has picked up the tab. They should rethink the wisdom of undermining that free ride. While today’s drugs are not in danger of being uninvented, tomorrow’s could be undone with the stroke of Washington’s pen.

Protecting budgets, not solving affordability

One might think that Europe is simply prioritizing making today’s medicines affordable to patients and that the US should do the same. Indeed, the fact that Trikafta/​Kaftrio or any other drug is cost-effective or cost-saving doesn’t necessarily make it affordable to any one patient. In Europe, that cost is spread across populations via taxes. In the US, it’s covered by a combination of taxes and insurance premiums. To continue to enjoy affordable innovation, we need market-based pricing, for a patent-defined period of time, made affordable to those among us who need it through proper insurance, which means insurance with low out-of-pocket costs.

What might happen if the US declined to pay a market-based price for a patent-defined period of time? The question is no longer rhetorical. A new law allows Medicare to pay as little as it likes for some drugs after just nine years on the market, well before the drugs’ patents expire. Investors and companies have already shifted capital away from projects that would run into this so-called ​“nine year penalty.”

All the countries that undervalue medicines haven’t ever really risked going without because the US has picked up the tab. They should rethink the wisdom of undermining that free ride.

Photo by Scott Graham on Unsplash

And the undermining of incentives takes other forms. Self-appointed cost-effectiveness ​“watchdogs” in the US using a version of the UK’s conventional cost-effectiveness math also neglected many aspects of Trikafta/Kaftrio’s value and declared it not worth its US price, and their math is dangerously close to being employed by individual state-level bureaucrats to deny access to the drug, which may have ripple effects across the country. 

Practitioners of this math often claim that they are just contributing to a discussion of the value of medicines and how they should be priced, but it just takes one policy change to weaponize these formulas into the hard rules that override the market and deny a medicine to patients.

Complex math can be quite intimidating to those who don’t know how to parse it. Clever mathematicians can even trick people into thinking that 1=2 simply by dividing both sides by zero. (1÷0 is infinity and ²⁄₀ is infinity, since infinity=infinity, so you can then cancel out the zeroes and you are left with 1=2). That kind of thing might wow the lay public, but mathematicians recognize that math breaks down when you divide by zero. It’s a nerdy sleight of hand that might make a 6^th grader smile once the trick is revealed. But the moment serious mathematicians see someone doing that, they lay down their pencils and say ​“nope, nothing you say from this point onward counts for much. You’ve got a ​‘divide by zero’ in there.”

NICE’s equivalent of dividing by zero is declaring that they are working with a fixed budget. A drug can’t be cost effective if it requires that the UK spend more on healthcare than it already does. The trouble is that the UK doesn’t do this math on anything except for drugs. So as its population ages and more people get Alzheimer’s, they won’t use CEA to justify not building more nursing homes. They will build more and have to hire people to staff them, just as the US is having to do. So their healthcare budget will absolutely grow. And yet, they could have simply spent more for a finite time on new medicines to prevent people from having to go to nursing homes and remain productive. Then those medicines go generic and continue to keep people productive and out of nursing homes. That’s how medicines reduce costs and reduce suffering. 

Not paying a higher but finite mortgage is no way to save when you are living in a crummy apartment and facing endlessly rising rent. And higher costs for hospitals and nursing homes is certainly a costly and rising rent expense for society.

Even our total budgets aren’t as finite as some would claim. The healthier we are, the more we can work to preserve that health. We can borrow against our future, healthier selves and our future averted healthcare costs to incentivize the medicines that will keep us healthier and out of hospitals. It’s not a given that people have to retire and draw their pensions when they do. If they stay healthy and productive longer, they can retire later. What if it were possible for us to live healthy lives until 100? Should we refuse that simply because it might require that we continue to have a job beyond 65? Europe would rather we say no to anything that costs more today.

Consider the lifeguard analogy. It’s not like the UK doesn’t have some lifeguards; it does have a healthcare budget. So if one child is drowning in the lake, the UK would say that it can afford today to send a lifeguard to save the child. But if two kids are drowning, the UK says ​“sorry, we only have one lifeguard on duty and absolutely cannot send two.” And yet, there’s a guy who can swim tending to a grill, flipping hamburgers. He could jump in. But that would mean that the UK would reduce its hamburger budget and increase its lifeguard budget. According to UK policy, that’s unacceptable. NICE’s math bakes in that arbitrary and demonstrably false limitation, pretending that this is just how it has to be.

If the UK had insisted on keeping its healthcare budget static thirty years ago, it would be far tinier than it is now. Clearly the UK has accepted the growth of its healthcare budget. The trouble is that it seems to only recognize the need to build more nursing homes, which will never go generic, but leans on its cost-effectiveness math to justify why it just can’t pay much for new medicines. 

Americans are increasingly angry that they pay more than everyone else. That anger has been cynically and systematically redirected at the companies developing and launching new, important medicines.

Photo by Alexander Grey on Unsplash

Economists recognize that medicines and nursing homes are very different kinds of products. While the US can incentivize the development of a medicine that spills over to the whole world, there is no aspect of the US’s spending on nursing homes that benefits anyone in other countries. Healthcare services linked to land and labor are necessarily local; every country for itself. So the UK only claims that its budget is limited when it knows that it can freeride on America but expands its budget at the expense of other parts of its economy to build more hospitals and nursing homes for its citizens. 

This is why not paying for better medicines is no way to save. You just end up paying more to manage those diseases. You pay in loss when loved ones die sooner than they have to. You pay in suffering when people must accept the pain of diseases that could have been avoided. And you literally pay for the extra beds and doctors and nurses to help the growing number of patients jamming into waiting rooms because you didn’t incentivize the development of a medicine to prevent their illness. And yet, it will be medicines for Alzheimer’s incentivized by the US market that will someday help the UK preserve its citizens’ ability to care for themselves, sparing them the need to build as many nursing homes… if the UK and other countries are smart enough not to talk the US out of it.

We can debate how to improve the math we use to figure out whether medicines are worth what we pay. But the math used in Europe is willfully flawed. The consequences of continuing to export it could be disastrous for everybody.

So if European countries – and others like Canada and Australia – really can’t pay more for medicines, so be it. The US can keep funding medicines that Americans want and the rest of the world can keep enjoying the spillover. Instead of doing conventional CEA and claiming a drug isn’t worth its price, call it ​“UK-specific budgetary analysis,” plead budgetary constraints, and maybe tip your hat toward the US and its willingness to pay.

That would actually help over here in the US, because thanks to rising out-of-pocket costs foisted on them by their health insurance policies, Americans are increasingly angry that they pay more than everyone else. That anger has been cynically and systematically redirected at the companies developing and launching new, important medicines – with the bargain prices enjoyed abroad used as Exhibit A for why we need traditional CEA just as American policymakers flail around grasping for levers to get overall healthcare costs under control.

If only traditional CEA’s flaws were obvious to everyone. Certainly everyone at the ISPOR conference in Copenhagen was happy to talk about its limitations. But outsiders can be persuaded that NICE is right and the US market is broken. That’s dangerous, like a scorpion riding across a pond on a turtle that can’t resist stinging it along the way, drowning them both.

GCEA vs CEA

It might sound like I don’t see any utility in doing cost-effectiveness analysis. On the contrary, I think that in a world where budget-conscious central planners are dead set on using their conventional CEA to convince the people they ostensibly serve that they shouldn’t want better medicines, it’s imperative that someone be doing better math. We can do CEAs that more comprehensively consider the value that medicines offer patients, their families, and society. And we must if we’re to vaccinate ourselves against the harm caused by the faulty equations being imported from Europe and amplified in the US by organizations like ICER.

We call these generalized cost-effectiveness analyses (GCEAs) — and every company ought to conduct one as each of its new medicines approaches the market. GCEAs are not tools for justifying higher drug prices in the future; they’re tools for understanding why drugs already consistently offer us a bargain at market prices today. 

Large, multinational drug companies already employ armies of health economists but CEOs don’t seem to appreciate the full extent of how to deploy them. My sense is that companies consider their health economists as engaged in necessary but ultimately pointless combat with ex-US central planners. Since those countries already contribute so little to the profitability of any new medicine, the outcome of those skirmishes is of modest consequence, so CEOs and boards don’t pay much attention.

CEOs should be charging their health economists with ignoring NICE’s instructions and instead building a pedestal on which to display the full value of their medicines.

Photo by Anne Nygård on Unsplash

When I have asked health economists working in industry why they won’t do GCEA, more than one has said something to the effect of ​“Because NICE won’t accept that framework.” 

That’s when I learned that NICE doesn’t even do CEAs itself. It makes companies do it to themselves. It’s as if NICE points to a pile of lumber and gives them instructions for how to construct a guillotine so it can use that guillotine to chop off products’ value. Companies oblige, because those are the rules that the UK made up for any company that wants to sell its medicines to the UK.

But that math doesn’t stay in the UK. It travels across the Atlantic and sows doubt in America, threatening the primary incentives that drive all biomedical innovation. And the miniscule profits companies derive from the UK are not worth the harms we do to ourselves as an industry. 

CEOs should be charging their health economists with ignoring NICE’s instructions and instead building a pedestal on which to display the full value of their medicines. If NICE doesn’t accept that math, so be it. They can spend their own money on economists to do their own math. 

But we compartmentalize everyone’s functions to such an extent that probably few CEOs and boards even know what the department in charge of UK commercialization is up to. HEOR teams at big pharmas do try to develop novel GCEA-like methodologies, but they operate with very limited budgets. Meanwhile, their colleagues in charge of US commercialization are spending a fortune fighting an uphill battle to secure reimbursement and access. The ex-US and US teams typically operate independently. I wish they recognized how their work is interconnected.

CEOs and boards should be VERY mindful of what their ex-US commercialization and HEOR teams are doing, because it has very real consequences here in the US. For starters, any time companies do any kind of CEA, it should be GCEA. Pedestals not guillotines. All industry HEOR professionals should be charged with doing GCEA on their companies’ back-catalog of drugs, especially those that have already gone generic, and every drug in their pipelines with so much as Phase 2 data. And if HEOR teams don’t have the budget for that, then they should get together with their US commercialization colleagues and unify their budgets, because it would take just a basis point of US sales and marketing expenditure to commission all the academics currently employed in the dismal craft of undervaluing medicines to instead do GCEA to reveal what value society derives from them. It would not take much to remove the scorpion’s stinger.

Done comprehensively, GCEA will show that effective medicines are cost-effective at market prices. Companies won’t price their drugs using GCEA — the market does that, taking competition and budgets into account. But GCEA will show that society is not wrong to pay the market-based prices that it does for patent-defined periods via proper insurance. 

Keep scrolling to learn more about GCEA.

What are we talking about when we talk about a drug’s value?

Does the medicine improve the quality of life of the person taking it?

Does the medicine improve the person’s productivity? Can they get back to work or be there for their family?

What’s the drug’s cost and what other healthcare costs are incurred or offset?

These are the building blocks of a traditional cost-effectiveness analysis, or CEA.

And a traditional CEA is narrowly focused
on those patients
who start treatment when a new drug launches.

But what about
tomorrow’s patients?
Or next year’s?
Or next decade’s?

And don’t forget that
drugs usually
go generic and
become inexpensive when patents expire.

A more complete CEA takes these future patients and cost changes into account when measuring value.
These values are called
​“stacked cohorts“
and dynamic pricing.

Traditional CEA ignores benefits to caregivers.
That’s real value, too.

And when a new drug emerges, we all benefit.
Our risk of suffering or dying from disease is reduced.

Drugs bring additional
societal value.
They can lead to
new discoveries.

Or address
health equity concerns.

Or benefit entire communities.
For example, treating patients with schizophrenia prevents psychotic episodes that can lead to costly incarceration.

Here are three of the drugs selected for Medicare ​“negotiation” in 2026.
The implication is that these drugs are overpriced.

A fourth drug, Trikafta, was selected by Colorado’s prescription drug advisory board (PDAB) for state-level price controls simply because it costs a lot per patient.

So are they worth their prices?

Let’s ask ICER, which does European-style cost-effectiveness analyses (traditional CEA) to inform policymakers’ decisionmaking.

ICER suggests these drugs are expensive and that Trikafta is way overpriced.
Look how much
they cost per QALY!

But ICER ignores that drugs go generic and that future cohorts start treatment,
as well as many other values. 

Let’s add back
just a few of those values.

ICER’s and others’ traditional CEA miscalculates how worthwhile medicines are, giving the impression that they should be denied or price controlled. 

Just look how ​“worth it” these drugs are when we add in
just a few values
that their CEAs ignore.

Do drug companies
charge more than the value
they created for society?

ICER might say yes.

But it turns out society is getting a really good deal.

How could society be getting such a deal if companies were as rapacious as some claim?

Because a functional marketplace of payors and competing drug companies is constantly negotiating.

Central planners overlook this. Yet the US market very much exists and is vital to guiding investment to where it can do the most good,
such as better medicines.

Willfully undervaluing new technologies using traditional CEA will mean companies discover and develop fewer drugs, our progress against diseases will stall, and society will miss out on the incredible bargain new medicines offer.

Learn more about how GCEA begins to generate a fuller picture of medicines’ value to society.