The USA healthcare system is the most expensive in the world. A common anecdote that exemplifies the situation is that of an American patient needing gastric bypass surgery, able to fly to Spain, get the procedure done, stay for recovery, and fly back to the United States, all for less than just the procedure would have costed him in the USA.
Why is it this way? Why is it that the United States spend almost a quarter of GDP on healthcare, but patients are still faced with have some of the highest costs in the entire world?
In a rational world, prices make sense (of course). When competitors enter the market, the price of a product usually decreases. When the market size expands to more consumers, the price of a product usually decreases. When the product doesn’t work, the price of a product usually decreases.
Not in the world of big pharmacy. Despite the entrance of numerous companies, the cost of medication still increases.. Despite the number of Americans needing the drug increasing, the cost still increases. And despite the drug sometimes not working as planned, or not working at all, the cost of medication still increases.
For example, Eli Lilly released a drug in 2014 called Cyramza that costs $50,000 per treatment, expanding the lives of stomach cancer patients by 1.6 months. For comparison, Genentech released a drug in 2004 called Avastin, that adds 1.4 months to life for $25,000. Somehow, a quarter of a month, or 6 extra days from the newer Cyramza costs as much as almost a year and a half of the older Avastin.
These price increases are seen across the pharmaceutical industry. 20 years ago, it costed $50,000 in current dollars to extend a cancer patient’s life by one year. Now, that same life year costs $225,000. With the median American income sitting at about $53,000 , and health insurance premiums and deductibles on the rise, the difference between life and death is decided by a dollar sign.
Already established drugs are rising in price as well, even as the market gets more competitive. Gleevec, a leukemia drug, has tripled in price since 2001, despite the entrance of competitor drugs Sprycel and Tasigna (of course, their prices are rising too).
Drugmakers cite the benefits that their product brings to patients and the cost of R&D as the reason behind the extremely steep prices.
But what other sector is such blatant pricing atrocity happen in? What other sector so clearly defies the basic rules of the market? What other sector places a dollar sign on the value of a human life?
Of course, can one really put a price on someone’s life? Is any price too high to save someone? But in the US, these drug prices aren’t rising because they have to, but because they can. The insurance companies have to provide equal access to all cancer drugs under federal regulations. Doctors are trained not to consider cost of medication when making treatment choices. Both of those mean that the drug companies can basically charge whatever price that they like.
Simply put, that’s not how the free market is supposed to work.
Competition and microeconomic forces would take care of the drug companies, if allowed to do so. But because big pharma has the insurance companies and the government as well as patients who rely on the drug to live in a vice grip, the drug makers are able to set their own rules.
We need reform. We can begin by making our country healthier, and work towards getting away from bottles and bottles of pills entirely. In the interim however, we can put our proverbial foot down to big pharmacy, before all patients, Medicaid, and the VA are all driven into complete bankruptcy.
As spending on cancer and other specialty drugs approaches the $400 billion mark, we need a radical transformation.
Disclaimer: These views are not investment advice, and should not be interpreted as such. These views are my own, and do not represent my employer. Trading has risk. Big risk. Make sure that you can balance your risk/reward, and trade small, and trade often.