What is the appropriate price for a biotechnology product? Jamie Robinson’s thoughtful post touches all the right bases in arguing that discussing the role of value in pricing is far preferable to discussing the cost of research, development and production.

The issues involved in biotechnology pricing aren’t fundamentally different than those involved in pricing for all pharmaceutical and vaccine products. Most pharmaceutical products and some that result from biotechnology have close substitutes that can inject market competition into pricing, especially for purchases by governments and organized care systems. For these medicines, prices can be established by negotiation between purchasers and producers based on purchasers’ ability to take their business elsewhere.

In contrast, some therapies that result from biotechnology lack close substitutes. They may be the only medicine that can help a patient and in some cases may be the only intervention that can save or extend life. While in the scheme of things the number of such cases is small, what are the options for establishing a reasonable price for medical interventions that have few or no close substitutes to generate a competitive price?

Some have suggested that government intervention is necessary, pointing to the analogy of regulation of natural monopolies. However, that analogy is instructive. Government price regulation is rarely if ever biased toward innovation. Change in telecommunication, for example, dates from the deregulation of the industry. Without sufficient incentives for innovation, the pace of biotech and pharma innovation would slow.

The alternative is the adoption of purchaser- and patient-driven cost-effectiveness evaluation. Purchasers and patients must demand, and biotechnology companies need to supply, health economic evaluations that provide useful measures of the cost of the intervention compared to its health benefits. Where such evaluations are not available, comparisons to interventions that provide similar benefits and that have themselves developed cost-effectiveness data may be appropriate to establish pricing.

Admittedly, the rigor of such evaluations can vary and are sometimes used by purchasers simply to deny access. Therefore, purchasers and sellers need to come together to develop a common set of expectations around the preparation, quality, and use of such evaluations. In this way, these evaluations can produce results that inform the marketplace to establish prices that appropriately value current innovation and encourage future discoveries.
For more research and commentary on biotechnology, see Health Affairs’ current issue, “Biotech Drugs Come of Age.”

Tomorrow on the blog: View from venture capitalist Leighton Read.

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