In his post, Jamie Robinson has raised the specter of an upside-down world of setting prices for biomedical innovations based on cost. Before we examine his serious admonition to focus on value in pricing new biotechnology drugs, let’s walk down the other trail: the argument that drugs should be pricy because they cost so darn much to discover and develop.

Robinson argues that if those who discover and develop expensive new medicines persist in this line of defense, some authority, somewhere, will take suppliers at face value and require bottoms-up cost information to calculate a “fair” price. If such a system were to take root, it would open up the oversight of biotechnology innovation to a much larger pool of managerial talent than those we rely on today. People who have excelled in the worlds of defense and aerospace contracting, for example, would be needed to maximize allowable costs at every turn in order to generate the maximum flow of cash through the enterprise.

Having managed every stage in the drug discovery and development process under our current system, I can tell you that this new world of cost-plus will also be a world of time-plus. If there is no strong and pervasive incentive to use money as efficiently as possible, there will inevitably be an expansion in the time required for every step in the innovation chain.

Maybe this explains why countries with Soviet-style planned economies have not produced a single pharmaceutical innovation with the health impact of any major blockbuster drug or vaccine. Our own system of stimulating pharmaceutical innovation has been spectacularly successful despite inefficiencies that result from segregation of key purchasing roles among those who decide (doctors), those who pay (insurance and government), and those who receive the benefit of the resulting products (patients). In the 1970s, when I first started paying attention, leaders in the field of health economics were already crying out that we would soon invent our way into an array of biomedical and technology innovations that we could never afford. The bogeymen of the time were rapidly proliferating CT scanners and pills that cost as much as one dollar a day (!).

Measuring Value: Hard, But Worth It

So what about value in biomedical innovation? Is it really so hard to measure? I argue that the actionable quantification of value of these inputs to the health care enterprise is indeed doable, it is hard to do, and it is worth the effort. The core methodologies underlying the use of quality-adjusted life-years (QALYs) as the output metric were thoroughly explored in the 1980s, including the rich gamut of moral, technical, and sociological issues that are raised by aggregating health outcomes across individuals for decision making. For over a decade, we have had league tables which array research findings from dozens of cost-effectiveness studies indicating the range of dollars per QALY we are paying in the current system for specific technologies or health care practices. The usefulness of these methodologies is not limited to some idealized single-payer system or any other form of overt rationing, but can usefully inform pricing decisions by providers, treatment decisions by doctors and their patients, and payment decisions by payers in our pluralistic system.

Clear thinking about the marginal cost of a specific use of a new technology in relation to the marginal QALY output of such use, compared with some specific alternative, is completely within our competency. What has been elusive is to put this highly informative data into the right context, where the value of new innovation is properly seen in the context of the other technologies and services for which we already pay.

It is an extremely bad idea to hold only the latest innovations to a high standard of value-for-money and leave all the rest of the drugs and devices for which we provide coverage unexamined. This approach will throttle back both the best and the not-so-best innovation in favor of the status quo. Furthermore, since improvements in drugs and medical technology often reduce the need for health care services, the context for value of innovations must be placed on a level playing field with all of the other inputs to the health care enterprise.

Maybe it’s time to reimagine how to do a better job of making decisions about medical innovation. If so, then we need to be particularly concerned about keeping the private sector interested in funding innovation in the very-long-lead-time technologies of biotechnology and pharmaceuticals. Whether or not you find the estimated billion-dollar price tag for a major new drug convincing, it’s hard to dispute the years of preclinical and clinical research and the massive capital investments in manufacturing that must be sustained before commercial products emerge.

As a full-time investor in early-stage biotechnology, I am one of many who are closely watching for signals from the CMS and the insurance industry that could hurt or help the prospects of development projects we might undertake. Policy changes will immediately impact the cost of capital the next time these money-losing start-ups raise money, and therefore the amount of dilution we experience as we take on new investors. Managers and investors focused on later-stage companies, profitable or not, are nurturing projects with enormous sunk costs and will exert commensurate political capital to protect the environment in which these portfolio decisions were made.

A Proposal for Investing in Innovation

So here is the beginning of a specific proposal: Let’s introduce a better framework for purchasing medical innovation that is set to begin enough years in the future that investors in the long-lead-time technologies can adjust to the new signals (and will not need to expend their political capital to derail these changes). This system will pave the way for wider and faster adoption of medical innovation demonstrating objective value for money that exceeds some pay-line on a cost-per-QALY yardstick that is reasonably consistent with trade-offs we make elsewhere in our economy. Let’s make sure that new innovation is not held to a higher standard than previous breakthroughs, which means that there is some system for continuous examination of value for money and a level playing field for payment decision on new and old technology. Furthermore, we need to envision a system where the other inputs to health care are evaluated and paid for on the same level playing field.

This sounds like a large undertaking, but I can’t imagine a sector of our economy or our personal quality of life where the stakes are higher and the effort more worthwhile.

For more research and commentary on biotechnology, see Health Affairs’ current issue, “Biotech Drugs Come of Age.”