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Conversation about drug pricing | Health care system | Heatlh & Medicine | Khan Academy

December 29, 2019

with Professor Laurence Baker from Stanford
Medical School, and I’m hoping he
can at least start to get me to understand
something that I’ve always wondered about and worried
about a little bit. Let’s say that I’m
some drug company. So let me write this down. So I’m some pharma
company, pharma company A right over here,
and let’s say that I invest 10 years and $100
million in some drug. I get it through all
of the clinical trials, and it gets approved by the FDA. And let’s say, just for sake of
simplicity, it cures disease x. Now once I get to
that point, I’m feeling pretty good about
myself as a pharma company. What happens next? I’m assuming that I’m going
to have to go to the insurance companies and maybe
Medicaid and Medicare and figure out how much
they’re going to pay for it, but how does that
conversation even happen? PROFESSOR LAURENCE BAKER: Yeah. So you’re going to
have a conversation with a bunch of different folks. In the US, we have lots of
different private insurance plans. We’ve got government plans. And you’re actually going
to have conversations with Europe and with some of the
other systems around the world, because each system is going
to make its own decision. SALMAN KHAN: And they have
a different way of doing it. PROFESSOR LAURENCE
BAKER: They may some have similarities in the
way that they probably want to talk to you about. SALMAN KHAN: Does there
tend to be a lead system? Does it tend to be
either the Europeans, or does it tend to be the
private insurers in the US? Or do you just start all of
those conversations at once because there’s so much
money on the table? PROFESSOR LAURENCE
BAKER: So there will be some strategy
your business is going to come to because it’s
very hard to have all of these conversations
exactly simultaneously. So you’ll talk to the US. You’ll talk to Europe. And there are some
cases in which people have viewed the regulatory
processes in Europe as a little easier
for some things, so they may want
to start in Europe. But in other cases, if
you’re looking at a drug that maybe some of the
national systems in Europe are less likely to
want to pay for, you might want to start
with the US, where there’s a little
more flexibility. SALMAN KHAN: But the
general rule of thumb is all the money is in Europe
and the US mainly right now. PROFESSOR LAURENCE
BAKER: A lot of it. The Asian systems, some of
them are pretty sophisticated and using a lot of the
advanced drugs, too, but I think the
majority of the money is in the US and
Europe, North America. SALMAN KHAN: And between
Europe and the US, I guess I’ve always imagined
North America was maybe where the bulk of the money was. But is that the case? PROFESSOR LAURENCE BAKER:
The US, well, our health care system spends more than
everybody in the world, and it’s true for drugs, too. We spend more on drugs here
than most other places. SALMAN KHAN: OK. So definitely if I’m
here, pharma company A, I want to make sure I
get this right in the US. PROFESSOR LAURENCE BAKER: Yeah. Eventually you probably
care a lot about the US. SALMAN KHAN: Part
of my investment that I made is based on
some understanding that, if I got all the
way through, that I would get some type of
return within the US. Will I necessarily
immediately go to Medicare because they’re one of
the largest players, or will I go to, like we
talked about, Blue Cross Blue Shield or Kaiser or some
of these other players? PROFESSOR LAURENCE
BAKER: So Medicare is actually an interesting
one for drug prices because, historically, Medicare
has not been a big coverer and still isn’t of a lot of
the drugs that you hear about. So Medicare does
not pay by itself for outpatient drugs, drugs
that you might take at home. SALMAN KHAN: Really? I always assumed
that– they don’t. PROFESSOR LAURENCE
BAKER: So Medicare, in its main pieces– Medicare,
we call Part A, Part B, Part C– so Part A and
Part B, let’s start there. They tend not to cover, or they
don’t cover, outpatient drugs. If you get a drug
in the hospital while you’re hospitalized,
Medicare will pay for those. And so if you’ve
got a drug that’s going to be primarily
used in that setting, you’re going to talk
to Medicare about it, and that’s going to
be an important piece of the conversation. But if you’re talking
about an outpatient drug, you’re talking to
many [INAUDIBLE]. SALMAN KHAN: Now, when
we’re saying outpatient, inpatient is you’re
in the hospital. You’re sick. You need, I don’t know,
morphine right now. That’s inpatient drug. PROFESSOR LAURENCE BAKER: Yeah. SALMAN KHAN: Outpatient is,
hey, you’re going back home. Take this three times a day. PROFESSOR LAURENCE BAKER: Yeah. Somebody sends you
to the pharmacy to pick up the prescription,
and you take it home with you. That’s going to be an
outpatient kind of drug. So Medicare doesn’t cover that
in its main Part A and Part B. There’s Medicare Part D, which
is a drug plan in Medicare, and that will cover a lot
of the outpatient drugs. And so there you’d have
conversations with them. But most of the
Medicare Part D plans are essentially
private companies that Medicare contracts with. So you’re not really talking to
the government at that point. You’re talking to these
private plans that have contracted with Medicare
to provide Part D care. SALMAN KHAN: So once
again going back to the crux of the question
of how are these drugs going to get paid for,
how are we going to determine the price at
which these drugs get paid for, it goes straight back
to the private plans again because they’re
going to contract. Part D is going to say,
oh, you’re Medicare Part D. We’re going to
go to go to Aetna. We’re going to go to some other
plan or whoever it might be. I don’t know who it might be. PROFESSOR LAURENCE
BAKER: Whoever is offering those Part D plans. SALMAN KHAN: Whoever is
offering those Part D plans– and so it will ride off of
whatever that private party has already negotiated with
the pharma company. PROFESSOR LAURENCE BAKER: It
would be related, probably, to that. SALMAN KHAN: OK. So let’s say that we have
some type of insurance. I’m running out of letters now. Let’s call this insurance
company Y right over here. And I go have a conversation
with insurance company Y, and I’m like, hey,
this is a big deal. Disease x, you know it’s
been killing people. I want $1 million per pill. PROFESSOR LAURENCE
BAKER: Yeah, and so those have been really interesting
conversations in the US. So there’s some
bargaining back and forth between the insurance
company and the drugmaker. The drugmaker is going to
have spent a lot of money. You’ve got $100
million up there. SALMAN KHAN: Yes. I deserve to make at least $10
billion off– I’m only kidding. PROFESSOR LAURENCE BAKER:
So there’s a certain amount, to a certain extent [INAUDIBLE]. SALMAN KHAN: It’s called
anchoring in a negotiation. PROFESSOR LAURENCE BAKER: Right. You start with what
you think you can get. SALMAN KHAN: Yes. Absolutely, yeah. [? PROFESSOR LAURENCE BAKER:
Push ?] that number to get everybody’s mind around, yeah. So in reality, it costs
well over $100 million to take a drug
through the trials, to do the development work. So they’re going to be sitting
there with a number, at least internally, saying, we want
to get our $800 million, our $1.5 billion back from this. And so we’re going to try
and price it accordingly. SALMAN KHAN: Because
it’s not just the cost of that one
drug– so what is the cost? Do you know that off the top
of your head, the average drug? PROFESSOR LAURENCE BAKER:
It’s hundreds of millions. So there’s the
development costs that go in that the pharma
companies aren’t typically willing to talk a lot about. And then there’s
the cost of getting through the trials and the FDA
approvals, which people say $500 million and up. They’ll say higher
numbers sometimes. SALMAN KHAN: For one given drug? PROFESSOR LAURENCE BAKER: Yeah. SALMAN KHAN: $500 million. So it can be as high
as $500 million. PROFESSOR LAURENCE
BAKER: It can be higher. SALMAN KHAN: Can be
greater than $500 million. And so that doesn’t even take
into the probability-weighted risk, that there’s a
10% chance that it fails or a 10% chance that it works. So it’s really, if you’re
spending $100 million per drug and only 1 out of
10 of those drugs are going to get
to the end zone– PROFESSOR LAURENCE BAKER: Yeah. You’ll see along the way. You won’t spend a whole
wad and then find out. You’ll find out in steps. So you’ll have to spend
something to get there. SALMAN KHAN: I see. You’ll stop. So even though on one drug, it
might be $100 million or $500 million, they might have spent
another $300 million or $400 million on drugs that
didn’t go anywhere. PROFESSOR LAURENCE BAKER:
Plus their own development costs in the background. SALMAN KHAN: Plus their
own development costs. So if you try to fully load
the cost, it’s a large number. PROFESSOR LAURENCE
BAKER: It’s large, yeah. Right. Exactly. They’re running
an operation where they’ve got to put in a
lot of money in up front. When they get a
success, they have to get enough out
of that one success to pay for the operation,
to keep things going for the next development round. So they’re looking at
those kinds of numbers, and they’re trying to figure
out in this negotiation what they can sell this for. And that’s a back
and forth discussion. The insurance companies
have some ability to say what they’re
willing to pay, but a lot of these
drugs, if they’re doing the curing a disease that
people care about, the pharma companies have a lot of
ability to come and say, this is what we need to get for
this and set that price and be able to get
it for a while. SALMAN KHAN: So obviously,
the pharma company is coming here with
all of this investment. They definitely want
it to get covered. But the insurance company,
their incentive is they don’t want to look
like, all of the sudden, this company that doesn’t
provide the cure for disease x. Do insurance companies
ever walk away and say, well,
that’s just too much. I understand you invested
all of this money, but we just can’t do that. That’s just crazy. PROFESSOR LAURENCE
BAKER: So it’s a little bit of a mixed bag. The US doesn’t
have a lot of cases where insurance companies have
really put their foot down and said, no, they’re
not going to do anything. They’re not going
to have anything to do with some new
drug that comes out. And some of that’s
due to the existence of lots of different companies. So if five of the companies
say no but the next guy in line says yes, then the dynamic of
that in a competitive market is often that everybody else
will eventually come around and say, OK, we’re
going to [INAUDIBLE]. SALMAN KHAN: Someone is
going to do something. They might not pay
for it outright. The whole reason why we’re
having this conversation is because there are some drugs
that seem reasonably priced to me, but there
are some that are like $30,000 a
pill or something. I made up that number. PROFESSOR LAURENCE BAKER: Yeah. So the cases, the
really expensive ones, are drugs that are
unique– tend to be unique, at least to some extent–
cure disease that gets some high profile, so
people are worried that they’re going to die if they
don’t get this drug. And of course, they’re
still on patent. That’s another
feature of all this, where you get the high price
for a certain period of time until your patents run out. SALMAN KHAN: And
then the generic– PROFESSOR LAURENCE
BAKER: And then generic comes in and the price– SALMAN KHAN: Can make them
for the cost of the pill, which is– PROFESSOR LAURENCE BAKER:
It drops dramatically. SALMAN KHAN: Pennies or dollars. PROFESSOR LAURENCE
BAKER: So how you get these things set
in a competitive market is an interesting question. One of things that
gets the brand name drugs to be a little cheaper is
competition within the class. So if there is two or three
drug manufacturers who have something that will
basically do the same thing, that will tend to take the edge
off the $30,000 a pill kind of situation and get you down
to more reasonable prices. It won’t get you all the
way to generic pricing, but [INAUDIBLE]. SALMAN KHAN: It
just seems to me– you just mentioned that very
few insurance companies have ever walked away from this. If you ever have a negotiation–
buying a used car– where one of the two
parties is not walking away, then it doesn’t seem
like there’s actually a hard, serious negotiation. Am I getting that wrong? PROFESSOR LAURENCE
BAKER: Yeah, I don’t know all the ins and
outs of all these negotiations. There’s lots that goes
on in these things. But I think that one of the
things that people would say about the US is that when
a drug manufacturer comes up with fairly unique,
on-patent drug that does some tangible good,
that they more or less can set the price that they
want to get for it. And they’re going to make some
calculation, because they could set a high enough price that
everybody would say forget it. So they’re going to try
and figure out something. But they’re trying to
get as much as they can, and they get some leeway for
at least a period of time to name that price. SALMAN KHAN: So
they’ll get leeway, and I guess there’s some
range of reasonableness where it’s like, OK. Yes, you’ve done something
amazing for humanity. You’re going to get a 35%
return on your investment, but that shouldn’t be a 300%
return on your investment. PROFESSOR LAURENCE BAKER: Yeah. I don’t know at what point
the US would ever walk or the private insurers
will ever walk from this. I haven’t seen it
really happen, and I think drug companies are pretty
sophisticated about trying to figure out what
price they think they can make work and get that
as high as they can get that. SALMAN KHAN: So
I guess I’m still unclear to see who’s making
out here really well. PROFESSOR LAURENCE
BAKER: This has been a really
interesting debate. Pharma companies put
huge amounts of money into these drugs. And once in a while, they do
some really useful things, and they get high premiums. There are other people
who argue that some of the things that they’re
getting high premiums for aren’t really valuable
enough or somehow we’ve been told we need a
drug that, if we had it to our own devices, we
would never have come up with the fact that we need it. And so what’s the real
value at the end of the day? And I think that’s one
of the debates we’re going to have in this
country for a little while. The industry has been
coming up with new things, and they’re going to
keep trying to do that. We want to, from a social
standpoint, from a policy standpoint, try to make
sure that things we’re doing are really valuable to society
and not copies of other drugs or not inventing a disease
that didn’t need a solution and then solving the problem. And sometimes we
worry that maybe we’re getting some of that. And I think that’s the challenge
for the US health insurance system, for the
regulatory processes to try to guide the
innovation and guide the purchasing of these
things to really create the most value for society. It’s been a challenge. It’s going to be a challenge. We have the challenge, because
we have tremendous opportunity with new drugs created. SALMAN KHAN: So your gut
sense is there probably are some drugs out there that
they’re doing really well, well above and beyond
the investment cost, but it’s hard to say. It’s really on a
case by case basis. PROFESSOR LAURENCE
BAKER: Yeah, I don’t think you’d want to make
a generic statement about all the drugs that have
been discovered. Some of the things that
we’ve put out there in the last couple
of decades are really important drugs that are
going to do a lot of good. And I think there are debates
about some other ones where maybe somebody’s been able
to be clever about marketing and sell it, and we’re less
sure that it’s [INAUDIBLE]. SALMAN KHAN: And that,
actually, marketing– I don’t want to make this
conversation too long– but some people bring up that
the drug companies, they say, look, there’s a lot
of investment right over here on this. And so they have to get some
reasonable return on it, and that seems to make sense,
especially when you probability weight it and all of that. But they spend a significant
amount of marketing as well, on actual marketing. You watch the nightly
news, most of the ads, you’re going to
see a drug company. They do the physician dinners,
and they do all of their things like that. That seems to undermine that
argument that all of the money is going for R&D. PROFESSOR LAURENCE BAKER: Right. If you just totalled
up the dollars, I’m not sure what the
numbers would come out like, and honestly, the
pharma companies aren’t really excited
about telling everybody all of the details of their
businesses for good reason. So absolutely,
there’s a huge amount of marketing [INAUDIBLE]. SALMAN KHAN: You spend a ton
of money on the marketing. And then you get
the consumer here to put the pressure
on the insurance companies and the doctors to
say, hey, you better cover that, or I’m asking for that. PROFESSOR LAURENCE BAKER: Yeah. There was a time
within my memory where we weren’t allowed
to do direct to consumer marketing, where the
laws prohibited that. And the change came around,
and now we’re allowed to do it. And it’s really changed the
way that drugs are marketed. SALMAN KHAN: And I
have found that weird because, if these are
drugs that are meant to be by prescription, which
means that it should be a doctor’s judgment
on whether or not you should get the drugs,
why is it being advertised on the nightly news
to a general audience? PROFESSOR LAURENCE
BAKER: Right– a general audience who doesn’t
understand all the ins and outs of the drug and whose
doctor may or may not want to take the time to
explain it all to them. SALMAN KHAN: Exactly. But then they’ll go to
the doctor and say, please give me this drug. And then the doctor, it’s easier
for them to say, well, sure. Why not? PROFESSOR LAURENCE BAKER: Yeah. No, I think a lot
of doctors would express a certain amount
of frustration about that. Their patients come in. It’s hard to have the
conversation in a short period of time, so it’s easier
just to give them the drug. SALMAN KHAN: Fascinating.


  • Reply josenros October 4, 2011 at 6:59 am

    Sal, can you do a video explaining the technical differences between generic and brand name medication? The FDA states that generics must have demonstrated 85-120% bioequivalency, but what exactly does this number refer to? The rate of entry into the bloodstream? The rate of clearance? All I'm able to gather is that they determine bioequivalence using some kind of log- transformed normal distribution…

  • Reply Malthias October 4, 2011 at 10:25 am

    The FDA has this publication:
    Section III (A) 1. has the info you want. Rate can be found via rate constant (k) which reflects rapidity of absorption. Extent has a few measures: Peak [drug], which reflects clearance and absorption, and AUC, which reflects exposure.
    Basically you want a similar enough rate and extent of absorption such that clinically there is little difference.

  • Reply FortNikitaBullion August 22, 2013 at 6:19 pm

    Just take vitamin C. Stay away from prescription drugs.

  • Reply Hugo Zaaijer January 21, 2016 at 9:50 am

    Who's watching this in 2016?

  • Reply Enriching Exchanges February 5, 2016 at 4:11 am

    What an incredibly uninspiring conversation! If you are asking questions, it means, you shut up and listen. If you want to interject all the time, why bother asking a question?

  • Reply Miles Oliva December 18, 2016 at 10:22 pm

    super distracting with all the interruptions. let the guest u invited bc of his expertise talk smh

  • Reply John Joyce Scott May 9, 2017 at 4:31 pm

    cost of humira per year????

  • Reply Anna Smith May 31, 2017 at 7:40 pm

    Sal, I need help on pricing data analysis that a pharmacy calculates for are the ndc helpful in calculation etc., can you give an overview on it.

  • Reply Anna Smith May 31, 2017 at 7:40 pm

    Sal, I need help on pricing data analysis that a pharmacy calculates for are the ndc helpful in calculation etc., can you give an overview on it.

  • Reply Anna Smith May 31, 2017 at 7:40 pm

    Sal, I need help on pricing data analysis that a pharmacy calculates for are the ndc helpful in calculation etc., can you give an overview on it

  • Reply Johnny Rebel August 4, 2018 at 3:37 am

    can you stop interrupting?

  • Reply lethu buthelezi December 1, 2018 at 3:22 am

    I stopped the video, I couldn't focus on the answers to the questions with so many comments 05:25 ah well, guess I'm just gonna have to look elsewhere

  • Reply Eric Schneider March 8, 2019 at 3:57 am

    “Right, right, right” ??

  • Reply cwang22 April 17, 2019 at 9:49 pm

    As doctor myself I find this market incredibly rigged and broken. No wonder costs are increasing exponentially with no efficiency attached. And I'm not referring specifically in US.

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