Are Medical Companies Exaggerating Their Costs to Increase Selling Price?

        The day I realized where all the money went was the day I pushed in a lyophilizer through a door frame.

A lyophilizer is essentially a big “freeze dryer”. It brings liquid samples in vials to low temperatures and then low pressures in order to remove the amount of water in the sample. This occurs by freezing the liquid into a solid sample which includes ice which is then brought to a low pressure so the ice escapes the top of the vial through state transformation into water vapor. Ice converting from a solid to water vapor directly is called sublimation.

The lyophilizer had arrived one random day while I was interning at a startup medical device company that also had a drug solution that accompanied their device. I was asked if I would be able to help move it inside. The problem was that this machine was just about the size of a doorframe and weighed near 500 pounds. 

Despite having around 12 people there to help move the lyophilizer, it took us around 3 hours to finally get the machine inside. To get it inside, we even had to remove some of the auxiliary parts that barely stuck out like a plastic shield in order to have it clear the doorframe by maybe a centimeter on each side. 

Once the machine was fully inside, one of the Senior Engineers, Joe, sighed to me and kept on saying how much of a relief that was to him. He explained that this machine was really expensive and was crucial to the company in order to ramp up production for testing. 

Joe said that this machine alone was close to $300,000 and that the operating costs of this machine would also cost multiple hundreds of thousands of dollars. When he said this, it really put it into perspective of why the costs of some of the medical projects like higher risk medical devices and pharmaceutical drugs are so high.

I, however, was still in shock since we had just manhandled this machine into the building with not as much care as one would expect. I’ve seen plenty of people show more care for their laptop or phone than this lyophilizer. 

It was estimated from the Tufts Center for Drug Development (TCDD) that in 2019, “The full product lifecycle cost per approved drug is close to $3 billion” 

Medical devices are also not far behind with complex medical devices being estimated to cost around $526.4 million. Complex medical devices are defined as class III medical devices that are not substantially equivalent to a legally marketed device. Complex medical devices are hard to pass through the FDA since they are normally devices that remain in the patient for life and sustain the life of the patient. These types of medical devices are also required to get premarket approval and tons of testing for safety.

Some factors for why these medical products, medical devices and pharmaceutical drugs, are soo expensive is that there has been an increase on clinical trial complexities, there is a shift of focus on chronic and degenerative diseases that have no solution and not much more understanding of cause or progression, an increase of required data analysis, and long term studies that occur even after the product is on the market.

Another reason for why these estimates are so high is that the estimates include the cost of failure. Medical devices are often made by smaller startups which means they regularly fail to make it to market. 

Startups often fail when creating a medical device due to a few similar reasons. One reason being financing. Financing for a startup medical device developer is best compared to a hamster wheel; The more progress, the faster you have to have to move. Management in startups are permanently busy looking for further financing since it is often tough to grunge up the money to continue research and development.

Another factor that often causes startups to fail is securing proper production of their products and prototypes. Often, startups need to produce high quality products at mass quantities which is not feasible for an individual to do so they would most likely need to turn to modern manufacturing. Many developers lack experience in how the production process works and how to secure their manufacturing needs. Taking time to understand the process can leave them unable to catch up with the pace of the hamster wheel before running out of financing and being forced to fail.

Lastly, startups fail due to the complexities of showing clear and constant evidence that their product has clinical benefit for patients. There are plenty of products that show clear benefit in small samples in a laboratory setting, however, the FDA requires extensive testing over large sample sizes. These large tests are expensive and often problems arise in them. Companies looking for FDA approval need to show that their products are simple enough for patients to use, even in sub-optimal conditions and have a significant benefit to patient.

 Although there are clear reasons why these complex medical devices and pharmaceuticals are so expensive, the cost of these innovations are still being questioned. This whole topic comes down to how much innovation is the U.S. public willing to pay for in medicine.  

It was estimated that medical devices and pharmaceuticals made up 5.2% and 7.8% respectively of the total National Health Expenditure. As estimated by AdvaMed, in 2019 spending on medical devices and in vitro diagnostics was $199.1 billion of the national health expenditure and The Centers Medicare and Medicaid Services estimated $378.0 billion on pharmaceuticals.  

With national healthcare spending being so high, it really begs the question if policymakers should interfere with the innovation of medicine in order to attempt to lower the prices for consumers.

The Commonwealth Fund Organization argues that prices need to be dropped as “Patients in the US are more likely to report that they can’t afford their medications; half of all adults with lower incomes go without care because of cost.”  Along with making prescription drugs more affordable for patients, The Commonwealth Fund claims that reforming how US citizens pay for prescription drugs would save federal dollars as well.

The Americans for Prosperity organization holds the opposite viewpoint that prescription drugs should not be price controlled since it would greatly cut the revenues of these drug companies which would most likely affect the amount of money these companies put into research and development of new therapies. 

The organization cites the White House Council of Economic Advisors findings after a price capping prescription drug policy was passed by the House but was rejected by the Senate since they warned against implementing a price cap. The Council of Economic Advisors found that the pharmaceutical industry’s revenue would be cut by $500 billion or $1 trillion over the next decade and that the industry would cut research and development spending by $75 to $200 billion during the same period.

 The reduction in research and development would most likely lead to fewer products being produced. The council of Economic Advisors also estimated that the implementation of this policy would reduce annual economic output by $375 billion to $1 trillion which is approximately 10 to 30 times more than what the policy was projected to save.

A report given by the Bipartisan Policy Center titled Examining Two Approaches to US Drug Pricing: International Prices and Therapeutic Equivalency was released in 2019 and examines the possible use of external and internal reference pricing on the high prices of prescription drugs. 

External reference pricing is defined as using international prices as a benchmark to set or negotiate the pricing of drugs in the US and internal reference pricing encourages the use of the least costly alternative which drives the price of therapeutically equivalent drugs to be similar.

Only recently has external reference pricing been considered and pushed for by experts and officials to be used in the United States for prescription drugs.  It is currently used in dozens of countries while some use it as the only tool for their pricing policy. Studies also generally show that external reference pricing “leads to lower drug prices immediately, although this effect may diminish over time.”

Internal reference pricing is also used by multiple countries in order to incentivize the use of therapeutically equivalent lower-cost drugs. Trends and analyses show that internal reference pricing policies reduce drug prices and expenditures by increasing the use of reference drugs rather than more expensive products. This type of policy has even been used in a limited fashion by the U.S government primarily through Medicare Part B policies from 1995 to 2010.

The combination use of external and internal reference pricing schemes in countries that are well developed and are market oriented include countries like Germany, Switzerland and Denmark.

For both tools to be used effectively, an infrastructure would need to be created in order to analyze international drug prices and to share data with other countries to ensure that drug prices are consistent throughout the U.S. and cheaper for the public. This need for infrastructure would also contribute to jobs and economic spending without as much of the harm described by Americans For Prosperity organization.

Overall, the medical device and pharmaceutical field is grossly expensive which could be moderated by certain policies within the U.S. to limit patients' rising costs. However, this change should not be one that is made overnight. As explained, with proper due process and planning, prices can be reduced without a huge decline in innovation.