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Can prescription drugs be priced on their 'value'?

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Last week the New York Times reported that a drug company, Turing Pharmaceuticals, had raised the price of one of its drugs from $13.50 a tablet to $750.

The drug, called Daraprim, is used to treat a deadly parasitic infection. It's been on the market for more than 60 years. So why did the price skyrocket overnight?

The Washington Post reported that the company’s 32-year-old CEO, Martin Shkreli, defended the price hike on Twitter, saying, "it's a great business decision that also benefits all of our stakeholders."

In other words, the company raised the drug's price because it was good for business.

The price increase – and Shkreli's defense of it – sparked outrage online. It also put a spotlight on how drug prices are set in America.

Drug prices today

In the United States, experts say, drug companies essentially have free reign to set prices. Those prices are generally based on what the market can bear. The market, in this sense, is not consumers but intermediaries who buy large quantities of drugs, like insurance companies, employers and the government.

Some say this system is broken. Others, like Stuart Schweitzer, a professor of health policy and management at the UCLA Fielding School of Public Health, says this market works when competition spurs further innovation and keeps drugs priced fairly.

"A firm can not sell a drug at a high price because it was expensive to develop," Schweitzer explains. "A firm can only sell a drug at a high price if it works and if it works better than previous drugs."

In the case of Daraprim, though, there were no other competitors. That's why Turing was able to raise the drug's price for no reason other than profits, says Dr. Peter Bach, a doctor at Memorial Sloan Kettering Cancer Center in New York, who's focused on drug costs.

"You can buy up a very old drug and increase the price by 55-fold, purely for the purpose of making profits, and there's nothing in the system that will stop that behavior, except in this case, bad PR," Bach says.

I should note: This is not the way that drugs are priced in other countries.

In the United Kingdom, Canada and Australia, for example, governments view the pharmaceutical market as "essentially uncompetitive," Vox reported, and "set the price as part of a bureaucratic process."

Another approach

The high cost of prescription drugs has been vexing consumers, doctors and policymakers for a while now. National debates have raged over the high cost of Hepatitis C treatments and cancer drugs.

But the kerfuffle over Daraprim is intensifying calls for reforms.

Just days after the news of Daraprim hit, Hillary Clinton announced a plan to curb the price of prescription drugs, as Vox reported. Some experts, including Dr. Bach of Memorial Sloan Kettering, are calling for a move toward a concept known as value-based pricing.

Bach explains the idea this way: With value-based pricing, he says, a drug that is better should cost more than a drug that is less good.

It's not a mysterious concept, says Schweitzer of USC.

"We as consumers do that anyway with everything else that we buy," he says. "We only buy things if we think it's worth it to us, and finally we're starting to think of that for pharmaceuticals."

This approach, Bach says, could help set prices that both our health system and consumers could afford. Meanwhile, it would still incentivize innovation in the drug industry because drug makers would be rewarded for developing better drugs that improve patients' lives.

What will it take to implement something like this? There are several challenges, one being that the definition of terms like "value" and "better" can be open to interpretation.

In response, Bach has developed a prototype – called DrugAbacus – that offers one way to find the value of a drug. The tool weighs different factors: A drug's price might increase based on how many additional years of life it provides, if it treats a rare disease and if it's novel; it might be lowered if the drug has serious side effects.

Another challenge could come from the Pharmaceutical Research and Manufacturers of America. In a written statement to KPCC, spokeswoman Holly Campbell says the concept of value is deeply personal and highly individualized, based on patients' conditions, genetics, treatment goals and quality of life preferences.

"As policy-makers consider proposals to link policy decisions to broad value assessments based on population averages, it is essential to ensure that these policies do not impede patient access to beneficial treatment options or interfere with physician-patient decision-making," she said in a statement.