[Auto-generated transcript. Edits may have been applied for clarity.] Okay. Welcome. Uh, good afternoon to everyone in the room and to those who've joined us online.
This is the, uh, guest lecture for the, uh, MSI Translational Health Sciences module on economics and regulation.
Uh, I'm very pleased to welcome, uh, New Garrison, who's joining us from the the west coast of the US.
Um, Lou is, uh, an emeritus professor, uh, at the Comparative Health Outcomes Policy and Economics Institute at the University of Washington.
Um, amongst many other things, he spent, uh, a career working on the sort of international boundaries of health economics,
um, and health technology assessment, uh, analysis.
So Lou's going to give us, uh, a whistle stop to, uh, of all of his, uh, work, um,
and stuff that is relevant to what we've been discussing all week during the module.
Um, for anyone who's online, anyone in the room, uh, he's going to talk for about 60 minutes or so,
and then we can take some some questions at the end.
Um, so with further ado, uh, Lou, I'll hand over to you and strap yourselves in.
Everyone, this this should be good. Thank you. Thank you. Professor Faulkner, are you seeing my main slide?
Okay. Yes. All good. Thank you. Lou. All right.
Well, thanks so much for the introduction. Um, really?
Really, uh, you've had a very busy week and, uh, got a great foundation for, um,
Professor Yangu and Professor Faulkner from some of the things I'm going to talk about.
Um, if you read this literature, you'll run across the name Victor Fuchs.
They, they named, uh, the lifetime achievement Award, I think, from either the Ash, Ashley Kahn or, uh, uh, he, uh, after him.
He was my dissertation advisor. He died last year at age 99.
He published at 98. So I was his teaching assistant in 1975.
So I've been doing this 50 years. So I've touched on about everything in health economics, but I'm still learning.
And, uh, I think I sometimes subtitle my presentation, uh, An American health economist point of view.
And I can explain that further. But let me let me just point out, uh, you've been a good professor.
Uh, Yang gave you a great introduction to a lot of HTA and economics, and you'll be getting my perspective on that.
But even in this, uh, this title slide, I make some choices that I want to emphasise global.
I'm thinking of this, uh, because I'm working.
I'm, uh, you know, I get it in terms of my career, I guess I should say I worked about 12 years in non-profit research for project Hope.
I started travelling around the world. I worked in Poland in 1989, for example.
I worked in Jamaica for a while. Um, and then, um, and then I, then I, um, sort of I worked at project Hope and in Virginia,
where the people who set up the journal Health Affairs and then I, uh, went to work in the pharmaceutical industry from, uh, 1992 to 2004.
And then I've been at the university, uh, 20 years after that.
So I worked in a lot of different settings.
But but the thing about and I've worked on physician fees, hospital costs and kind of ended up more in pharmaceuticals,
uh, in the industry and focusing here at the School of Pharmacy at the, at the University of Washington.
But, you know, pharmaceuticals as I'll talk are global public goods. The information in there can be used by everyone.
So hence the term global, uh, hence the term biopharmaceuticals.
We moved from small molecules to biologics. And then I focus on what we call market design.
How have we you know we have this in economics. I assume you've all taken some.
We have the idea of a perfectly well-functioning market.
But this is not there are a lot of failures here that we try to address and we try to develop a market design.
And then so I'm going to talk about what the kind of what you could call economic value.
I'll say, uh, you've heard a lot about health technology assessment.
I'll prevent, uh, present a view on that, and then I'll talk a lot about access, because the big problem with, uh,
with these medicines, as we invent them, they don't cost that much to make after we've made the big investment.
And then you access is delayed all over the world. So, you know, I should mention that I was I think I was,
I was president of is poor and that's my primary home in terms of we have 20,000 members globally.
I've been in 49 countries. Uh, talking about HDR.
Uh, certainly in, in, uh, South America, Africa and Asia, but not all countries, but uh, a good chunk.
And what I my, my key met and what my concern is and I have a special interest group that is
poor on access is trying to move to faster access after these drugs launch.
Uh, first in the world. So and I and I, I'm going to talk about what we'd say we need a broader concept of economic value.
Um, and so I really want to think about it three ways a broader concept.
So not just, uh, health gain, which is core or cost savings, but also the peace of mind people get from, uh, reducing uncertainty is important.
I want to think. And but when we start to think about this, we tend to focus on launch price.
But actually we need to look over the product life cycle because that's.
The way the investor looks at it, the investor saying, if I, you know, the product is,
uh, on the market for a period, what are my what are my returns going to be?
What is the net present value.
And then because this is a global public good, economic theory says that we should have differential pricing across countries and across individuals,
with rich individuals contributing more to global R&D than low income individuals.
So the question is how well do we approximate that?
And the answer is not so well, but we want to push towards that. So I think we're going to my message is we want to think broader.
We want to think over a lifecycle and we want to think globally,
but we also want to move faster to what I call rapid and efficient, to which I'll explain that.
So I've structured this around ten questions.
Um, and then so I'll mention that. So first of all, what makes medical care different from other markets.
Well the first thing is, you know, you can't buy health. There's no you can't go to the store and buy health.
You have to produce it and you buy the inputs. But I want to remind you just about the basics here of, of, uh, of economics.
So if you've taken micro you've seen the simple market, but there's a lot of things going on in this figure.
We have a demand curve and a supply curve, and we have an equilibrium at p star.
And to to get this to be in equilibrium, we have to make a lot of assumptions about perfect information.
Everybody knows what the prices are. Uh, people know the you know, the and so on.
So that that's actually even though it's a simple model,
it's what I would call a complex system because you have an interaction between demand and supply.
So, you know,
increasingly these days I've heard the term complex systems and a complex system is complicated because you have feedbacks and simultaneity and so on.
And so we get this p star and complex systems.
People use the term emergent property of a complex system and the emergent property.
Here are two properties I want to highlight. One is called Parado optimality, named after a famous, uh, Italian economist from over 100 years ago,
which basically says that equilibrium point means that people have made all these changes.
They could make their would, uh, without making that there are no changes left that would make anyone better off.
So that's, that's what this theoretical maximum is.
Now the other part is it, it maximises what is called the social the social welfare which is the sum of the,
the um, they don't have these consumer surplus area and the producer surplus area.
Um, I'm not sure if this is a build slide or not. Uh, okay.
But anyway, so the CHS is consumer surplus. The that is producer surplus.
And I really want to emphasise the importance of consumer surplus in thinking about economics in general.
Consumer surplus is the difference between what you'd be willing to pay and what you have to pay.
So the people of the upper left hand corner of the demand curve would be willing to pay a lot more than equilibrium price,
so they get consumer surplus. And I would submit to you that life, uh, consumer surplus is one of the most important things in life.
So there you are in Oxford, one of the nicest places on earth. I was there last month, uh, in a wonderful academic setting.
Um, you know, very, you know, just a wonderful community.
And you're getting a lot of surplus that maybe you don't have to pay for. At least I hope so.
Um. Okay. My slide is not advancing.
I'm having a little trouble here. Hold on. Okay. All right, so I'm sorry I didn't.
It was I had a build here. Here's the consumer surplus land producer.
Okay. Well, coming back to you've talked about cost effectiveness.
And I like to say when all said and done, we're talking about maximising welfare maximising.
And we have this simple rule that we compare marginal benefit and marginal cost.
So the key word is really marginal. And that's where we know we're at an optimum.
We need to think about that.
But yet despite that these we have a lot of assumptions to make that market perfect that are not in the real world not met.
Now, in the case of drugs, one of those is public goods, and public goods and information is a public good and free markets would under supply it.
Hence we have invented the patent system. Hence we subsidise research labs and so on.
Other kinds of market failures are externalities. Um, across uh, you know, they talk about pollution.
Sometimes we have natural monopolies. We have informational asymmetries between the, uh, the physician and the patient.
The physician has more information in the patient. And what's probably underappreciated is uncertainty itself leads to market failure.
So we the the what? Uh, the article by Kenneth Arrow in 1963,
really the seminal article in the field basically argued that the institutions that we
observe in the medical care sector reflect us trying to deal with these market failures.
So and you would say, even drug regulation of, uh, national regulatory agency and is a kind of dealing with a kind of market failure.
But I would just point out we also have government failure.
And I guess you as you, uh, if you're living in the, you know, as you know, today, uh,
governments, uh, uh, have difficulty making long term commitments and they reverse them.
And unfortunately, we're seeing a lot of that, uh, these days.
But now we can then focus down to a what makes biopharmaceuticals different from other medical inputs.
So we could say that what we're trying to do is maximise the health of the population.
Economists like to talk about a health production function but has inputs of physician visits, hospital care,
medicines, patient's own time and other, with other being the social determinants of population health.
As I'm sure you're aware, when we talk about populations, uh,
it's really the social determinants that the reason that the Japanese have much better life expectancy than the U.S., for example,
it's not just the medical care, but yeah, what's unique about a drug is it's it's information,
it's new knowledge, and it's a public good in the sense that everyone could benefit from it.
My use of the information doesn't use it up. You you can still use that information, even though we have restrictions on access to the use of that.
So not only that, you know, uh, that information is potentially available to 8 billion people on the planet,
not just the, you know, the 300 million in the U.S or the 300 million in Europe.
And I think the, I don't know, 400 million in Africa. Now, free markets will under supply public goods.
So we intervene. We say, well let's have an intellectual property.
We'll set that up, we'll have patents. And so we basically set up a system and said we're going to put patents out there and uh,
innovations, uh, get a 20 year protection that gives them monopoly power.
Now they don't have perfect. They may not have perfect monopoly. There may be substitutes and there's competition.
So it's basically an oligopoly. But what economists say is the optimal way to finance public goods would be to have differential pricing,
called Ramsay pricing, in that for an economist from about 100 years ago.
Uh, and so that rich people should contribute more than poor people and we'll get the optimal amount socially.
But obviously, the problem is, uh, we all have an incentive to be a free rider.
We want to get on the global public good bus and not pay the fare.
So the question is, how do we get people to pay the optimal to to contribute their share?
So that's so I guess. So I guess I just want to say that's what makes drugs a little different than hospitals.
You know, the majority of spending in the healthcare sector is in the hospital or the doctors.
Those are about 20, 25% drugs or maybe 10 to 20%.
But those two but they're different markets and we address them them differently in terms of,
um, the way we pay for doctors and hospitals and so that the pharmaceuticals are different.
So what do I see as the two major failures? Well, the public goods I've mentioned and uncertainty, how do we deal with these?
Well, with regulation, uh, and I know that, uh, professor, uh, Faulkner gave her I looked at the presentation,
a really detailed and wonderful presentation on the all the complexities of national regulatory agencies.
But from the simplified economics view, I'm basically looking at this as well as the the medical consumer.
I face product quality, uncertainty. I don't know how good the medicine is.
And I need, uh, a regulatory body to certify that it's high quality in the sense that the expected benefits outweigh the outweigh the harms.
Now, as you know, from clinical trial development, the trials are designed to measure the treatment effect and that benefit.
They're not powered to measure safety, uh, adequately in the trial.
And so we do follow on surveillance and so on. So it's a complex process.
But how technology assessment. And I refer to traditional CTA as cost per quality or quality adjusted life year or cost per dally averted.
So that's one you can think of that as a kind of regulation of the of the price and quality.
But we still have what I think are some big failures.
Uh, and I'm sure if you've gone to any of the meetings, you know, you know that real world data and evidence is a big failure.
You know, if you have if you have a medical condition, most of us have some kind of medical condition.
Uh, you know, we we get information on how the drug worked in a trial,
but we don't collect data on how the drug works over the detailed data, systematic data on how the drug works over the patient's lifetime.
So that's a big failure. And we're all trying to address it, but it's not.
The current system doesn't do a great job of providing that information.
The other big failure is this differential pricing doesn't work well.
And I'll talk later about these lags between first launch anywhere in the world to access and in low and middle income countries.
But it all raises a big question from a global point of view.
You know, we're spending it's unclear as a as a global as a global enterprise, we're spending $300 billion to 600 billion per year.
I would say, uh, you'll see we produce about 50 medicines are, you know, but yeah, these things have benefits potentially for 8 billion people.
You know, as we saw with the Covid vaccines.
And we as we see for many of the vaccines and so on, the potential benefits and 8 billion people, are we investing enough globally.
Now, an important distinction that I'm sure you run across in economics is static efficiency and dynamic efficiency.
So static efficiency is kind of the way that, uh, uh, a national, uh, like the NHS has to operate in the UK.
They say, well, this is our budget for all of the health care this year. We're going to allocate a certain amount to meat, to medicines.
And then among the, the for the amount we're allocating to medicines, we want to maximise the health gains.
So they look at it kind of an this year, this period this budget.
How do we do it. Now the question is well if we do that on a year by year basis,
does it lead to dynamic efficiency and even globally that we get the optimal route of innovation over time.
So we're as I said, we're spending 300 billion to 600 billion a year globally on medicines.
Suppose we cut that by 20%. How many medicines would we lose?
Uh, that's called the elasticity of innovation. And we don't we don't know what that is.
Exactly. And there's a lot of controversy about that.
Now, one of the really, uh, thought leaders in our field, uh, Joseph Newhouse of Harvard, wrote this paper in 2004 about medicines.
And it's still true. It was focusing on Medicare, but it brings out the basic economics of medicines,
which are there's this big upfront investment in the billions of dollars to get to get one new molecular entity approved.
We give them a monopoly 20 years. Uh, and the drug developers, the investor, they on average, uh, you know,
it takes about ten drugs to get one, ten, ten drugs in development to get one to succeed.
So 90% of the time they're failures. And when I worked in the industry for those years, I know I worked on some products that that were successful,
but I also worked on an obesity product that everyone thought would be a blockbuster.
But it wasn't. And by blockbuster, they mean earning $1 billion in revenue.
So if you're thinking, uh uh, you know that that's what they mean.
But there are very few of those. But what Joseph Newhouse said is this whole that that's what we're trying to do.
Okay, so what is this market design? And here's a book I can recommend to you by, uh, the colleague.
I know, Peter Kaczynski, and he's basically trying to point out that, look, we do have a market design.
The market design is we have a fixed patent life.
And according to the Hatch Waxman Act, the the companies agree that after the period is completed, uh,
they will the market is open to a generic situation which will drive through competition among generic companies,
will drive the price to close to the short, the marginal cost, the short run marginal cost.
What is it? What is the marginal cost? So that's the theory. The practice is this if you think about the market design,
is if you have $1 billion product and you're a manufacturer, every day is worth tens of millions of dollars.
So you will do everything you can within, hopefully within legal limits to game the system,
to get every day of patent life and to block competition and so on.
So we have to have other ways to counteract that. But the fundamental design is you get to be a monopolist or oligopolies for a limited period,
and then you're the competition then drives the price to do to low levels.
And then everybody in the world can get the product for for a low price.
I like to point to Lipitor for by Pfizer, which was launched in 1997.
By 2011, it was off patent. Over that period, Pfizer received about $150 billion.
So so you could say, well, suppose that it had cost them 3 to 3 billion on average to develop a product that was a blockbuster.
That was a tremendous return. That product went off patent in 2011.
It's still in its product life. I mean, people, it's one of the most used products in the world all these years later.
So if you just think about the you got to think about the life cycle, including this generic, uh, period.
So on. You've talked about this already, but just here it schematically we have the drug development period.
You have the 20 years. It takes 8 to 12 years to get it to the market.
Then maybe you have 8 to 12 years to get your money back. And then it's generic.
So this is the pharmaceutical life cycle. Now this is a paper that I wrote with Peter Chesky.
And you know, we both agree that one of the big failures in the US is we don't have universal health coverage explicitly now.
In theory, if anybody can go to an emergency room and by law they have to be treated.
But that's not coverage because you live in risk of bankruptcy.
But drug development is time consuming. We have this unique market design.
It's different than hospitals and doctors because of the patterns.
We use HCA calculations, but they could be seen as a form of price setting drug spending as a minority of total spending.
It's not yet and it's not increasing that much as a share.
But this elasticity of innovation, how much we lose if we reduce R&D is unknown.
But pricing, I will just say pricing based on R&D really doesn't make sense.
Because, you know, if I have ten products and one succeeds and you say, well, I want to reward you for the one that succeeded,
I say, well, what about what we have to cover the cost of the nine that failed?
And those are essentially arbitrary. So we can't do that. So we really have to pay on a value based system.
And I would say not what I just said. Not everyone in Europe agrees with.
And there are people trying to come up with a cost based approach, but I don't think it makes sense.
So instead, we've got kind of country specific value based pricing.
Some country uses traditional or conventional CEA.
And I'm arguing that, well, we need to think more broadly than that.
And I'll say more about that. So well how competitive is the biopharmaceutical industry.
And I show here a number of years and you can see that in 2010, 2004, remember when Lipitor was on Panopto 2011?
It was, you know, it was uh, uh, you know, it was the number one product earning 7 billion by 2013.
Abilify is the, uh, you know, uh, antipsychotic is the number one product by the by 2016.
In the upper right, humour is the number one product.
Now, after, uh, after Lipitor, Humana from AbbVie became the blockbuster, one of those $200 billion blockbusters over many, many years.
And it's only recently kind of come off patent now because it's a biologic instead of a, uh, a small molecule generic.
We have biosimilars to allow entry.
And then you can see just under Humira there in 2019, Keytruda from Merck has become a blockbuster, is becoming a blockbuster.
And I would say, you know, it's kind of the next giant wave of a of a multibillion dollar blockbuster, which is, you know, and so that's complicated.
And but during that period, as you know, after 2019 and 2021, we had we had Covid and, uh,
the companies that came up with Covid vaccines received, uh, you know, something like $50 billion a year.
So there were big rewards, but those didn't persist after that. Now, does this model work in terms of, well, when products come off patent,
what happens to does the price does the price get pushed to the marginal cost.
And this is an old slide. But it's still basically true. And as you can imagine that competition.
Drives the price down and the more competitors there are post patent, it gets closer and closer to marginal cost.
So the first entrant into the small molecule, generic or by are not going to take you.
They're not going to get into a they're generally not going to want to make a big price cut.
Even so they're not. But you can gradually gets driven down.
I've done research in the for example,
in the hepatitis C market and between 2015 and 2019 and the the products were launched in the U.S. in the first year at about $50,000 per patient.
But because of competition, and this is not a generic market, but even you can get a price war in a branded market.
And the price of hep C drugs by 2019 was down to $15,000 per patient.
So there is competition and it can work.
Now what happens is in this market, you know, it's you kind of have this split between the brands and the generics.
And on the left you can see that in terms of money and the financing of the industry,
it's the branded products that produce 75% of the money to finance the R&D.
But the total prescriptions dispensed over time. It's increasingly generic.
So things like laboratory now generic. So that's the green bar on the right.
So that's what you observe in this the market design.
That's what you would predict that it's financed by the blockbuster. They go off patent and then access is improved.
And that's good. But the trouble is it's not improved fast enough for everybody in the world.
Well you know how productive does this industry. And this is a a paper that I think the 2024 version just came out in the last two days.
But this just this just is in the journal Health Affairs that I mentioned, which is a prominent policy journal in our field.
And it basically what you see as the U.S. is about an 18% of GDP.
The rest of the world is only at about 12% of GDP. So we're spending more as a share of GDP.
We're also spending you can see average health spending is about $15,000 per person in 2023.
Uh, prescription drug spending is almost 500 billion.
You can think about that as an investment. Yeah, we have many uninsured people, which is a great flaw in the US system.
But, I mean, but this gives you an idea of the order of magnitude.
It's a big in the U.S., it's a big share of of, uh, of of the GDP.
Now I like to ask people, well, how many drugs you know are produced each year.
And just looking at what's approved by the, uh, by the, uh, FDA through the cedar.
You know, it's about 47 per year over the last ten years. And you'll notice that there's no hockey stick here.
This is up and down is changing. Uh, it's high risk, high reward.
I've talked about that. And their productivity is flat. Uh, but you can see that they're still first in class medicines.
They're not all metas. 50% of them are first in class.
And we also see a growing trend towards, um, growing, uh, trend towards, uh, rare and orphan diseases.
And we got to understand that there's science is going on in the background,
and the science has changed over the, over my career over the last 40 years.
So, you know, we've talked about personalised medicine for a long time, and we didn't talk so much about, uh,
you know, uh, some of the genetic advances, the rare and orphan diseases and, and those are quite amazing.
Those are actually there's a scientific push there that works are different than we had historically when we had small molecules for big conditions.
These are maybe biologics or special molecules for, for rare conditions.
And so it's changing and the world is changing. Now I've already mentioned that, you know, the drug development is complex.
You you have probabilities of getting through these phases. Uh, and, you know, the estimate is that is about a year ago that it was about 3 billion.
Sometimes you could go as I sell 6 billion. I don't quibble about the billions.
It's a big number. Uh, we don't know exactly. And as you start to think about.
Well, how would you estimate that?
Well, you have to build it up from a model, and you also have to deal with all the fact that nine out of ten failures drive a lot of the cost.
So it's not easy to estimate, but it's in the billions.
And here this this figure illustrates the problem. The probabilities are, you know, for each phase of there's high probability of failure.
So if you look at the lower bar on the right, by the time you're done, only about 10% products make it through.
So if you're an investor you know it's risky. You've got to figure out, well, what's the chance that is it a health problem that needs these help?
Uh, is convenience worth paying for and so on. So it's a highly risky thing.
Now, what is the gain? Well, this is the best paper, uh, that I've seen on estimating the gains.
And this is looking at, uh, pharmaceutical spending in the US and what happened between 1990 and 2015.
Life expectancy grew by 3.3 years. Now, in this exercise, these are really well known.
Authors estimated that 35% of that was due to pharmaceuticals.
Now it's really complicated to to estimate this sort of thing and it's not easy.
But if you just did the back of the envelope calculation, you get an astronomical value, you know,
and you go back, uh, just a few slides of saying that like GDP is like 30, 30 trillion a year.
But this says that the value of that gain was $57 trillion.
If we had the population of the U.S. at 330 million, they each each person got 35% of that 1.5 life years.
It's 57 trillion. It's a gigantic number. Now, that's a what we call a back of the envelope calculation.
Well, what what what do we have to invest to get that. And that's uncertain.
But suppose we're investing 300 billion a year for 25 years.
That's only 7.5 trillion. So, you know, these are all ballpark numbers.
But you know it's just the value of life gains is astronomical.
Now you know we know what happened. The question is well, things changed after 2015.
We had Covid. We know that U.S life expectancy had been falling because of opioid abuse and so on.
So it's not an easy thing to estimate, but it's clear that pharmaceuticals can be life saving for lots of people.
So then we talk. Okay. So how do we run this ecosystem?
And we said, well, we're not we don't have a global body that decides how much we're going to reward industry.
It's it's a, you know, it's a it's a market. And we have, uh, each country's a different market and they have to decide what,
how do they value it and how much essentially are they willing to reward innovation and contribute to R&D.
Now? This is a slide I use to pick up the key things, many of which I've mentioned.
The industry productivity is flat. Now, what that means is if the productivity is flat and the costs are rising,
that the cost is rising, if we're going to finance that, we're going to have to pay higher prices.
So we shouldn't be surprised when we find, oh, we're going into these rare conditions and we're just getting these little gains.
And to cover it, we're going to have to raise prices to finance it. That shouldn't be a surprise now.
And we also know the science pushes to these more specialised and orphan products.
Uh, but these when you I'll show you a slide later. The rewards are not strongly correlated with the health gains.
There are a lot of imperfections in the system. US prices are rising relative to other countries, which, uh,
Donald Trump and many Americans have found troubling and say ten years ago people were very worried about these rising prices.
And they said, are we getting value for the money? So we started asking questions about value.
And at the time, you can see there were a number of bodies that produced value frameworks.
Uh, you know, Asco, the American Society of Cardiology,
the Institute for Clinical Economic Review and certainly nice has been around since 1990s, 1999.
Uh, and some people have been we've been in various countries address this in different ways.
Now it is poor. We said, well, but people are getting confused by having all these different value frameworks.
Well, let's get together a group of economists and then have let them produce an approach to this and
then have it reviewed by stakeholders and is for including patient groups and other groups.
And, uh, the way we looked at it, well, the one reason people got confused is these value frameworks.
We're looking at different questions. Now, the one question you have at the national, at the health plan level, which you know,
is the NHS in America is a separate insurance company, is do you include it in your benefit package and at what price?
And that's the that's what we would call most people think of, you know,
the core of traditional HTA is assessing cost effectiveness and negotiating price.
But even after you've brought it into the formulary and made it available, you still need to manage it.
And so and I know that, uh, you know, nice does this they have treatment pathways and guidelines.
We have that this is all standard treatment pathways and guidelines.
But some of these frameworks, we're more concerned about that from the cardiologist in the Cancer Society than than they were about price.
That's a different question. We still need to manage. And and then a number of these frameworks were really focus on the patient.
And this is uh, what we call the shared clinical decision making,
where you're the patient sitting with your physician and you're trying to decide what to do.
Now, you don't want your patient, your doctor, to say to you, well,
I would really like for you to have this medicine, but, you know, we can't afford it as a health care system.
Okay? You know, you're not worth it. I mean, we don't want to hear that.
So my reaction is, well, I want to constrain the doctor and say, this is what these are, your treatment choices.
And your job is to advise the patient. And I don't want you worried.
You know, we want to decide based on that. At that point. We want to decide what's what's best for the patient.
So the different frameworks look at different things.
But as economists, we're we're kind of focussed on this question.
Well, how much should we pay if we want to get optimal innovation.
So if we set what how do we set the signals to and to investors and to innovators.
And we start to say, well, we know we wanted to improve the health of the population.
And then I would say, well, more than health. We also wanted to improve the well-being of the population.
So it's not just life years lived, it's also quality of life.
And, uh, mental health benefits from reduced uncertainty.
So we were so we were really as our we formed a task force and we set out to try to, to think about this and should we modify what we do.
And so that was our working premise. Now, the way I think about it,
another way to look at it is a lot of the focus of HTA as people talk about it has been on this health benefit package inclusion and that,
and that's in the middle there.
But we have all these steps from the drug investment decision to the regulatory approval to assess benefit harm to a set cost effectiveness,
and then down to these other decision context. So, you know, when people talk about HCA in our field,
I think most of the time they're thinking about nice in the US or GBA in Germany or Icer in the US, and they're focussed on pharmaceuticals, right?
But there are other institutions like these guidelines and so on that actually affect what reach reaches patients.
So we see in the world a continuum of methods from some that are based on the quality of just of life here,
which you heard about, uh, I'll probably say a bit about that. And that's the UK.
And in the US it's Icer,
even though the government has outlawed the use of the quality fruit technically from the from the health plans point of view,
Australia and France are more in the middle. They they have centralised HCA assessment.
Uh, they don't they may not explicitly use the quality in the same way that the UK and the US does.
And then Germany look focuses on the clinical data and the health gain.
Okay. Now. I would argue that these are these are they're all area as patients we want health gain.
We want better length of life and better quality of life. And I think these systems are all trying to do that.
They're just they're just doing it slightly differently. And this is true outside the, you know, in other systems as well.
Some of them rely. But in the end more on stakeholder engagement and deliberative process.
Uh, even Icer and UK, at the end of the day, they have a deliberative body that makes a decision.
So there is a continuum. And the reliance on the the sort of numerical quality varies.
Now looking across Asian health care systems and I guess I, I've been in all of these countries in the last ten years.
Um, you know, they're they vary a lot. So in Thailand is really I picked up the hi tab has picked up the nice methodology.
And I know at one point there was a memory, a memorandum of understanding between, uh, Chinese authorities and nice.
So nice has had a big influence around the world, but not everyone has bought into that methodology.
The in Japan, they still, uh, focus on added benefit, but they have a lot of price regulation.
India is focusing on HCA in priority setting.
It's not they're not they don't have a unified national, uh, benefit package that they need to decide whether to include things.
So you observe a diversity around the world.
And I think everybody's trying to pay for value given their own, their own concept of value.
Uh, and here's a survey. And I guess I went to a meeting at, uh, W.H.O., I don't know, ten years ago.
And they keep and they keep moving these surveys forward, which is good.
Uh, you know, where does HTA stand?
And, you know, I've also worked in Uganda and Kenya, and though they don't have centralised HTA in the way that nice does at this stage.
But anyway, people, you know, the people use data to inform decisions.
But economic valuation is not the norm nor or explicit willingness to pay thresholds.
And that's a question we could come back to. I like, um, uh, Professor Yang's presentation.
I think governance is extremely important here. It's not just about applying the HTA.
The question is you have to set up an independent body that is insulated from political influence.
So governance is important. And these institutional and political barriers may matter more than analytic methods.
And when we're thinking about 104 countries, it's clear that most countries have not adopted the cost per quality.
Now, I will say you may be aware that that despite the controversy about the quality,
there's a registry at Tufts University in the US and something like over 12,000 studies have been done,
not not all in medicines, but in all kinds of care. 12,000 have applied the cost per quality.
So I would argue it makes some intuitive sense.
This despite some of the limitations of the calculation of the quality.
So this comes back to what I've said. These systems are promoting value.
Well what is value from an economist perspective? It's somewhat you know, we use markets to tell us what the value of something is.
That's willingness to pay. But in this case we don't have perfect markets.
So sometimes we use another approach which could be opportunity cost.
What did we have to give up in order to get it?
Well, if in a market you give up money to get it in a non market, which is kind of medical care, you may give up other things.
So that's opportunity costs. But one problem with this concept of value well we all have different values varies across people.
My values may change over time. It's difficult to measure in health care because we're not in a market.
We're not where people are not paying the price of these things out of their pocket.
They bought, uh, kind of an option through insurance.
Now, in principle, the way I would ask the question, I would say, well, um, well,
suppose you're a 20 year old and you might need a heart transplant over the rest of your life.
What would you be willing to pay over the rest of your life in an incremental insurance premium, in the event that you needed a heart transplant?
How would I get that? Well, people can answer that question.
So if I say to you in America, well, your average spending is $15,000 a year, well,
how much more would you be willing to pay on top of the 15,000 you're paying now to get this have access to a heart transplant?
People cannot answer that hypothetical question.
I think so, but what we say is, look, but if you can tell me how much we value a life year, I know the probability that you need a heart transplant.
And I can actuarially calculate what you should be willing to pay.
So I think that's how we think about it. Now, what is economic value?
It's what but fully informed. And remember that hypothetical market assumes full and fully informed which is not true in the real world.
But certainly if it saves me money, it's valuable. If it gives me life expectancy, it's valuable.
If it gives me quality of life improvements or reduction in morbidity, it's valuable.
So I'm willing to pay for those things. And that's the essence, the simple essence of the quality and cost utility analysis.
But what our what our welcome to what our what our task force said.
Well that's good. It's a good starting point.
And you've seen the instrumental cost effectiveness ratio which is this marginal benefit to marginal cost comparison.
I pointed out that beginning and again in the, in the standard, uh, traditional.
The numerators change in medical cost, the denominators change in quality and you get the quality adjusted life year.
And that's marginal benefit marginal cost. But what our our what our um, task force said well that's is great.
The quality is a great starting point.
But you know and that's where I've got that we, we came to be called the is poor value flower because it came out of this group.
And we said, but there are a lot of other things to take into consideration. So a 12:00 think of this as a clock we take of the quality.
At 1:00 we see net cost. That's the traditional cost effectiveness ratio.
The quality has length of life and quality of life. But other things matter.
Like how does it affect productivity, how does it affect other family members.
So those are the first four. And then around the bottom we said, well wait a second.
Uncertainty is very important.
Like and you know, and so we talk about the value of knowing insurance value, fear of contagion, um, value of hope, real option value.
Those are all concerned with uncertainty.
Now at 10:00 and 11:00 we have equity, which is not an area we focussed on in our panel, but has been an area especially,
uh, where people have made a lot of progress in the last five years, especially the folks at York.
Um, uh, uh, coxswain at all. And then scientific spill-overs are the interesting one are interesting one because these it's kind of a public good.
Uh, and so when you're, you know, when you're, when we're paying for a technology,
if I only pay for what it gives you for, you know, it's not maybe saying, well, you know, maybe I should.
It actually benefits many more people. That's a that's an extra analogy or scientific spill-over that, uh, now I want to go back to that.
We have a long running discussion about what perspective to take.
And there are multiple every stakeholder has a perspective, as you can imagine now.
And this from a system point of view, kind of either we take the health sector perspective or we take a broad societal perspective now.
And I the National Health Service, NHS in the UK says we're going to take this societal perspective.
We're going to look at health outcomes and medical costs. We have a fixed budget, uh, now, but you can also say, well, wait a second.
We know that, for example, Covid vaccines, you know, help people avoid the severe, uh, severe Covid,
but it also gave people, uh, leave to to restart the schools and get children back to school.
How do I take that into account?
And when you start to think about it, you say, well, you know, if I, if I drop a technology into the economy, yes, that affects the health sector.
Yes, it affects people, but also affects all these other sectors like productivity, consumption, social services, criminal justice, education.
So you can imagine that you might want that an expanded view would take account of
the almost what we would call general equilibrium impacts in multiple sectors.
And people sometimes do that. So I'm going to go around the, the uh, the value flyer once more quickly.
So again we had qualities in that course and I explained those.
And we know that this is traditional CPA. Uh, then we say, well wait a second.
In the US, for example, we have an employer based system. So people, you know, so migraine drug and people at work.
So maybe it's more valuable to employers.
And then there are things that can improve adherence or family spill-overs should we take those into account.
And then we have these elements related to uncertainty. And I just really want to highlight this a couple of these.
But you know, I got into this and this is uh, when we did the first value flower about ten years ago for the European Personalised Medicine Alliance.
I got into it because I was with Roche and I was working on a drug called her septum,
which was really the first, which was a drug that was targeted in breast cancer for her two positive women.
And people said, well, that was the first personalised medicine drug where we could actually identify the women who would respond,
no, you could give it to 100 women, but only 20 would 20% would respond.
So we needed a test of her to positivity. And so but all the women were better off once we knew that we could identify the 20%.
So we call that the value of knowing, so that then we started thinking about broader concepts of value.
And I think the one that's really important is what's called insurance value.
And this is really a couple of components where obviously insurance gives you financial risk protection.
But less appreciated is it gives you health risk protection.
And I like to think of you know, and and I think losing track.
And so I think in in March of 20, 2021 when I'm being told, you know,
that I'm elderly and that I'm at risk of dying from Covid and we're going to have tens of millions of people die in the next six months.
My utility level fell, I was much I was worse off, you know, and so my peace of mind was disrupted in March of 2021.
And I'm also thinking it's going to be so difficult to get a vaccine.
I mean, we know we've been trying for HIV vaccines for years. We've not succeeded.
What are we going to do? You know, we're going to have tens of millions of people die.
Now, I would argue that 8 billion people on Earth were actually worse off once Covid 19 hit, because we all were living in this, um.
Known with some fear of death. But once we had a vaccine.
You know, by September of the year, we knew we had a and we were better off.
And that was a big health gain. So I think that's true of most things.
Your, you know, the peace of mind you get from knowing that something can be done is very valuable.
And the way we calculate the quality, it's not in there. So that's health risk protection.
So I think we really that's what I'm arguing for. And I think the methodologies I'll be talking about,
such as what are called generalised risk adjusted cost effectiveness analysis and generalised CTA to try to put,
say, we need to take these valuations of these different things.
Now, real option values the idea, well, if I extend your life then a new you can get a new drug.
My wife has chronic lymphocytic leukaemia which she's fortunate.
It's a drug with a lot of it's an area with a lot of medicines and she's on a third generation product.
She survived and she had a monoclonal antibody. Then she went to a Bruton EB and now she's on cowplant.
So too. So the life extension and new new innovations came.
That's real option value. The value of hope is a wonderful term, but it's actually very, uh, ambiguous and uh,
confusing to people because all of this sounds like hope to patients. And it is.
Um, and but the basic idea was here.
It's interesting. The literature on it said, suppose I gave you a choice between I had 2 to 2 outcomes that had equal poly gain,
but one of them was more uncertain than the other. And for example, the immunotherapies that have a chance of a cure in maybe 30% of patients,
you might be willing to take a drug that had a risk of maybe a more a treatment, a more immediate death, but gave you the chance of a long term cure.
And that's that's kind of mathematically what was called the value of hope.
Now, you know, again, the severity of disease influences willingness to pay in that.
And, and this fear of contagion we had.
And there is really has to do with this rarity, uh, like, you know, like an infectious disease and avoiding those risks.
And then again, I just want to point out those other things I was talking about, kind of operate at the patient level.
Where at where the where I, you know, and the question we're dealing with.
And there's actually a working group now called Hema Health, um,
Economics Advisory group that combined of Nice and CDA in Canada and Icpsr in the U.S. and they've sort of said,
well, what do we what's the next generation? What do we need to do, uh, to incorporate some of these other things?
And they're still being somewhat conservative, I would say and say, you know, the cost per quality's good.
Let's stick with that. We're not sure we can measure all these other things.
But as I mentioned, I think scientific spill-overs are really underappreciated.
I mean, once, once the MMR mRNA platform was validated, even though, uh, some people in the US don't believe it.
You know, it's, uh, it's very valuable to everybody in scientific progress.
And if I just pay for the gains in people in the health gains, I'm probably not putting enough money into the pot for innovation generally.
And then there's the whole issue of equity and distributional.
Okay. Which I could talk about later. Now, I wonder I mentioned this generalised risk adjusted cost effectiveness.
So two of the people in our in our task force, our export taskforce of 12 economists, uh, worked on.
You know, worked on. They said, well, how can we how can we formalise this in our methodology?
Right. And they and they basically came up with a mathematical framework.
And here's a book they had sell a series of articles. So they deal with the fact that there's a variance in health outcomes.
People are risk averse. So reducing uncertainty is valuable.
And what you find is that you would actually get variable cost effectiveness thresholds.
It wouldn't just be based on opportunity cost. It would also be based on risk aversion.
And so it says here thresholds would be five times higher for for for Alzheimer's disease.
So I would say this is still something that's being debated in our field.
But I think there's a strong case for it. And we're still we're still trying to implement that.
Now our task force set of, uh, you know, cost per quality is a good starting point.
Uh, but, uh, we need for better frameworks that focus on that coverage and reimbursement, inclusion in the health plan.
We should also consider some of these other things that are in the value flower.
Now, since that value flower in 2018, it's been refined by people.
You can see the list of co-authors I'm on the list. We're still trying to re refine it and work out the dynamics of the system.
So we put things into four buckets dealing with uncertainty, thinking about the product lifecycle and recognising generic and traditional.
C.A. did not recognise generics ization, though.
I think people realise that we got to focus on the beneficiary and we got to look at some of these other things.
So you see here that this is really this paper is really the latest, greatest, uh,
workbook for how do you handle these things and uh, things like outcomes uncertainty, disease risk reduction.
What are the methods you would use? Um, when do you take an ex-ante point of view versus exposed CTA and so on.
So I would recommend that paper to use if you wanted to see the state.
What I would say is the state of the art and the state of the science, which is still imperfect.
Well, well, what are the current problems?
Well, again, the problem that I'm focussed on in my special interest group of this paper is the fact that we have this drug,
we invent these medicines for billions of dollars, and then people in low and middle income countries have to wait nine years to get them.
Now we know what the what we should have differential pricing. And you can see that we should have a price that goes down where the green area is.
Rich people should pay more, and that's how we're going to find it.
They would contribute more and we'd have more money for R&D. And that's what we call perfect price discriminating monopoly or Ramsay pricing.
Now when you go out into the world this is old. But it's still true that on the left you see that US prices are 2 to 3 times higher than anybody else.
These are for drugs for drugs only. And the US finance is over 50 to maybe 50 to 60% of global R&D.
But then if you look at the diamonds and this is kind of trying to you,
if there was if it was tightly correlated with income, okay, then there would be a flatline there.
But there's not. It's all over the place. And and these are all OECD countries and their contributions vary a lot.
It's not really tied to. And then it raises the question what are they really revealing their willingness to pay to a global global good budget.
And so we start to think about it I think increasingly over the product life cycle.
So I mentioned the life cycle for Lipitor started out before 1997.
There was a big on the left, a area where they made Pfizer, made a big investment, invested in a lot of things.
And they actually, you know, there was a Merck, there was a Merck drug Zocor on the market.
And Pfizer came and came up with a product that was better and then essentially knock Merck off the perch and, and they got to earn some rents.
Uh, so you can think about the product life cycle here. This is like starting from there.
Uh, during this period of patent protection, you can see the loss of exclusivity.
The consumer surplus goes to the manufacturer. They get we give them a reward as a monopolist or oligopolies.
But the idea is at some point it gets phased out. And the reason I didn't make it a very, uh,
strict curve because people people game the system are managed to get rents, get these consumer surplus after expiry.
But at some point, uh, Lipitor became off patent and we're all getting word from 2011 to 2026.
We're getting the consumer surplus as societies. And that's that's global.
So that's how you think about the life cycle. Now the investor is thinking about that area B that's what they say.
I've got a I've got to make enough money in area B to cover the nine failures I had, uh, plus the product that I developed here.
So that's how they're thinking about it. But this results in an access like the way we do it to access in the world.
So it's launched about 65% of the time.
Uh, first in the US that's changing with an entry of China doing a lot more.
But then you have its launch in the U.S., maybe the the European launches a year or two later,
and then it starts to diffuse across these other countries.
And then even if it's if it's approved in a market, doesn't mean that people are reimbursing it or that there's uptake.
In the population to an appropriate level. So what you get is I mean you can yeah.
So you can see this is this is a central medicine's a recent paper basically saying in the high
income countries the lag is about two and 2.7 years all the way out to low income countries.
The lag is eight years. So if you you know, I mentioned 20 years of patent life, 12 years to get to the market.
So the low income countries often don't get access to these essential medicines until they're off patent,
which is, I think, a big failure of the global system.
And you can see this is a study that was from the Pharmaceutical Research and Manufacturers of America.
But it's very good. And it it starts to say, well, what is the lag from first launch to availability in other countries.
And you can see there were 460 medicines launched between 200 2012 and 2021, and less than half of them are available in many countries now.
Hopefully they've selected the best ones right, but they're not of it.
They're not available. So that is that's an availability lag.
And the consumers are in those countries that patients are worse off because they don't have access.
But there's not just the access to the launch. And this they also picked up they tried to and this is hard data to get.
Well, what's the difference between the launch and then reimbursement.
And there's another lag. So again we're talking 21 months.
So we're talking four year lag to get reimbursed in access.
Again it's a I would say a giant failure of our global system.
Well well given that the marginal cost is low, we can say, well why.
You know, why is it why is that still what's happening?
Well, from the company's point of view, there's not sufficient margin or returns to justify launching in these small, low income markets.
On the demand side, the governments, you know, they have limited body budgets to manage each year.
And so they're, you know, they're they're nervous about bringing new drugs in because it's going to increase costs.
And then we have gaming going on. You know, people are trying to do parallel trade.
They're trying to buy it in low income countries and move it to high income countries.
And the manufacturers are trying to to limit that.
So all of these factors kind of lead to this access delay.
Now what's being done about these? Well, you know, you may be aware that the U.S. has said, well, uh,
at least from Donald Trump perspective, he sees this as not that this is he thinks is not fair.
I mean, we can argue about that. And he said, we want the we want the same prices.
You know, our prices are 2 to 3 times higher.
We want the same prices that you guys get in Europe now, I would say, well, we're the richest country in the world.
We should contribute more to R&D than anybody else.
But there's also an incentive under, um, you know, under a public good for people to free ride and not reveal their true willingness to pay,
not consciously, but as an outcome of their system.
And another way to look at this, and, you know, you probably heard that, uh, the U.S. has said, well, let's look at NATO.
You know, we you know, NATO is also a defence is a there's the classic example of a global public good.
Like, I live, I live under the umbrella of our defence policy and I'm protected, uh, in the US or, and NATO is essentially that.
Right. And, and then and then the US said, well, you know, we're contributing more as a share of GDP than other countries,
and we're not that much richer than Luxembourg or the Netherlands.
So why don't they contribute more? And so they started looking at the same thing from the standpoint of GDP spent on R&D, on drug R&D.
And this is an estimate by a consultancy that said the U.S. on the upper left,
the US is spending 0.78% of GDP on on R&D, whereas Germany's only doing 0.36.
And we're not our incomes are not twice as high as Germans are. Wealth is not so.
And the argument is we want Germany to contribute a bigger share of their GDP.
Now, I put it on the right a couple of articles that I think are the classics that argue that we should have value based differential pricing.
So the U.S. should pay more, but everybody should contribute based on ability to pay.
And that's the question are they actually doing that. So so essentially you get these delays.
You get an availability delay from launch to available in your market.
Now suppose I'm a country and I say, you know, I'm just not as rich as the United States.
And I appreciate the United States paying for the majority of R&D.
But and I'll contribute. But I can't contribute as much and I and I'm so I'm not going to be able to contribute as much.
Well how can I limit my contribution? Well, I can say, well, I'm not going to launch the product for four years and that'll limit my contribution.
I can say I want this lower unit price, and so I'm not going to contribute as much,
or I'm going to say I'm going to restrict the use in my population during the patent period.
So in the end I'll contribute less. And you can see it in this figure, uh, that I've on the welfare cost, the welfare causes, what's loss.
So during the access delay, if you had launched it the way let's say that the dotted line for the sake of argument is
what the population in a country could have afforded and would have been willing to pay.
But given the incentives, their their representatives have an incentive to not reveal their true willingness to pay, so they delay.
And so they lose this benefit of what they would have been willing to pay this welfare cost of access in this triangle.
And then over the life cycle, they they say, well, I'm not willing to pay as much per,
per unit of per prescription and I'm not willing to use it as much.
So you get this other area of the welfare loss.
And that's a those are the patients in that country are worse off because they didn't reveal their true willingness to pay.
At the same time, the green area is lower than what it would have been.
So they contribute less to global R&D, which means we have less global, you know, global innovation.
So that's what happens when you think about the life cycle approach now.
So this most favoured nation basically said, you know, we're the U.S. said we're unhappy that we're we're bearing the largest cost.
And so we said, we're going to we're going to tell the tell the companies that, uh, you know, we want the European price as well.
I mean, from my point of view, the companies, you can imagine somebody saying to the company, well,
if you're willing to accept this low price from Germany, why don't you accept it for the United States?
And I would say, well, that's just not the model. You know, the model is rich.
Countries should pay more. So the US prices should stay high with us willing to debate, but maybe other countries should be willing to pay more.
And you may have seen that the UK has reacted to this by saying, okay, we will raise our willingness to pay threshold.
So that's a kind of a response. But I think what's likely to happen is, uh, the companies make their money in the United States.
They're going to be reluctant to reduce U.S. prices. And so this is potentially leads to launch delays in other countries.
And that's going to be the tragedy. But all this is happening while we have science marching on.
I mean, we have the mRNA platform, we have Crispr, we have the GLP one,
we have advanced therapy medical products, and we have China producing more and more medicine.
So there's a lot going on here. And again, how do we improve global health equity is the question I what can be done.
Now? One of the concerns I have that, uh, HDR is complicated and not all we've already seen, you know, that not all countries do this.
Uh, Uganda and Kenya do not have a sophisticated, nice deep HDR process.
And the question is, well, what should they do?
You know, and I think, uh, uh, you know, I guess I argued that this not only is the information about the matter, about the matters,
the chemical formula, a global public good, but the information about the fact that it works in a population is a global public good.
Right? So that. Now, I should wrap up this to my, uh, you know, if they.
So that information is important. It's that information. And it's called the, you know, the kind of the binary that we all human beings have the same.
We have livers, we have hearts, we have lungs. So that's that information about the science is transportable.
We. And the second point is global differential prices justifiable.
So what I think is I'm arguing countries should monitor these approvals and try to move with greater alacrity,
move faster to get access to these medicines where they have significant economic burden.
They don't have to bring all 47 in. But don't drag your feet now.
And in a sense, they should do they should use drugs. They should negotiate the price, you know, should use Pharmac economics to negotiate the price.
And it probably makes sense to have a dedicated body in in organisation to do that.
Now, when we say HTA in most countries we're thinking about approving like nice and uh, GBA about approve in Germany.
And I sure in the US we're focusing on pharmaceuticals because that's the most dynamic and uh, and innovative part of the whole story.
So that's why we focus on that now. But in theory, we know HTA means everything.
It means diagnostics, it means devices, it means physicians, it means hospitals.
So those, you know, the those systems tend to operate separately, you know,
and use other criteria to decide how many doctors you need, how many hospitals you need and so on.
But so this, this, this innovative pharmaceuticals was really marginal to the health care system.
Now I like to point to what China,
what I understand China to be doing now is you and I first went there in 2009 and talk to the to the drug committee,
and they've made many changes since 2009.
And they implement kind of a rapid review process. They they do do a couple of cost effectiveness analysis by blind in two different investigators.
They present that to, uh, a uh intermediate person who has a budget impact model.
And then they invite the company in and they say, you know, we looked at your product and, uh, we, uh,
we want to negotiate a price, uh, and they will say, well, by the way, you know, we have 1.5 billion customers.
And so we would like a relatively low price compared to the rest of the world.
And you have a short time to decide. You give us a price, and if you can't give us a price, we'll see you next year.
So that's what I call rapid and efficient. They they use the information from the world.
So that's the end of my presentation. I appreciate your interest and attention and I'm open to questions.
So thank you very much, uh, Professor Faulkner, for the invitation.
I appreciate it. So.