The Cost of Innovation - Pharmaceutical Executive


The Cost of Innovation
Highlights from "Large Molecules, Large Dreams: A Forum on Global Drug Pricing and Sustainable Medical Innovation," held August 12, 2004, at MIT's Sloan School of Management.

Pharmaceutical Executive

Administrator, Centers for Medicare & Medicaid Services (CMS)

Mark B. McClellan
As healthcare costs keep rising, every country is struggling with a fundamental, growing problem: How can we possibly afford these products? Most countries see only one solution. They use their national health system to apply tough pressures on new drug prices, to limit spending to what they think they should pay—or in many cases what they want to pay. Some of the world's richest nations are driving the hardest bargains. As a result, many wealthy countries have been moving away from covering any significant part of the cost of research and development.

I want to be very clear that a better global solution to this problem doesn't mean that medical spending needs to go up. Many countries could do more to encourage innovation in healthcare, not by spending more but by changing the way they're spending to get more value for their citizens.

Drug Prices and GDP
First of all, most countries need more competition when it comes to generic drugs. Generics should be made available quickly, and used widely and at the lowest possible prices as soon as legitimate drug patents expire. That happens rapidly today in the United States thanks to new reforms in our laws and regulations. With generic competition and the savings that result, more resources can be devoted to supporting new medicines. This approach encourages innovation—because you can't keep making money on the same old drug. Many countries do the reverse by holding down payments for new drugs while artificially elevating prices for older ones. The effect is to encourage keeping those older drugs around, not innovating.

Although the treatments we pay for in Medicare generally have proven benefits, we spend a lot of money on treatments whose benefits are uncertain. And we pay for many medical practices that may not be the most efficient way to deliver care. If we had better information to guide the decisions of physicians and patients, I think it would also help improve the rewards for creating truly valuable innovations. It could create an impetus for more rapid adoption of beneficial technologies, and it would also provide a clear rationale for rewarding the best technologies financially.

To achieve these kinds of benefits, the information I'm talking about needs to be developed and shared more effectively. This is someplace where governments can help. In the Medicare program, we're implementing new methods to identify priorities for Medicare-supported clinical research on treatments in which we face important questions about effectiveness or costs. This will include new steps to identify alternative study designs and procedures for gathering reliable evidence about the risks and benefits of new and potentially very valuable medical technologies.

One of the most important ways to put good evidence at the center of medical decision making is to emphasize outcomes. The new Medicare law starts to link payments not to how badly patients are doing—with more services and more complications meaning more reimbursement. Instead, we're starting to reward care that gets better results. An example of what's coming is the Chronic Care Improvement Program, created to give seniors with certain chronic conditions better education and support. Providers caring for patients with these conditions will get paid additional amounts only if overall costs go down and clinical outcomes and patient satisfaction improve as well.

We're gearing up to start as many as 300,000 beneficiaries through this program beginning at the end of this year. And we're conducting a random evaluation to determine which approaches to chronic care improvement work best for which particular kinds of patients. We're going to take those results and turn the pilot programs into nationally available additional steps based on pay for performance that will be available to all Medicare beneficiaries with these common chronic illnesses.


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