01/10/2017

Does Disneyland Provide A Guide To The Future Of Personalized Medicine?

Tomas Philipson, Forbes.com

Disneyland and other amusement parks often charge a high entrance price at the gate but low prices (or nothing at all) for the rides inside. In healthcare, personalized medicines often have the same two-part pricing: companion diagnostic tests are the gate, and  drug therapies are the rides. Unlike at Disneyland, however, ownership of the gate and rides is often separated and pricing for personalized medicines tends to be reversed, with low costs for diagnostic tests with higher priced drugs. Pricing personalized medicines more like amusement parks—with joint ownership of tests and drugs and higher diagnostic prices with lower drug prices—could enhance innovation in personalized medicine, a space that has lagged relative to past forecasts  on major advances for patients. Stimulating more rapid growth of such new technologies is not just a matter of science, but also economics. 

Personalized medicine has the potential to take the trial and error out of treatment. People are different, and they respond to medicines in different ways. By leveraging our increasingly sophisticated knowledge of the effects of patient-specific factors on treatment responses, treatments can be targeted to the patients most likely to benefit, or the least likely to experience dangerous side effects. For example, personalized medicine can use predictive tests or companion diagnostics to stratify patient populations into likely responders or non-responders, or can even target medicines to individual patients’ specific genes.

As a result, personalized medicines promise greater value to patients and society by directing drugs to the individuals most likely to benefit from them. This is particularly true in contexts where trial and error in treatment can be very harmful, due to severe side effects or the harm imposed by being on the wrong treatment. It is perhaps no surprise that personalized medicine has emerged mainly in cancer care, where knowing which treatment is right before starting treatment can be a matter of life and death.

The development of personalized medicines, however, has been slower than predicted 5 or 10 years ago. Much of the slower than predicted  growth in personalized medicine is due to scientific barriers. However, I think equally important barriers are economic ones. In particular, innovators have a hard time capturing the value of personalized medicines due to current pricing practices that involve cheap diagnostics coupled with expensive drugs.

Disneyland can help illustrate the problem with this type of pricing. Amusement parks like Disneyland have pricing at two stages, similar to personalized medicines: at the gate, the entry fee is the analog to the price of diagnostic testing; and the price of rides inside the park is the price of drugs after testing into therapy. Disneyland could let you walk in the gate for free and pay a hefty price whenever you take a ride. But they don’t. They charge you a large entry fee at the gate, often hundreds of dollars, and nothing for the rides. The reason is that this allows them to better capture the full value of all the fun you have enjoying the cheap rides, without having people being discouraged from taking marked-up rides once inside the park. The late Chicago economist Walter Oi was a pioneer in analyzing the value of such pricing strategies.

Pricing in personalized medicine is generally the opposite of the type of pricing used at Disneyland. In fact, the lab tests that make up companion diagnostics are often priced close to their costs. This distorted pricing is in part due to public (Medicare and Medicaid) reimbursement rates for lab tests, which influence prices for the entire market. This cost-based pricing of lab tests is in contrast to the drugs used once a patient has tested into therapy, which often cost tens of thousands of dollars—well above the marginal cost of production.

The cost-based pricing of diagnostics is a disaster for innovation in personalized medicine, for the same reason allowing generics in at the launch of a new drug would be for drug innovation. It prevents the new part of what personalized medicine offers, the diagnostic, from being priced based on the value it generates to patients and payers. When prices are disconnected from value, it sets the wrong signals to innovators to bring that value to the market.

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