Intro. [Recording date: March 16, 2018.]
Russ Roberts: Today is March 16, 2018, and that happens to be the 12th anniversary to the day of the release of the first episode of EconTalk, which was a conversation about Don Cox on parenting. I know some of you have been listening since that first episode. Others, crazy ones of you, have gone back and listened to them from the beginning, which blows me away. And I want to thank all of you for listening, even if this is your first episode. If you do go back to the beginning--12 years, 600-plus episodes ago--you'll notice that my interview style has changed over the years. I hope for the better, but I'm not the best judge of that.
Russ Roberts: My guest today is Vincent Rajkumar of the Mayo Clinic, where he specializes in myeloma, which is a blood cancer. He is currently the Editor in Chief of Blood Cancer Journal, and an associate editor at the European Journal of Hematology. Vincent, welcome to EconTalk.
Vincent Rajkumar: Thanks so much for having me, Russ.
Russ Roberts: Our topic for today is the price of cancer drugs. We're going to talk about two papers you've written, one with Jean Luc Harousseau and the other with Mustaqeem Siddiqui. We'll put up links to those. One of those papers is from the Mayo Clinic Proceedings. The other is from a journal with, I think maybe my favorite name of any journal: it's just called Blood. That's the right name, right? Just Blood?
Vincent Rajkumar: That is correct.
Russ Roberts: It's awesome. But first a little background. I want to hear a little bit about your specialty and myeloma. What is myeloma, and how prevalent is it?
Vincent Rajkumar: My specialty is multiple myeloma. Myeloma is a cancer of plasma cells. These are the cells that normally help us fight infection: they make antibodies. When they become cancerous, the condition is called multiple myeloma. Multiple myeloma is a cancer that destroys bone, causes low blood counts, kidney failure, and increased risk of infections. It affects probably about 25-30,000 Americans each year. And, the disease has seen a remarkable transformation in terms of new treatment options over the last 10 to 15 years. And so, what was once a disease that people died an average of 3 years to 4 years, is now something that patients that can expect to live 7-10 years longer.
Russ Roberts: Does it strike folks in any particular age?
Vincent Rajkumar: It's a disease of elderly patients. Most commonly it affects patients over the age of 65. But, you do see about 4 or 5% of patients less than 40 being diagnosed with the disease.
Russ Roberts: And, how is it treated? What is the state of the art of treatment right now?
Vincent Rajkumar: Myeloma is treated usually with about 4 cycles of chemotherapy. That's about 4 months of chemotherapy. And then, typically, patients undergo an autologous stem cell transplantation with their own stem cells. And then we give some form of maintenance therapy with a pill. And, you know, that goes on until the disease becomes refractory.
Russ Roberts: What does that mean? What does refractory mean?
Vincent Rajkumar: It means, refractory means, sooner or later the cancer becomes smart enough to outwit the chemotherapy and it starts coming back; and then we go to a second-line regimen and a third-line regimen. It's a cancer that comes and goes; and patients will have multiple relapses and remissions, with each remission becoming shorter than the previous one.
Russ Roberts: What are the symptom?
Vincent Rajkumar: Usually patients, about 2/3rds of patients present with bone pain, because the disease commonly goes to the bones of the body. They may get fractures of the back or fractures of the arms or legs, spontaneously sometimes. And other patients can present with just fatigue from anemia, or acute renal failure or kidney failure, and they come into the emergency room with a high-calcium kidney failure. So, the presentations can be myriad. It can also present with infections and then you make the diagnosis in the hospital.
Russ Roberts: So, the drug part of this, walk me through a patient who has, let's say, some of those issues--back pain or a fracture of some kind. A diagnosis is made that it's myeloma. Walk me through, again--you gave us a little bit of it--where do the drugs come into that starting at that first diagnosis?
Vincent Rajkumar: Well, when a newly diagnosed patient comes in, the first question after we verify the diagnosis is: Is the patient a candidate for transplantation or not? Transplant, meaning we take stem cells from the patient; give very high doses of chemo [chemotherapy]; and put the stem cells back to rescue the bone marrow. Patients who are candidates for transplant, our approach is we start them on a chemotherapy regimen. Typically it consists of three drugs: Bortezomib, which is marketed under the name of Velcade; Lenalidomide, marketed under the trade name of Revlimid; and Dexamethasone. So, VRD--Velcade, Revlimid, Dexamethasone--is what we use. We give that treatment for about 4 months. The transplant process takes another 2 months, so that's 6 months right there--4 months of chemo; 2 months for the transplant. And then we put them on maintenance therapy with just Revlimid: 1 pill a day, 3 weeks on and 1 week off. And they take that as long as it works. Typically that works for about 3 to 4 years.
Russ Roberts: So, how much does that pill cost? Revlimid?
Vincent Rajkumar: That costs, right now, probably $15,000 a month.
Russ Roberts: $15,000 a month. For just the Revlimid. $180,000 a year? For 3-4 years.
Vincent Rajkumar: Correct.
Russ Roberts: That's just the Revlimid. There's two others in the cocktail you mentioned, right?
Vincent Rajkumar: The two others in the cocktail are done for the first 4 months.
Russ Roberts: How much do they cost?
Vincent Rajkumar: Well, I think right now you could probably get Velcade for about $5000 a month.
Russ Roberts: A bargain.
Vincent Rajkumar: Yes.
Russ Roberts: So, the bottom line is--let's make the cheeriest story. What's the alternative? Is the alternative death?
Vincent Rajkumar: The alternative is death.
Russ Roberts: How long will that take?
Vincent Rajkumar: [?] Prior to the arrival of Revlimid and Velcade, myeloma patients were alive only for about 3-4 years. Now, these drugs are great because they have doubled the survival. So, they are definitely very important, but they come at this high price in terms of actual financial cost.
Russ Roberts: So, let's take the cheeriest story. I'll tell you what I mean by cheeriest. A 65-year-old patient comes in. A young myeloma sufferer. And, they find out they have myeloma--bad news: their life expectancy is now 3 to 4 years. The good news is, is they can make that 6 to 8 years if they spend, or someone spends for them, something on the order of, I'm guessing 3/4 of a million dollars. Maybe a little bit more?
Vincent Rajkumar: Right. In the United States. In other countries it would be cheaper.
Russ Roberts: Yeah. So, you could move. But, most--I'm pretty confident that most of the patients who are spending that kind of money aren't spending their own money. They are spending Medicare, right, or an insurer?
Vincent Rajkumar: Absolutely.
Russ Roberts: And, what's an old patient who gets myeloma? Eighty?
Vincent Rajkumar: Yes. Patients over the age of 70 with myeloma are not treated with transplant, but they are given VRD. And so instead of 4 months we give them about 1 year of the 3-drug combination. And then, we put them on Revlimid, as maintenance.
Russ Roberts: I was going to say something that's probably not in good taste, but: if you gave them the choice of selling it on the street--of course, you can't sell it on the street. That's why it's a joke--and not funny. But, an 80-year-old person who gets myeloma would have had--would they still have, in the absence of treatment, a 3-4 year--or is it more like it was a little higher for the 65-year-old?
Vincent Rajkumar: Yes. Patients who are eligible for transplant live longer than patients who are not, just because of the other co-morbidities and the effect of the transplant itself. But, survival has improved for all patients with myeloma.
Russ Roberts: So, the challenge here--we're going to get into the details; you have a lot of interesting proposals, what might be done about these high prices. And before we do that, we're going to talk about why they're so high--because they're extremely high. But it does raise the interesting question that there are a lot of people who would certainly not pay for the treatment out of their own pocket, either because they literally couldn't--they don't have the money--or they'd rather not do so: they'd rather leave that money to their children. So, what we've done as a society--and I say that, 'as a society,' because this is not a market solution. It's a very strange world we are exploring in this conversation. This world of drug pricing is such that society has, some group, some emergent force has created a world where elderly people are taking enormous sums of money from the next generation in order to live a little bit longer. And, there's something glorious and miraculous and wonderful about that. There's something--the part that's hard for an economist is to say, 'Well, maybe there's a more effective use of that money that would make life even better.' So, that's the challenge. That's sort of the philosophical question, I think, that we should have in the back of our mind. Do you want to comment on that before we go into the details?
Vincent Rajkumar: Yeah. I wouldn't think of it like that, Russ.
Russ Roberts: That's because you're a doctor.
Vincent Rajkumar: Well, not only that. I think you have to think of the whole spectrum of cancers. If the high cost of myeloma therapy was the only problem we had, you could be right in saying, 'Why are we spending only on myeloma like this?' And, it's not. What's happening is there are many cancers that affect young people, younger patients. Cancer affects all ages.
Russ Roberts: Absolutely.
Vincent Rajkumar: And whatever cancer drug has been introduced in the last few years, all of them are priced at more than $100,000 a year. Every one of the new cancer drugs in the last several years is $100,000 a year or more. So, as a society, we are paying for all ages. For all of us. [?]
Russ Roberts: Yeah. I apologize. Actually, we're on the same page there. I didn't mean to suggest that somehow the elderly didn't deserve an extra couple of years. It's certainly the case that--younger people--it could be decades of longer life. It's a wonderful thing. And these innovations are extraordinary. The question is why the price is so high and whether--the real economist's question--is: Is there a way to generate the creativity and innovation of the pharmaceutical industry without requiring that level of compensation for their innovation?
Vincent Rajkumar: Right. But you are right in the sense that the normal market forces that affect the cost of any product are absent here. Because, if you take a look at India, it's mostly a country of out-of-pocket medical care. So, if the price of the drugs is very high, patients simply will not take the drug because they cannot afford it. And there is no--most, 99%, 90% of the population probably is not insured. So, the cost reflects what people can actually pay for. So, that's not here because insurance is paying, or Medicare is paying. So, the costs then go up to the level that the whole of society and market can bear rather than just what individuals can manage out of their salaries.
Russ Roberts: But that conclusion--you said it very well: what the whole of society can bear rather than what the individual can bear--is so much more complicated than that sentence would suggest. Because, we've decided--that's the wrong verb--it has happened that a set of incentives, compensation, subsidies, restrictions are in place that allow the price of that drug to be as high as it is in the United States. And that's what's I think so fascinating about what we're discussing.
Russ Roberts: So, let's talk about some of that. When people say, 'Old wine is more expensive than new wine,' people will often say, 'Well, that's because it tastes better.' And, 'People will pay for it.' And, 'It's more valuable.' And, as an economist I always respond, 'Well, that would only lead to a higher price if in fact it cost more to produce older wine.' Which, of course, it does: you have to forego the income that you would have from selling the wine today; you have to leave it in the barrel, leave it in the cask. And, it's that cost that drives the price combined with the demand side. So, when people hear that cancer drugs are expensive, they're, 'Well, of course they are expensive. It's really valuable. They're really important.' They are, but you only have to pay more in a market system when the costs are also higher. And, here, the costs being higher is really complicated. Or that you have a monopoly; that would be the other way you can get a high price even though the costs are low, because there's no competition to drive the price down to the competitive level. So, talk about both those factors--the cost side and the regulation side that gives producers something of a monopoly.
Vincent Rajkumar: Yeah. Absolutely. I'll just go through the main reasons why I think cancer drugs especially, and prescription drugs in general cost so high. Some of these are worldwide phenomenon. Some of these are really unique to the United States. But, even those that are unique to the United States have an impact beyond the United States. And it affects prices around the world and access around the world as well. So I'll just go through the list here really quickly. This is from the paper that Jean Luc Harousseau and I wrote in Blood. I think the main thing is it does cost a lot of money to bring a new drug to the market. And people have estimated it from $750 million to several billion dollars to bring a new drug to the market. And the costs are so high because, for cancer you need to show most of the time in a large randomized control trial where you take a large number of patients--half of them get the drug; half don't--and you have to give it and show that patients actually live longer, or at least some surrogate[?] endpoint is improved. And that's a hard threshold because many drugs are simply not active. They look promising but they fail that test. And, to do a trial like that costs a lot of money. So, companies, if they have a good drug, rather than doing one trial, they may do two or three trials just to make sure that at least one of them succeeds. And, there are so many regulatory barriers and differences between what the FDA [Food and Drug Administration] will accept as an endpoint for the United States to get a new drug approved versus Europe. So, these companies have to sometimes make the trials larger to satisfy one regulatory body versus the other, and so on. So, it's just very expensive to develop a new drug. So, I grant that, if you are going to invest in such a high-risk proposition, you should have some way of making that money back. So, a high cost, a reasonably high cost is something that they need as an incentive to develop these drugs and take on the risks and challenges of developing a new cancer drug. The other main factor is that most cancers are not curable. And so, if, for example, in multiple myeloma, when Velcade and Revlimid stop working, then you try the next one, which will be daratumumab. Well, that will cost $100-$200,000 a year. And if that stops working, you will try carfilzomib, and you will try elotuzumab and panobinostat and pomalidomide. And each of these drugs is really a virtual monopoly. Even though we have 7 drugs for myeloma, I cannot simply say, 'Oh, I have 7 drugs so therefore there's competition.' There isn't. Since patients will have to try Velcade and Revlimid and carfilzomib and elotuzumab and so on.
Russ Roberts: The point being that once I've used the first 3, and now the 4th one is in the mix, the 1st one doesn't compete with it any more. Because I can't use it.
Vincent Rajkumar: Yeah. Exactly. So, each drug is a virtual monopoly where the government says, 'You can sell it, and only you can sell it for the next 7-10 years,' and it's not like the--if only Apple made the iPhone and we had no other cellphone, we could still probably live without a cellphone. But, here our cancer patients are going to die without a treatment, and we have said, 'You can have this drug, but only this company can make it for the next 7, 10 years.' And so, whatever price they say, we have to give, or else you don't have the luxury of saying, 'I'll choose a competitor's product.'
Russ Roberts: Just to clarify, because this is a subtle point but I'm just curious about it. You say after I've used the first 3, I go to the 4th one. I'm very impressed that you can remember them all, by the way. I don't know whether that's common. I bet you can reel off 10 more. They're not easy to remember. But, the 4th one is the 4th one because you've used the first 3 and they are not working any more, right?
Vincent Rajkumar: Correct.
Russ Roberts: But could I start with the 4th one?
Vincent Rajkumar: You could start with the 4th one, but then you'll go to the 1st one.
Russ Roberts: I know, but the R- one--what was the R- one?
Vincent Rajkumar: Revlimid.
Russ Roberts: Is Revlimid always the first one? Do some people start with the 4th one?
Vincent Rajkumar: So, usually people start with Velcade, Revlimid, and Dex [Dexamethasone], and then when that stops working they will go to daratumumab and probably some other 2 drugs together, and so on. But the point is, if you have 6 or 7 drugs and we use actually all of them in combination--so if you use 1, 2, 3, you'll go to 4, 5, 6; then you might go to 2, 1, 3, and then you might go to drug 1, 4, 5; and you try all kinds of combinations. But you don't usually give up and say, 'Myeloma is not responding to VRD, so I give up.' You actually try each drug before you say 'Nothing is working.' In essence, then, each drug is something that patients need--
Russ Roberts: But I don't think it's technically a monopoly; and not even maybe in practice, because there is some competition. But the problem is, is that competition works because the customer wants the good and has multiple places to get it. Here, it's true there might be different mixes--let's make it simple. Let's say the Big Three, RVD--are those the right initials?
Vincent Rajkumar: Yes.
Russ Roberts: So, let's say the Big Three, they are $150,000--actually, I know they're more; some of them are more--so let's just say they are $250,000 a year each. So, if I go through that cocktail, I'm going to spend a very large amount of money. If there were a competitor, there were 3 or 4 others that were $1000 each instead of $250,000, that triplet might not be the standard triplet. So they do have to compete against the other ones. The real question is, and this is one of the things I found so surprising about the so-called market, is that if a new drug comes along and it works a tiny amount better, it still could be given that monopoly privilege. And by 'monopoly privilege,' here, I'm not talking about the fact that it's going to be a choice of cancer patients and physicians. It gets the monopoly privilege that no one else can market that drug. And, it will still get that FDA approval and get that up to--let's say 7 to 10 because it depends on when it got introduced, how long the clinical trials took, how long the approval took--but it's still going to have a monopoly on that formulation for 7 to 10 years even if it barely improves the quality of life--not the quality--the quantity of life. Is that correct?
Vincent Rajkumar: That is correct. And, what will happen is, you can see it with many instances, including myeloma as well as with older drugs. As you --you know, 7, 10 years go by, and let's say Velcade is old news. You still will have to use Velcade. But, the first choice, you might go with the newest drug, which is even more expensive. Because, by then drug companies can show the newer drug is slightly better; or they might use a trial with a slightly biased design to show that the new drug is better. Or, you can do continuing medical education lectures and advisory boards and come into a lot of experts that new drugs are better than the older one. So, you would think that the prices would go down as these drugs are becoming generic. But, by the time drugs become generic, there is another sheriff in town, a new drug comes along. And that's the one people are using; and now that one's now going to have monopoly for 7-10 years. This happened with [?denatinib?]; now it's happening as we speak with Velcade. So, I mean, clearly a big problem is that there's really--in a monopoly I always say, 'Even water will be expensive.' If it's a life-saving monopoly that you have control over, then you are the person who--you command whatever price you think your drug is worth. And that's the reality of what is happening. So, that's the second big factor. Which is that, there is to some extent a monopolistic or an oligopolistic system.
Russ Roberts: We had a very interesting episode with Robin Feldman talking about the ways that pharmaceutical companies keep out generics, postpone generics. And it's an important issue.
Russ Roberts: But I think the inherent issue that you're talking about that's important is, in particular, is this issue of the old drug. So, you have this drug that gets developed. It stays on patent for 7-10 years. And then it's off patent. And it should fall in price. And it probably will fall in price. But the market share that it would normally get in a typical market, because there's a new alternative that is under patent, that is again $250,000 a year. And it is--it's a little bit better than the generic version of Velcade or whatever it's called. So, normally people would say, 'I wouldn't mind living a little extra'--and this could be a month in clinical trials, right? We're not talking about years. 'I'd like to live an extra month. But I'm not sure I'm willing to spend $250,000 extra for that extra month. Wouldn't it be great just to go use the old one?' And the answer is, what you are suggesting is that there are cultural and, I assume, legal encouragement of the medical profession to always upgrade. Even if the value of that gain is very small relative to the price.
Vincent Rajkumar: Because doctors generally don't want to take on the value proposition. They are constantly, like, 'If this is better, then that's what I'm going to recommend to the patient. Forget the cost.'
Russ Roberts: Well, I noticed they do that even when the patient pays the cost. And the patient is often not in the habit of saying, 'Wait a minute. Which of these is more expensive?' And 'Is it worth it?' That question is so alien in our world of subsidized medical care that when you are confronting it--which I've done, for lots of reasons, in my own life, for my parents--people--they treat you really strangely. They say, 'What do you mean?' Example--I had a--I still have it--I have a little skin tag on my eyelid. And my dermatologist said, 'You can probably get that removed, but, I'm not so comfortable doing it. Why don't you get a surgeon to do it?' Okay, great. So, I have a high deductible; I have a Health Savings Account [HSA]. I called 3 or 4 of the surgeons she recommended. Most of them, their office couldn't tell me what it was going to cost. They viewed that as a--they were taken aback by the question. And I think that's an extraordinary feature of the current medical landscape.
Vincent Rajkumar: That's correct. So, I'll move to the third reason. I think the high cost of drug development, the existence of monopoly, and the ability to sustain that monopoly by, you know, either by delaying generics or by bringing in new drugs and making the old drugs [?] use, are two big reasons. But the third one is we are dealing with a vulnerable population. These are patients and family members who are willing to pay any costs to save a life. And, like you said, it's not like a luxury that you can live without. We are not talking about BMW [Bayerische Motoren Werke] versus--
Russ Roberts: Honda Accord. My fine car.
Vincent Rajkumar: Exactly. Here you are talking about, 'Hey, Doc, what is the best treatment? And we'll somehow find a way.' I've had so many patients, everywhere, that would say, like, 'Don't tell me the least expensive way to do it.' It's like, 'What is the best? What would you do? What would you do if money was not a concern? What would you do?' And, particularly well-insured patients--that is not even a question. Because it really doesn't cost them different to choose the best versus the less expensive ones. So, patients are willing to pay very high costs even for marginal improvements. If you say, like your mom could live 6 months more if they tried this regimen versus that, I mean, they would be willing to sell their houses to get that 6 months. So, it's--
Russ Roberts: And that's a beautiful thing. Right? The more complicated issue is--and I'm going to say something here somewhat disturbing, and I'd like you to weigh in on it. Sometimes doctors have an incentive to provide that "higher-quality" treatment regardless of the tradeoffs--not just for the money side, but also there's quality of life. You're going to be eager sometimes to suggest chemotherapy or other things that may extend life 6 months but they may not be a very good 6 months. They may require a lot of pain and suffering. It doesn't always work. But there are sometimes financial incentives for doctors to be more aggressive. Is that true?
Vincent Rajkumar: Yes. I mean, you've just hit the fourth reason why these drugs are expensive. Our system rewards doctors more for the more expensive treatment. Now, not all doctors. Some. If you are employed in a fixed-salary position, then you are going to get the same salary regardless of what treatment you give to patients. But, oncologists in certain practices, and probably more than half the oncologists in the country administer chemotherapy in their own offices in a chemotherapy suite. So, they are basically functioning both as the person who is recommending the chemo as well as the person who is administering the chemo--buying and administering chemo. So, Medicare Part B reimbursement for chemotherapy drugs that are administered in doctors' offices--these are intravenous drugs, parenteral drugs, subcutaneous drugs--they can ask for an average sales price plus 6% on Medicare. And so what happens is that if you have a choice between Taxol and Abraxane, which is a newer version of Taxol, which you could say is a toss-up in terms of efficacy, Taxol, you would get 6% of $600. Abraxane, you might get 6% of $6000. Now, my numbers might be off, but that's, you can see how easy it is for--if I have like 4 brand new CME [Continuing Medical Education] lectures from various experts saying that, you know, Abraxane has got less side effects than Taxol, or Abraxane has got this study that was like 10% more response rate than Taxol, it's so easy for physicians to want to do the right thing. But, you don't want to have a conflict where, let's say very, very few physicians would use the financial incentive to give it. But the problem with conflicts of interest is not whether there is a conflict or not. It's just that you don't know who is influenced and who isn't.
Russ Roberts: Yeah. Explain that. And, by the way: CME is Continuing Medical Education. You are talking about a situation where a doctor wants to find out about new treatments, shows up at a conference, and there's someone who is going to make the case that this new drug is the one to always choose. But, why do you say that it's a question of where the conflict is? Explain that.
Vincent Rajkumar: No. So, financial conflicts of interest where you say, like, a doctor can make more money by giving the more expensive chemo. Okay? If I am a doctor, I'd be upset. And I would say, 'No. I'll never do that. I am a good doctor. And I will always do whatever is best for the patient. And I will not give a more expensive version of the drug just because I can get more money in return.'
Russ Roberts: That would be a horrible thought.
Vincent Rajkumar: That would be [?] you. I'd be [?] of you. But, we have tens of thousands of doctors in the United States, and how can be sure that every one of them is fine, or what proportion of them are like that? And, who is who? I mean, conflicts of interest are always about the fact that we don't know who is conflicted and who is not. A patient has no way of knowing.
Russ Roberts: So, what you mean by that is if I'm sitting in the doctor's office and I say to the doctor, 'What do you recommend?' and I don't know the history of this doctor's CME attendance and when a drug rep [representative] recently took that doctor out to dinner, and whether they are running the chemo out of their own office, and whether they are getting--right? That's what you are suggesting is the important--that's the ignorance, as a patient.
Vincent Rajkumar: Not only that. It's not like that. It's more like even the doctor may not be aware. It's all subtle. When there are financial conflicts, it's very hard. It's not conscious, often. When there's a huge financial incentive, it's very, very hard. I mean, there have been some studies that have been done where generally doctors don't administer chemo when you don't need chemo. But they do tend to administer more expensive chemo if there is a choice between two; and that was a study we cited in the Siddiqui paper. Subsequently, I have heard of other observations--I don't have references for that--where insurance companies have documented changes in practices that occur just based on reimbursement of drugs, between, you know, a cheap drug and a more expensive version of the same one. It's just that we should have a system where this is not, doctors are not put in that position, where, you know, the choice of the drug you use will change your take-home salary. That's not a position that any physician should be in, because no one is a saint. No one is immune from temptation. And, it's a subconscious thing.
Russ Roberts: Well self-deception is very powerful; and we talk about it a lot on this program. I think I would call it non-conscious. It's a mix of sub-conscious, unconscious. The environment, after a while you start to convince yourself that, 'Of course this is the right thing to do.' And this is true for people who come to tell you whether you need waterproofing of your basement, as well. They are not bad people. But, when the waterproofer comes to my house, I know he's got an incentive to recommend waterproofing, so I'm a little bit skeptical. Well, a lot skeptical, often. And, when it's the doctor, we have this romance--earned, mostly--that they're never going to do the wrong thing; they're always going to try to help me. And it's not a suggestion--I think this is really important--that you administer chemotherapy to someone who doesn't have cancer. It's that you administer chemotherapy that, say, has terrible side effects, that this person is unlikely to enjoy those extra months--but you convince yourself that that's better than doing nothing. And most of the time it will be. Many times it will be. Whether it's a question of the improved amount--excuse me, the improved efficacy might be small but it's still an improvement. You're not suggesting--and of course this does happen, but you are not suggesting that it's a big problem, that people fraudulently make claims; these are just that all these things push people in the direction of the more expensive.
Vincent Rajkumar: Correct. Correct. It's just one other pressure point in the direction of the more expensive drug.
Russ Roberts: So, this raises the question, which is a bizarre question: Why are these drugs so cheap? And I want to make it clear--you corrected me earlier, and it's important to remind listeners--we've been talking about myeloma as an example. But this is a problem across all cancers, all drugs. They are all in the 6-figure a year or higher--you mentioned that in passing. This is not a myeloma problem. This is a general problem that--it's not $100,000, I think you said, or $300,000 a year to administer. So, it--and I just want to say also in passing--People ask me: What about--I don't know how to pronounce his name--Martin Shkreli--he just recently got sentenced to prison. But he was condemned, publicly, before he was convicted of fraud, I think is his crime, for raising the price of certain drugs of companies he got a hold of; and he jacked the prices up. People would say to me, 'There's your free market working.' And I always--as if, before he came along it was a perfect world, and now he's gone and ruined it; he's the first greedy pharmaceutical manufacturer. And, of course, that's silly. It's silly for a hundred reasons, one of which is, as we were talking about, it's not a market price. But, the real puzzle is: in a way, he provided--not 'in a way.' He provided a service. He illuminated--it was not his goal--he illuminated, I would call it the intellectual bankruptcy of the way that this so-called market works. Or at least how this market is distorted. And, the fundamental part--you mentioned it in passing--is, a lot of these drugs are paid for, say, by the government. And, as you point out in your articles, Medicare is not allowed to negotiate. Now, I generally would say, 'That's a good thing. I don't want the government determining the profit margin of a company. It's a weird thing for the government to negotiate over price. There's a potential for corruption there.' But, if you are going to pay for it, every penny, you've got to have somebody negotiating. Otherwise, the taxpayers are the ones who would like to negotiate; and they're not allowed to. It's a messed up system. But it raises the question of: Why don't they charge more? Why don't they just double all the prices? What stops them? In a normal world, the answer will be, 'Well, people won't pay for it.' Now, there's a lot of reason that they would pay for it, in the current world, the way it's structured. What stops them?
Vincent Rajkumar: So, this is just absolutely outstanding, what you just asked. Because, I have thought about it. Do you know that Martin Shkreli, the drug he raised the price of, which is Daraprim, he raised it from $1.50 to I think $700 or something like that.
Russ Roberts: Yeah. It was $750 or something.
Vincent Rajkumar: And, that drug is still selling for the same price. It's still selling for $4000 a month. Okay? Because that is legal. And he is going to jail for something else--securities fraud or something. But not for thing, because what he did is legal. And it's legal because tomorrow I could--if I am selling Macintosh, MacBook Pros, I mean tomorrow Apple could sell it for $100,000 a computer, and that's legal. But that's okay, because I don't need to buy the Macintosh. I can buy a hundred other computers. But, what he's doing is, he's the only one selling Daraprim; and he can raise it to that level. Normally, it would be easy for a hundred companies to come and make iPhones and iPhone cases and whatnot. But it's not so easy to get into the drug market, for tomorrow for a hundred other companies to come and make Daraprim. So, the drug is still priced so high. This is something that in a different level is done by all companies working in the cancer industry. If you look at the price of drugs, they steadily go up. The difference is, they know that the only thing stopping them or preventing them is outrage. They are clever. They are not, like Martin Shkreli, raising the price overnight by 5000%. They would raise it 10% every single year. And I made a comment recently: 10% a year of a $15,000 drug is more than 5000% of a $1.50 drug. In absolute dollar money.
Russ Roberts: But it seems, it's like: You boil the frog slowly, the frog doesn't notice. Yeah.
Vincent Rajkumar: Yeah. And that's the way they do it. Tomorrow, they could raise the price to $100,000 for Revlimid, or $100,000 for a month of Velcade, but they don't do it because then outrage will happen. And what works better is to increase the price 5, 10% a year, 10%, 15% a year, or something like that, so no one notices. This has happened with Melphalan for myeloma; this has happened with Revlimid, with Velcade; it's happened in all other cancer drugs--with Gleevec. It's happened with insulin. It's widespread. This is not something unique to Martin Shkreli. So, why is this happening? Well, because they can. And the normal market barriers, which is competition, is not there. So, they have monopoly protection for the large part. They can increase the price. And, we have a system where we said, as you mentioned, Medicare cannot negotiate the price of Part D drugs. So, what happens is that we passed a law saying that Medicare will buy and provide for its citizens free drugs that are under the Part D program. But at the same time, Medicare will have to pay the pharmaceutical company whatever money they say their drug is worth. Now that's a system, from that point onwards, the cost of drugs has gone up faster than it did before that.
Russ Roberts: Seems like a design flaw. But, of course, if you are in the industry, it's a feature, not a bug. And also, I want to add--I just checked your Twitter feed to verify it--you, right now, at least, your pinned tweet starts off with the observation that this is not the blaming of pharma. They're just following their--now, I'm going to put a footnote to that. But I would agree in general with your point, that: These are the incentives that have been put in place. So, it's not surprising that they respond accordingly.
Vincent Rajkumar: Exactly. I mean, they have a solution that is not available to Blackberry or the iPhone. Which is: I can just--don't innovate at all. I'll keep the same old iPhone. I'll just increase the price every year. And, I can meet all my targets.
Russ Roberts: Now, my footnote is: Is that, when that Medicare Part D regulation was put in place, I think you said, I think you wrote that it passed in the middle of the night. Literally.
Vincent Rajkumar: Right.
Russ Roberts: The pharma industry wasn't just standing on the side saying, 'I hope this turns out well.' They did have some, I assume, influence on that vote and structure of that plan. And that's the crony side of crony capitalism. And it's a terrible thing. The bright side: unlike the financial sector--so I like to make the point that the financial sector, because they socialize their losses and make me pay for them when they go bankrupt, they get bailed out with my money as a taxpayer--say, basically, they have access to my checking account and they act accordingly. Which is not surprising. And similarly, the pharmaceutical has access to old people's checking accounts--not their checking accounts--their bodies. And so, the rest of us are paying for those checking through taxes or paying for those very high prices that don't have any market restraint on them. And that's a great deal. If you can get that--it's nice work if you can get it. It's a money machine.
Vincent Rajkumar: Yeah. And then there are a couple other things, also, Russ, that are important. One other main factor in the United States is that we do not take value into account when the drug is approved. And we talk about it when we talk about the solutions. But, in the United States, the FDA approves drugs just simply based on: Have they shown safety? And have they shown clinical benefit? Clinical benefit and safety is what we are looking for. And, they don't make a judgment on: You prolong life by one week and therefore you cannot sell the drug for $100,000 a year. You prolong life by 5 years, therefore you can. They don't make any judgment on what is a drug worth. But, they simply have to make a judgment: Has the drug demonstrated safety and efficacy? And if it does, then it's approved. In most other countries, there is a second step, which is: What does it add in terms of value? And that allows the pricing to be proportional to what is provided in terms of value, so that somebody cannot sell a bicycle for the price of a BMW. Although I'm sure there are bicycles of that price. But, the truth is that we have drugs that prolong life for 4 weeks that are priced as high as myeloma drugs. So, in a sense, a company which makes a myeloma drug could say, 'You know, I just doubled the life of somebody from 4 years to 8 years, and you are fighting with me for the price of my drug. But here are like so many other drugs for cancer--for lung cancer or pancreatic cancer, for breast cancer--that hardly work; and yet they are all charging $100,000, $150,000 a year.' So, our system is where there's no correlation at all between the value a drug provides and the price. The price is high for everything.
Russ Roberts: Yeah. And, it's hard to believe--and it sounds naive; I am naive to some extent about this--that kind of the only thing restraining it, in the United States--each country has different sets of these constraints--but it's sort of conscience. Or, what you can get away with. And of course, again, neither of us is suggesting that they are exploiting people, because they are saving lives. It's extraordinary stuff. And it is extraordinarily expensive. And the regulatory process is long and arduous, and often leads to failure. And we understand that the successes have to include the costs of the failures to make the whole thing worthwhile.
Russ Roberts: But then the question is--let's turn to the question: What could improve that? I have more radical reforms than you do. But, let's start with yours, which are much more practical than mine. What would you do if you were in charge? What would you do to make this better?
Vincent Rajkumar: I think, you know, there are several things which are very easy to say, hard to implement, because it does require actual changes in laws. Congress has to actually act, change laws, for some of the changes to occur. But, the Number 1 thing that I would say--and it's being said; I was at a couple of years ago there was a forum at the Department of Health and Human Services [HHS] where top guys--I was in the audience, but top people in the industry from pharmacy benefit managers to pharmaceutical company executives, to Andy Slavitt, to various people on the same stage. And people who when they were asked what's the Number 1 thing that you can do, it was basically, 'Medicare should be able to negotiate the price of drugs.' If I am the buyer, I am buying--I remember that the sea of, of Keyser Permanente Health Group, said, you know, 'I have so many employees. And I have so much money that I'm going to use to buy drugs.' I would be, in a normal situation, be able to say, 'Hey, I'm going to be able to buy $100 million dollars' worth of drug from you. So, can you give it to me at this price?' The power of Medicare to bargain on behalf of its citizens for the best price for drugs--you know, you cannot overestimate that. It's something very important. And that law has to be changed. If Medicare is going to have to buy for all its citizens important life-saving drugs, they should have a say in what price they pay for it. Now, there should be some safeguards because obviously they can walk away from the negotiation. But, most countries do this. We don't need to reinvent the wheel. And what they do is, they have a benchmark based on value. Which is, if you prolong life by 1 year, then your drug can be priced at, say, anywhere from $50,000 to $150,000 a year. And if your drug works only for like 1 week, then don't come and ask me the same amount of price. And so, there's some negotiation that goes on based on some starting point. And I have made the point that since we can think of ourselves as a wealthier nation than Germany or France or any of the other countries, we could have set that limit even 3 times higher than what they set. But at least then the pricing will be proportional to value. There will be some safeguards, so that, you know, Medicare won't ask for unreasonably low prices. And you can even have a non-governmental panel that's involved in setting the prices: other countries have it, where the health authorities are different than the people who approve the drugs. And so, it [?] basically empowered Medicare to negotiate prices; and the price negotiation is evolving around some concept of value.
Russ Roberts: So, I'm going to be interviewing, if all goes well, I'm going to be interviewing Jerry Muller soon for an EconTalk episode on his book, The Tyranny of Metrics. I'm reading the book now. And one of the themes of the book is the surprise, unintended consequences sometimes of using metrics. In this particular case, you'd think there's, normally wouldn't worry about this. So, the normal problem that an economist would raise is: 'Well, what's the incentive of the Director of Medicare to be a good negotiator? Or to be--he or she could be corrupted.' But, you could have a board, like you point out. There are all kinds of ways to solve that challenge. There are still challenges. But, one of the challenges would be, I would think, that if the whole value is extending life, would you worry at all about the possibility that there would be ways of extending life that would be not particularly pleasant? But that would show up as longer life, and that therefore would earn you the right to charge more? Would it change the way people did drug discovery? Or is that too cynical?
Vincent Rajkumar: No, actually, [?]. So, what they do, Russ--and again, we, I always find it very strange that we always want to reinvent the whole wheel, when all of the developed countries have figured this out--and so, we don't need to, we just need to improve on it. And if we are wealthier we can give a better deal to all the drug companies. Um, what they do is they do a quality-adjusted life. And this is something that people misunderstand. Patients misunderstand. They think that if we say value-based pricing or a quality-adjusted, life years of quality, we are putting a value on somebody's life. It's the opposite. We are only putting a value on what the drugs work[worth?]. So, for example, if my drug prolongs life by one year, and you have absolutely no side-effects at all whatsover, that would be one quality-adjusted life year. And, generally, the World Health Organization [WHO] and others say a country should be willing to reimburse for one only year extra life that drug provides 3 times GDP. Um--
Russ Roberts: GDP per capita.
Vincent Rajkumar: Yes. And so many countries have their own version of how much one quality[?] is. So, for example, in Europe it might be $70,000 to $80,000 per quality-adjusted life year. So, if you have a new drug, zero side-effects, you increase life by one year, you can charge $70,000, $80,000 per year for that drug, and we pay for it. And then they work along that. I mean, drug companies negotiate around the price. They may get more or less. I'm saying, in the United States you can make it $200,000 per year if you want. Maybe because we are wealthier. But that's at least some value framework. Now, suppose that same drug makes you feel absolutely miserable: you cannot even get out of bed half the time you are awake. So then I don't say that your drug prolongs life by 1 year. It does prolong life by 1 year, but 6 months of that one year, you are like a vegetable. You are doing nothing. So, the metric they use--
Russ Roberts: They discount it--
Vincent Rajkumar: is a discount. So they will say your drug really prolongs life only by 6 months. Because the other 6 months we can't really count. So, they adjust--it's not a value on a patient's life, but it's the value on the drug. That's the main mistake that patients think, that somebody's putting a value on their life. No. What we're doing is we are saying is like the drug prolongs life for one year but 3 months you wish you wouldn't have lived because that's how many side-effects you had. Therefore we are just giving credit only for 7 months, and we pay that drug, not $70,000 per year, but $50,000 because, you know, that 20% was really side effects. So, quality-adjusted life year is what is used as the metric in all Developed Countries, where the drug price negotiation starts. No one fixes a price. There are unique situations where they will give you twice the amount that they give for another drug because maybe it's a rare disease. And the company really put a lot of risk in developing the drug: there's no other alternative. So, but that's a starting point of negotiation. And there are people there without conflicts of interest, because they, you know, it's they are all salaried people. They don't have a very reason to, you know, dis-pharma or make them go broke. They really want to help their own citizens. So, they try and work out a price. And by and large they successfully negotiate a price for most life-saving drugs. I mean, all the drugs that we have in the United States, many of them are available in Europe. Maybe later because it took time for them to negotiate. But Velcade's available. Revlimid's available. Daratumumab, carfilzomib. These are all available because they finally figured out a price that they could all live with.
Russ Roberts: What are they charging here?
Vincent Rajkumar: Um, I don't know--
Russ Roberts: Less--
Vincent Rajkumar: but it's definitely less than the United States.
Russ Roberts: And of course, one response to that is, well, that's definitely our market which is unrestrained, is where the drug companies are able to make a lot of their money. And therefore we're subsidizing patients outside the United States. I think that's true, to some extent. It's actually for the poorest of countries--that if we are relying on negotiated prices there, there maybe would not be as much innovation. But, in some dimension, the United States as this great cash cow, for pharma, is driving innovation for the whole world? Right? It's--our markets' profitability. And normally what that would do is it would encourage more pharmaceutical companies. But as you point out, the barriers to entry are quite large. The compliance costs are quite large, to get approval. So, to me, you have to work on all these things. And I would, of course, I would prefer a world where nothing was subsidized through the government or through the subsidization of insurance. And rather I would rather relay on philanthropy and foundations to supply drugs to people in desperate straights, who could not financially afford them. And that would have its own issues. Even if it worked, it would have some challenges.
Russ Roberts: But the other issue, of course, is just transparency. It's hard to pay attention. So, it's hard to know. If we move to the European system here--and these negotiations took place--I would feel better about it relative to the current situation, for sure. They are both imperfect. But I think there would be an improvement. But it would be--I'd be more confident about it if it was a transparent process and there were a lot of people paying attention. And I think people sometimes forget this. They think, 'Well, it's all public information.' Yeah, but if people don't pay attention to it--like your point is a great point about Daraprim, right? Daraprim is still $750 or whatever it is dollars instead of a buck fifty [$1.50]. And people just forgot to be upset about it. They just stopped paying attention. It's still public. It's not a secret.
Vincent Rajkumar: Yes.
Russ Roberts: You are not revealing anything. What do you think about, what could be done with the FDA here relative to European approval to either speed up the process or, are we too cautious?
Vincent Rajkumar: Yeah. They are. They are much less cautious, actually, than Europe, in terms--not cautious. That's not the right word. The FDA is actually more liberal in approving drugs than European authorities. Which is good for our patients. So, we have access sooner. They are willing to take a risk based on smaller studies, based on single-arm studies or life-threatening diseases.
Russ Roberts: What's 'arm'?
Vincent Rajkumar: Pardon?
Russ Roberts: What's single-arm? What's arm standard?
Vincent Rajkumar: Single-arm meaning, so, if it's a life-saving drug and I don't have a control group, and I just gave, you know, 100 patients with this cancer, this drug, and I show the FDA, 'You know, these patients have very bad cancer that there is no treatment for. I gave my drug to 200 of these patients, and in 30 of them, they are better now.' And I show proof of that. Rather than insist on a controlled trial where you take, you know, 500 patients and 250 get your drug and 250 don't, which will take a longer time to do and more money, the FDA approves the drug based on the fact that this is for cancer; this is a serious disease. There is good proof that the drug works. 'We'll accept, we'll approve the drug, let it go on the market.' That's called accelerated approval. And then, the company promises to do the control-trial subsequently. So, it facilitates the drugs coming earlier on the market, earlier on in the United States. All of the myeloma drugs were available in the United States years before what they were in the rest of the world. So, the FDA is really good about that. What they need to do, I think, is that, we need to facilitate the easier entry of generic companies into the United States. So, the first one will be negotiate price and value-based pricing. And then the second one would be facilitate competition. True market competition means you have--I use the example of Poland and Gleevec because somebody put it out on Twitter for me, to help me out. That, there are 19 versions of Gleevec sold in Poland. If I have only one competitor to Gleevec, I will price it as about like the airlines--like 90% of the Gleevec price. If I have, you know, like Tylenol in CostCo--if I have every store making its version of Tylenol--then the Tylenol price is very, very cheap. Because, there is true competition. I mean, what we need to do is encourage a lot of generic companies to come establish markets here, prevent pharma, Big Pharma, from introducing these generics. We don't need onerous regulations, you know, exactly, I know how the FDA monitors this or what kind of proof they want to say that a generic drug is equivalent. But we should make it just so--
Russ Roberts: Make it easier--
Vincent Rajkumar: not just for one drug, but make it like the automotive market, you know? I just look; I've got a hundred different vehicles that I can choose from. I pick my drug based on cost and whatever else. That's the way we need. So that for every drug, cancer drug, where the monopoly production is ending, we shorten the monopoly protection. We prevent these companies from exploiting the laws to prolong the monopoly protection by lawsuits and paying all generics and all of the things that they have done. But, at the same time make it easier for generics to come in--from India, from China, from wherever else. Make the drug so that our citizens have access to drugs that are effective, cheap, reasonable costs for society as well as for the patients.
Russ Roberts: And right now, Vincent, you and I are clamoring for that. And on one--and there's tens of thousands of people, maybe a hundred thousand people hearing this podcast, and they are saying, 'Yeah, that's a good idea.' But they are not going to take to the streets, because they don't pay for it. Well, they do, but they don't see it. They don't pay for it directly. They pay for it through their higher taxes. And I wonder if when Medicare starts to bankrupt the government of the United States, the budget of the United States, these issues will start to get a little more important. I have to think that also that part of the reason is--and I used to hear this from a drug, the CEO [Chief Executive Officer] of a drug company used to tell me, when he, and I'm sure he was right. He's probably still right. He used to say, 'You know, if you could get the inflation of pharmaceuticals down to zero,' and even if you could start thinking about it, if you could give away all drugs for free, the impact on the expenditures of the United States of, medical expenditures, would still be quite small. So, any one of these is outrageous. But, it's a small part of the whole problem. And, I think that reduces the incentive to be extra-vigilant about it.
Vincent Rajkumar: Yeah. The third solution is that I really, really think it's important for, because it's going to be--quite, to allow Medicare to negotiate, that's a mega-law-change. You have to change the entire Part D law. To allow value-based pricing, you have to create a whole agency, aside from FDA, to evaluate value of the drug: What does it provide? And to negotiate around that value. In order to facilitate easy entry of generics would probably again require major changes to FDA regulations. The other one that we should do, and again also requires changes to existing law, would be the importation of drugs for personal use. I'm not saying allow me and you to start a company tomorrow that you go to India and buy all of the drugs, come back here and sell it for a low price. I am saying that if I have cancer, and I simply cannot afford the drugs here, allow me to get the drug from somewhere else. And bring it back for my own use. I am sure that people can do it. But it's still illegal. And so, if we allow that, then the prices at least of the United States will be similar to other countries rather than being so much higher than everywhere else.
Russ Roberts: So, those are all interesting. And I'm sympathetic to all of them, even though they are not my favorite solution. I think a farmer[pharma?] representative or that person here on the, listening in here on our conversation, would say, 'Those are all lovely but they are going to take profits out of the pharmaceutical industry. You are going to get less innovation. And therefore you are going to hurt, you are going to hurt human beings.' What's your answer to that?
Vincent Rajkumar: I ask you this question: If you are a pharmaceutical company CEO, and I told you, 'Listen, Russ, you have a drug that works for 3 years. You could just modify that drug slightly, make it slightly less toxic, slightly more; and you get a new patent, another 7 years; you have ways in which you can make sure that that drug is the preferred drug.' It's very less risky because you know it's going to win in any trial that you do. Would you do that? Or would you risk all you have on another brand-new, out-of-the-box innovation? So, my answer is, the fact that you can command a high price regardless of value means that there's really no reason for you to innovate when you can make Me-Too drugs all year long, and make the same thing. It actually stifles innovation, because: Why innovate and take a big risk when you can just modify your existing drug and capture the whole market for another 7-10 years? And it's something very important to recognize, because a lot of the big pharmaceutical company drugs that are blockbusters are probably not the result of their own innovation, but they just buy smaller companies which have innovated; and they know already that the drug is going to be successful so you buy it out, and then you market it. I think it stifles innovation, the fact that they can command a price no matter what the value is. If we tie value to the price, then you would really innovate, because you want to get the bigger reward for the risk that you've taken.
Russ Roberts: It's a superb answer.
Russ Roberts: I want to close--we're over time. I just want to close with a quote that you had on Twitter which I--I spoke to, a theme on this program. It's sort of off-topic, but it's sort of not. And we'll close with that. It's about complexity, and the uncertainty of our knowledge. You say, you wrote the following: "We don't understand the human body like a car mechanic understands the car. They"--I think you mean the car mechanic--"they can operate on plausibility and reason. No need for randomized control trials. They just know what each part of the car does. We are not even in the same planet." Want to explain that a little bit?
Vincent Rajkumar: Yes. This is why medicine is so complicated. A car mechanic, if they find a leak, they fix it; they know your car is going to be fine. They know exactly what the problem is, as long as you have a good mechanic. We are just guessing. So, it's true: Pharma needs to take a big risk, because on paper it looks like this drug should work beautifully. It targets the exact pathway that causes the cancer to occur or to grow. And, 'I have a drug that blocks that very pathway. And, you know, in most experiments the cancer just goes away immediately. I've tried it on animals and primates. And the cancer disappears.' So, now you put it into a clinical trial. And you'll be surprised--like 90% of the drugs don't work. And that's because the human body is complex. Going from Rochester to Minneapolis, I could block Highway 52 and I still have probably another hundred different ways of reaching Minneapolis. So, you block that pathway; little did you know that the cancer cell is so smart it found another way to do that same thing. And, it just bypassed your drug as if it didn't exist. So, we are not understanding the whole process of carcinogenesis. The only cancers that we have really cured and or controlled very effectively where are few cancers where there is a real, short path from what causes the cancer to the cancer cell. Like [?], [?], [?], there is one particular translocation that is present in 100% of patients; there is one particular [?] that is abnormally expressed. You block it, and the cancer goes away. Few cancers are as simple as that. And so, our entire problem is that we are then having to do complicated studies with large numbers of studies to prove that a drug works. And we are faced with a high failure rate. There is no denying it's a complex problem. And cancer is complex. And cancer is cunning. Even if you find a drug and it works, as we've seen in myeloma, 9 months go by and the cancer is back. And now we have to find Option B. And then C, and D, and so on.
Russ Roberts: Well, it reminds me a lot of my favorite quote from Hayek, which I haven't said in a while so I'm sure listeners have been missing it: Which is, 'The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.' You weren't talking about the economy, public policy; but it's true about medicine and epidemiology and the human body.
Vincent Rajkumar: Yes.