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Stay Hungry. Stay Foolish.

A blog by Leon Oudejans

Healthcare: total loss or repair

3 June 2015


In property and liability insurance there’s a guideline for determining whether the object is a total loss or still warrants repair. When the cost of repair is higher than the object’s residual value then there’s a total loss and then it’s more (cost) efficient to replace it. The residual value can either be determined through a sale (direct market value) or through determining the object’s future earning capacity in its remaining years of operation (indirect market value).

In life (insurance) this calculation gets complicated for several reasons. Firstly, ethical considerations. Secondly, emotional value. Thirdly, determining indirect market value. Yet I have no doubt that pharmaceutical companies will use such a calculation to determine the “optimal” pricing of their new drugs. Reputation damage for refusing to refund such new drugs will also be a factor in this equation.

The above thoughts were triggered by an FT article today, in which the CEO of a leading global pharmaceutical warns the UK government after the British government refused to refund a new expensive cancer drug. Apparently, the UK government uses a measure called “quality-adjusted life year added” to judge the value for money it gets when comparing the cost of medicine. Basically, this also implies that the cost of treatment (repair) is minimised and that the residual value of the person’s life is always deemed higher than the cost of treatment.

Since 1850, there has been a dramatic rise of life expectancy around the world. The increase of the minimum age for retirement has only started since this decade and only in some countries like in The Netherlands. Future pension premiums must reflect an ageing population. And future healthcare premiums must reflect the increase of healthcare expenses for an ever ageing population. The cost for car maintenance, repair and tyres (MRT) at car leasing companies typically shows an accelerated pace for each additional year in operation.

The Hippocratic oath has been the cornerstone of Western healthcare for many centuries. The modern version even reflects a balanced consideration between treatment (repair) versus the value of adding life (e.g., over-treatment and therapeutic nihilism).

Considering a global population of some 8 billion people, it makes perfect sense for global pharmaceutical companies to focus on “cash cows” rather than small – niche – drugs (“dogs”). Small pharmaceutical companies face the cost of FDA approval which can easily become prohibitive. FDA approval is important for future refunding by governments and healthcare insurers. FDA approval is also important to prevent bad medicine from entering the consumer healthcare market.

Pharmaceutical companies typically explain their huge profits for being able to fund research and development of new drugs. However, quite often their purchases of their smaller pharmaceutical competitors needs to fill their future product portfolio. This consolidation development will only reinforce their “optimal” pricing of future drugs. The approach of pharmaceutical companies by the Chinese government is quite interesting and may teach others the way forward (link 1, link 2, link 3).

Medicine is like money. You can’t do without. Sooner or later, pharmaceutical companies will be treated as the new evil bankers of society.


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