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I'm here with Professor Lawrence Baker from Stanford Medical School and I'm hoping he can at least start to get me to understand something that I've always wondered about and and worried about a little bit let's say that I'm some drug company so let me write this down so like I'm I'm some pharma company Pharma pharma company a right over here and let's say that I I don't know I invest I invest ten years and a hundred million dollars in in some drug I get it through all the clinical trials and it gets approved by the FDA and it is and let's say just for sake of simplicity it cures it cures it cures disease it cures disease X now once I get to that point I'm feeling pretty good about myself I'm as the pharma company what happens next I mean I'm assuming that I'm going to have to go to the insurance companies and maybe Medicaid and Medicare and figure out how much they're going to pay for it but but how does that conversation even happen yeah so you're going to have a conversation with a bunch of different folks so in the u.s. we have lots of different private insurance plans we got government plans and you're actually going to have conversations with Europe and with some of the other systems around the world because each system is going to make its own and they have a different way of doing it and they may not they they are having have similarities in the way that they probably want to talk to you because there tend to be a lead system does it tend to be either the Europeans or does it tend to be the private insurers and the u.s. where you start all those conversations at once because there's so much money on the table so there will be some strategy your business is going to come to you is very hard to have all these conversations exactly simultaneously so you'll talk to the US you talk to Europe and some there are some cases in which people have viewed the regulatory processes in Europe is a little easier for some things so they may want to start start in Europe but in other cases if you're looking at a drug that maybe some of the national systems in Europe are less likely to want to pay for you might start with a u.s. where there's a little more flexibility and and but the general rule of thumb is all the money is in Europe and the US mainly right now a lot of its there the Asian systems and some of them are pretty sophisticated and using a lot of the advanced drugs too but I think the majority of the money's in the USA right and between Europe and the US I guess I've always imagined a lot of North America was was maybe that where the bulk of the money was but is that the case the US when our health care system spends more than everybody in the world and it's true for drugs too we spend more on drugs here that okay so definitely if I'm here pharma company a I mean I want to make sure I get this right in the US yeah eventually I probably care a lot part of my investment that I made is based on some understanding that I'm if I got all the way through that I would get some type of return within the US so let's say I go to I go to the it will I necessarily go to immediately go to Medicare because they're one of the largest players or will I go to like we talked about Blue Cross Blue Shield or Kaiser or some of these other players so you probably Medicare is actually kind of an interesting one for drug prices because historically Medicare has not been a big cover and still isn't of a lot of the drugs that you hear about so Medicare does not pay by itself for outpatient drugs drugs that you might take it home really man I always assume that they they don't they don't so Medicare in its main pieces Medicare we know Part A Part B Part C also Part A and Part B let's go start there they tend not to cover or they don't cover outpatient drugs if you get a drug in the hospital while you're while you're hospitalized Medicare will pay for those and so if you got a drug that's going to be primarily used in that setting you're going to talk to Medicare about it and that's going to be an important piece of the conversation but if you're talking about an outpatient drug you're talking to many say outpatient I mean inpatient is your the hospital you're sick you need I don't know morphine right now that's inpatient drug outpatient is how you're going back home take this three times a day yeah somebody sends you to the pharmacy to pick up the prescription and you're I go home with you that's going to be an outpatient right a drug so Medicare doesn't cover that in its main Part A and Part B there's Medicare Part D which is a drug plan and Medicare and that will cover a lot of the outpatient drugs and so there you have conversations with with them but most of the Medicare Part D plans are essentially private companies that Medicare contract with so you're not really talking to the government at that point you're talking to these private plans that have contracted with Medicare to ICD so once again going back to the the crux of the question of how are these drugs going to get paid for how we're going to determine the price at which these drugs get paid for it goes straight it goes back to the private plans again they're going to contract their Part D is going to say oh your Medicare Part D we're going to go to we're going to go to Aetna we're going to go to some other plan or whoever it might be I don't know whoever's offering those per whoever is offering those Part D plans and so it'll be--it'll kind of ride off of whatever that private party has already negotiated with the pharma company be related probably okay so let's say let's say I go to let's say that so we have some type of insurance let's call this insurance I'm running out of letters now is call this insurance company insurance company why right over here and I go have a conversation with insurance company why and I was like hey this is a big deal you know disease X you know it's it's it's been killing people I want 1 million dollars per pill yeah and so those have been really interesting conversations in the US so there's some bargaining back-and-forth between the insurance company and the drug maker the drug maker is going to have spent a lot of money you got a hundred million up yes in most cases I deserve to make at least 10 billion dollars off ok so there are certain excessive amounts there's an extent called anchoring a negotiation start with what you think you can yes yes number to get everybody's mind around right yeah so II know in reality it cost well over a hundred million to take a drug through the trials to do the development work and stuff so they're going to be sitting there with a number at least internally saying we want to get our 800 million our 1.5 billion back from this and so we're gonna it's not just the cost of that one drug is that so what is the cost you Angela for the top of the room hundreds of millions just so there's the development costs that go in that the pharma companies aren't typically willing to talk a lot about right and then there's the cost of getting through the trials and the FDA approvals which people say you know 500 million and up they'll say higher numbers for for one for one given drug yeah 500 million so it can be as high as 500 million can be higher can be greater than five hundred five hundred million so that doesn't even take into the kind of the probability weighted risk that there's a ten percent chance that it fails or a ten percent chance that it works right so it's really if if you're spending a hundred million per drug and only one out of ten of those drugs are going to get to the the end zone yeah you'll see you're actually spending oh you won't spend a whole lot and then find out you'll find out inside right thing to get there so even though that this on one dragon might be 100 million or 500 million there they might have spent another 300 or 400 million on drugs that didn't go anywhere plus their own development costs plus their own development cost so though so if you if you try to kind of fully load the cost it's it's a large number it's a legend yes so they're they're running a right exactly they're running a operation they got to put a lot of money in upfront when they get a success they have to get enough out of that one success to pay for the operation right kind of keep things going for the next development round so they're looking at those kinds of numbers and they're trying to figure out in this negotiation what they can sell this for and that's a back and forth discussion insurance companies have some ability to you know say what they're willing to pay but a lot of these drugs if they're doing a curing disease who care about the the pharma companies have a lot of ability to come and say this is what we need to get for this and set that price and be able to get it for a while so who is I mean obviously the pharma company is coming here with all of this investment they definitely wanted to get covered but the insurance company I guess their incentive is they don't want to look like all of a sudden this company that doesn't provide a you know the cure for disease X I mean do insurance companies ever walk away and say well you know that's just too much I understand you invested all this money but we just can't do that that's just crazy so the it's a little bit of a mixed bag the US doesn't have a lot of cases where insurance companies have really put the foot down and said no they're not going to do and you're not going to have anything to do with some new drug that comes out and some of that's the fact they do to the existence of lots of different companies all right you know if five of the companies say no but the next guy in line says yes then yeah the dynamic of that in a competitive market is often that everybody else will eventually come around and say right someone's going to do something they might not they might not pay for it outright that's right you know I guess the whole reason why we're having this conversation is because there are some drugs that are you know seem like reasonably priced to me but there's some that are like thirty thousand dollars a pill or something create I'm a doubt that number but yeah so if you so the case is the really expensive ones are drugs that are unique I tend to be unique at least some extent cure disease that gets some high profile so people are worried that they're going to die or I get this drug and of course they're still on patent that's another feature of rise right right this we get the high price for a certain period of time until you and then the generic and then generic coming in the price of the pill which is drops pennies or dollars right right so you know how you get these things set in a competitive market is an interesting question one of the things that happens in one of the things that gets the brand name drugs to be a little cheaper is competition within the class if there's two or three drug manufacturers you have something that'll basically do the same thing that'll tend to take the edge off for every thousand a pill kind of situation and get you down reasonable more reasonable prices it won't get you all the way to generic writing it just seems to me I mean you just mentioned that very few insurance companies have ever walked away from this if you ever have a negotiation when you're buying a used car whatever we're one of the two parties is not walking away then it doesn't seem like there's actually a hard a serious Nagori am I getting that wrong or is yeah so you know I get I don't know all the ins and outs of all these right right right there's lots that goes on in these things but I think that one of the things that people say about the US is that when a manufacturer drug manufacturer comes up with a fairly unique on patent drug that does some tangible good they more or less can set the price that they want to get for it and they're going to make some calculation because they could set a high enough price that everybody would say forget it so there I try and figure out something right but they're trying to get as much as they can and they get a some leeway for at least a period of time to take a look at leeway and I guess there's some range of reasonableness where it's like okay yes you're you know you've done something amazing for Humanity you you're going to get a you know a 30 percent return on your investment but that shouldn't be a 300% return on your investment yeah I don't you know I don't know at what point the US would ever walk or the private insurers so we don't ever walk amiss I haven't seen it really happen and I think drug companies are pretty sophisticated about trying to figure out what price they think they can make work and get that as high as they can get yeah so I guess I'm still backward it's still unclear to see who's kind of making out here really well you know this has been a really interesting debate you know pharma companies put huge amounts of money into these drugs and once in a while they do some really useful things and they get high premiums there are other people who argue that some of the things that they're getting high premiums for you know are really valuable enough or somehow we've been told we need a drug that if we head up to our own devices we would never come up with the fact that we needed and so you know what's the real value at the end of the day and I think that's one of the debates we're going to have in this country for a little while the industry has been coming up with new things and they're going to keep trying to do right we want to from a social standpoint from a policy standpoint try to make sure that things we're doing are really valuable to society and not copies of other drugs or not inventing a disease that didn't need a solution and then solving the problem and sometimes we worry that maybe we're getting some of that and I think that's the challenge for the US health insurance system for the regulatory process is to try to guide the innovation and guide the purchasing of these things to really create the most value for society it's been a challenge it's going to be a challenge we we have the challenge because we have tremendous opportunity so your gut tension there probably are some drugs out there there may be we are that they're doing really well maybe it well above and beyond the investment cost but it's hard to say it's I think really on a case-by-case basis yeah I don't think you'd want to make a generic statement about all the drugs that have been discovered some of the things that are put out there in the last couple decades are really important drugs are going to do a lot of good and you know I think there are debates about some other ones where maybe somebody's been able to be clever about marketing and sell it right we're less sure that and then actually marketing not to make this conversation too long but but you know some people bring up that the drug companies you know they stay say look at this there's a lot of investment right over here on this and so they have to get some reasonable return on it and that seems to make sense especially when your probability weight and all of that yeah but they spend a significant amount of marketing as well on actual marketing you watch the nightly news you're going to most of the advocacy drug companies they do the physician dinners and they do all the things like that I mean that seems to undermine that argument that all of the money is going for it for R&D I write if you just tone it up the dollars I'm not sure how you'd actually what the numbers would come out like and it's you know honestly the pharma companies aren't really excited about telling everybody all right how's the right businesses for good reason right so I seems like it's absolutely there's a huge amount when we spend a ton of money on the marketing and then you get you know you get the consumer here to kind of put the pressure on the insurance companies and the doctors to say hey you better cover that or asking for that whatever it may yeah there was a time Nina within my memory where we weren't allowed to do direct-to-consumer marketing where the law is prohibited that and the change came around and now we're allowed to do it and it's really changed the way the drugs and I have found that weird because if these are drugs that are meant to be by prescription and it's just such that which means that it should be a doctor's judgment on whether or not you should get the drugs why is it being advertised on the nightly news to a general audience right right general audience who doesn't understand all the ins and outs of the drug and who's dr. Reilly or may not want to take the time to then they'll go exactly but they'll go to the doctor says please give me this drug and then the doctor it's easier for them to say well sure yeah I think I think a lot of doctors would express a certain amount of frustration about that their patients come in it's hard to have the conversation in a short period of time so it's easier just to give them the drug fascinating