Would A Wider Variety Of Vial Sizes Reduce The Cost Of Chemotherapy? Not Likely

The high prices of many patented pharmaceuticals, especially chemotherapy drugs, pose substantial challenges to the budgets of public programs, private insurers, and patients and their families. Addressing this problem in the US context, through changes in drug negotiating rules, reimportation, price controls, or patent reform is pragmatically daunting and politically fraught. It's natural, then, to seek ways around the problem - options that might reduce the price of drugs while sidestepping that charged territory.

Vial Size

In a March 1, 2016 article published in BMJ, Peter Bach and colleagues propose one such strategy: Require drug companies to offer drugs in multiple vial sizes to reduce overspending on wasted product. Unfortunately, this idea is based on a questionable set of assumptions. It may raise the cost to pharmaceutical companies of producing drugs, but is unlikely to reduce the costs that matter to patients and payers.

As Dr. Bach points out, chemotherapy dosing is based on body size, so one size of drug vial doesn't fit all. The standard vial size for some drugs contains enough active ingredient for a large size person - when the drug is used for a smaller person, the excess is wasted. Assuming the cost of the excess drug is proportional to the amount of drug in the package, as Bach et al. do in their analysis, the cost of the wasted drug is very substantial.

It is wrong, however, to assume that production cost is proportional to package size. That's because much of the cost of the product-product development, marketing, distribution, testing, packaging, labeling-is entirely or nearly invariant to unit size. The cost of an additional unit of the product itself, the marginal cost, is usually quite low relative to these fixed costs. That's true in the case of even simple consumer goods sold in highly competitive markets (for example, a Starbucks venti coffee was 67 percent bigger than a tall, but the price was just 29 percent higher). It's much more the case with goods like patented pharmaceuticals, which require extensive up-front investment and complex distribution networks. By assuming that drug costs increase proportionately to vial size, Bach et al. greatly overstate the potential cost savings to drugmakers and to payers from increasing the number of available vial sizes.

Pricing

The more serious error, however, is in the treatment of pricing. Bach et al.'s analysis fails to account for the fact that patented pharmaceuticals are, by government design, monopolies. A drug manufacturer holding a patent seeks to price its drug at the highest price consumers (in this case, mainly payers) are willing to pay for it. The willingness of chemotherapy consumers (whether patients or payers) to pay for a drug doesn't depend on their body weight and how many milligrams of the drug they use - it depends only on whether the optimal course of treatment will improve and extend lives or not.

The most profitable way for a patent-holding drug manufacturer to price drugs would be to set that price based on payers' willingness to pay for a course of treatment and then ship the drug in packages of whatever size were most economical. When the marginal cost of the drug material is high, that might mean shipping in multiple sizes of vials; when the marginal cost is low, as it is for most cancer drugs, it might be least costly to ship in a limited number of vial sizes and allow the excess drug material to be wasted.

Even in quite competitive markets, there is nothing strange about this pricing strategy. We've come to expect it for goods that are sold in single units - like ladies' dresses, which are priced the same in a size 6 (requiring 2 ¼ yards of fabric) as in a size 16 (requiring 3 ½ yards of fabric). Dress consumers are willing-or not willing-to pay for a dress - and their willingness to pay doesn't decline as the amount of fabric required falls. In fact, in countries where drug prices are established by governments, regulators assess appropriate prices based on the dose of a drug required by the average patient for an effective course of treatment. In consequence, no one, anywhere argues that we should treat cancer in 90 pound women but not in 450 pound men because the cost-effectiveness of treatment is much greater in the former than in the latter.

Unintended Consequences

What would happen if we required drug manufacturers to sell drugs in more vial sizes? The manufacturers would choose prices for the various sizes of vials that maximized their total revenue net of the costs of production. Since the cost of production would be a little higher, but consumers' willingness to pay for drugs would be the same, the average consumer would pay about the same amount for a course of treatment.

Of course, there might be more variability within that average: people with lower body weight might spend less on cancer drugs, but people with higher body weight might spend more. The efficiency of drug production overall would decline, as producers would pay more to generate inventory and distribute multiple vial sizes. Overall, the costs of production would rise, while consumers would see little change.

Pharmaceutical pricing is a tangled issue, requiring tough tradeoffs that are politically challenging. Unfortunately, we're not likely to avoid those challenges with a clever shortcut.