The Ethics of Pharmaceutical Pricing

I don't think I'm alone in having noticed in my own country – as well as throughout that part of the developed world where states run reasonably expansive publicly financed health service schemes – an increased political and general societal problematisation of the costs of new pharmaceuticals.* The background to this increased focus is doubtlessly complex, but four aspects stand out as especially relevant explanatory factors. First, there is the generally splendid public health situation in these countries, with ever increasing average life expectancy and declining morbidity rates at the population level,** but with the side-effect of more and more of this increase being effected by reparative treatment of chronic, aging-related health problems, rather than primary prevention of basic health problems. Second, there is the next step in pharmacological development strategy, whith drugs targeting more and more specific and limited groups of patients and conditions, as a side-effect also providing treatment for extremely rare and serious diseases which have before been a dire fate to bear, with very limited treatment opportunities (many of these monogenic diseases which have been virtually untreatable). Third, there is the increased focus on rationality and ethics of public spending and the organisation of health services, effecting a greater transparency, control and regulation of the assessment, introduction and prioritarisation of new treatments. Fourth, there is the pricing policies of pharmaceutical companies, in extension reflecting the chosen expectations of return on investments of their owners. This post is about the fourth of these factors.

In most discussions of public policy in this area, this fourth factor is and has for a long time been treated as an immovable state of nature. There are three basic reasons usually presented in favour of that stance: First, commercial businesses have to be assumed to act as commercial businesses and strive to maximise profit for their owners, and are – in fact – in most jurisdictions required by law to do so. Second, if pharmaceutical companies would not be allowed to act in this way, they would soon be deprived of investor capital (as this would move to more profitable areas), and this would cripple the development of new drugs. Third, states are not capable of taking on the task performed by pharmaceutical businesses today; if they would, the result would soon be either an even worse cost crisis, or declining development and production. I think that the third argument is worth some critical discussion, especially in some areas of particular societal importance – such as vaccines – but in the present context, I will let it stand unquestioned for the sake of discussion. That is, I assume in the following that states are indeed dependent on private business solutions to have an effective development and production of pharmaceuticals.

But what about the other two arguments? Lately, these have been questioned in the context of debates in several countries about the pricing of a drug called Soliris by its manufacturer Alexion, targetting the rare and very serious hereditary disease Atypical hemolytic-uremic syndrome, or aHUS. In several countries, agencies responsible for assessing the evidence base, cost-efficiency and priority of new drugs have expressed serious complaints about the high price (here, here, here, here). In several of these cases, the national health services have eventually chosen to introduce this drug any way, in order not to have heavily burdened patients caught in the fight between health institutions and drug companies. But the change of tune with regard to pharmacological companies is notable, and raises the more general question of the plausibility and validity of the two arguments above.

I will claim that, given that the thesis supposed to be backed up by the arguments is that national health services, governments and related agencies have no reason to apply normative (ethical or political) judgement regarding the pricing of pharmaceuticals, my assessment is that while both arguments are plausible (as in likely to be true), they are invalid (as in not supporting the conclusion). I will support that claim with two arguments, one ethical and one political, and then sign off by pointing to some complicating factors that I think are mostly overlooked in health policy debates.

1. Even if commercial companies lack moral obligations, their owners don't
It may be debated to what extent commercial companies have moral obligations and, if so, which these are. Most countries have set up a system where, in Milton Friedman's famed words, 'the business of business is business' – that is, beyond keeping to the limits of criminal and necessary civil, and administrative law, commercial companies are not to mind about anything else than meeting the profit expectations of its owners. Based on this, a company may, of course, chose to abide by one or the other moral judgement, but only to the extent that it is thought to be a sound commercial strategy as defined above. Also, while thus using business only for its expected good outcomes of business (usually increased productivity of goods and services), a state may take political action to compensate for its bad side-effects, e.g., with regard to public health. In recent decades, this 'separation thesis' regarding the obligation of commercial companies (to maximise profits for its owners inside the realm of the law) has been questioned as both increasingly irrelevant (due to globalisation, which enables companies to move freely between jurisdictions in an amoral manner, thus emptying the content of the requirement to abide by the law) and for its inability to reply to increased arguments coming from the area of business ethics, corporate social responsibility and political philosophical observations that the separation thesis assumes a demarcation between the realms of business and that of basic public concerns which is simply not to be had.

However, even if we would grant the idea that companies have no other moral obligations than meeting the profit expectations of their owners inside the realm of the law, it doesn't follow that national health services, governments and related agencies have no reason to apply normative (ethical or political) judgement regarding the pricing of pharmaceuticals. This since the separation thesis does not in any way undermine the claim that owners of businesses have moral obligations and ethical reasons to behave considerate towards other people beyond what the law may require. Or, it may do so in the first instance, as many owner's are institutional business parties (banks, funds, and so on), but at the end of the day, there will be actual and quite ordinary people, and these have the same moral obligations as anyone else. In fact, it would seem that the whole idea of the separation thesis rests on the assumption of a well-functioning society within which businesses may operate, and a core part of such a society is that people act decently towards one another. This implies, e.g., the recognition  of basic and reciprocal civic obligations of due diligence, duty of care and general consideration to other people – all stretching beyond what is strictly required by law. Just start to imagine what walking along a street in a city would be like absent such basic cultural arrangements in place. Likewise, imagine a society were no individual assisted another in need according to such principles. I take it that no one would disagree that we hold these sort of moral obligations to one another. However, if we do, these don't just magically disappear if we happen to open a shop or purchase some company stock. Even if not required by law, as owners of businesses, we are still bounded by ethical considerations to other people, e.g., to care for those in dire and undeserved circumstances.***

So how does one discharge these moral obligations in the role as owner of commercial enterprise? Well, since the enterprise itself – a company – works according to the main principle of realising the profit expectations of the owners, the lever available to an owner seems to be exactly these expectations. That is, the material outcome of the duty of the company towards its owners being discharged can be manipulated by the owners' communication into the company structure of what level and rate of return on invested capital is being expected. This creates ample room for an owner to have ethical reasons to adjust such expectations in view of reasons beyond those of "pure business". Transferred to the case of pharmaceuticals, this line of reasoning results in the conclusion that, to the extent that this is required by our normal set of ethical reasons to be considerate towards each other, an owner of such a company has a reason to decrease his or her expectation of return on invested capital, whether in terms of level or rate. In both cases, such an adjustment will enable the company to adjust its pricing downwards without defaulting what it owes its owners. To be true, such a reason need not always be available, but in the case of drugs for very serious diseases, it seems quite reasonable to claim that it does. Note also, that the reasoning can be applied also to argue against withdrawing investment, thus diffusing the argument that reducing profit margins to enable lower pricing would effect investment flight. Maybe it would, but it still holds that investors should not thus flee a slightly less profitable investment that would mean meeting one's general moral obligations to other people. I made this argument myself, in the Swedish debate around Soliris.

In conclusion, the idea that there are sound and valid normative (ethical) claims to make with regard to the pricing of effective drugs for very serious diseases holds up to scrutiny. The (assumed) facts that "the business of business is business" and that (potential and actual) owners of pharmaceutical companies do as a matter of fact not currently seem to act in accordance with their moral obligations (maybe partly because these have not been recognised) do nothing to undermine this claim. Owners of pharmaceutical companies owe it to very sick people to adjust their profit expectations to enable more modest pricing, and potential owners owe the same people not to withdraw from investment due to this obligation.  

2. States owe their citizens not to be money pumps
The second argument does not target individual people in their role as (potential) owners and investors, but rather state institutions in their roles as counterparties in business negotiations. This argument is entirely independent of the first one, and will hold up even if the former would be shown to be somehow faulty. The argument does, however, assume that pharmaceutical companies are behaving more or less according to "the business of business is business" pattern, with owners who as a matter of fact do not moderate their expectations on return on invested capital as they should. Should owners start to behave more in line with their moral obligations, the validity of the present argument will be undermined (although it is still sound).

The behaviour of pharmaceutical companies with regard to pricing of drugs as just sketched means that they try in every instance to find an optimal equilibrium between the price per sold item and the number of items sold. This is the reasons why the so-called "list price" of new drugs is in most cases much higher than the price eventually paid by public health services; the company sets an exaggerated price as it expects a negotiation where the price will be decreased in light of consumer demand, as expressed by the public agencies doing the state's bidding. In my own country, where up till recently, this bargaining has been undertaken by each single county government (responsibly for its health care service region), companies have thus been very savvy at, insisting on commercial secrecy around the agreed price, play all these counties against the middle to maximise bargaining outcome. From a political ethical standpoint, to have state or county agencies – and ultimately tax payers – thus being allowed to be played for suckers is simply unacceptable. For what it means is that the state – in view of the never ever ending demand for health care – allows commercial parties to milk its treasure chest dry. In more technical sense, the state thus allows itself to be what experts on economic bargaining rationality and game theory call a money pump – someone who applies a bargaining or game theoretical choice strategy that systematically leads to a losing position, albeit each single move may appear winning, given the circumstances.**** The argument that one should avoid such strategies (technically, to avoid dutch book strategies) has given raise to the discipline of dynamic choice theory, and is a standard motivation, e.g., for why it is irrational to apply decision strategies that make one succumb to blackmail – as each concession of a black mailer's demands (no matter of well motivated in the single instance) makes it rational for the blackmailer to continue the blackmail and increase the demands. In the case of negotiations about the price of pharmaceuticals, the state or responsible public agency becomes a money pump by being overwhelmed by the reason to accept the offered price presented by needs of single patients, and thus not considering the option of declining the offered product as a live option. Just as the blackmailer in the analogous situation receives increased reasons to continue the blackmail and up the stakes, the pharmaceutical companies are thereby reinforced in their reasons in terms of business logic to increase prices even more, and thus increasingly bleed the public health services budget.

I take it that everyone agrees that a state and its agencies owe it to their people to avoid such positions. As a matter of fact, since the rationality of avoiding being a money pump is so basic, this would seem to hold even on the super-thin libertarian idea of the state as a security business enterprise of its citizens (which I take most people would want to go beyond). But to do that, the state has to create a bargaining situation where the counterparty counts a declining of its offer as a live option to be calculated with. And to create that situation, the state needs to actually decline offered services also when they are necessary to meet important needs.If they don't, the companies will not view such a declining as a live option, and will thus be motivated to increase the stakes. Now, this does not necessarily mean that it is in case of effective orphan disease products such as Soliris, where the most urgent need for such demonstration of actual bargaining power is called for. Rather, one would find it more acceptable to decline state subsidising of treatments for far less serious, albeit more widespread conditons, although that may not harvest much of political popularity. But if the state never says "no" to anything, the money pumping result will eventually affect the entire public health service supply, and it is not unlikely that before long the willingness of citizens to fund very expensive treatments for conditions that strike only very few will falter as a result. Moreover, as more and more drugs for all sorts of condition (many of which will not be as extreme as aHUS) can be expected to become "orphan" in the sense of targeting only very specific patient groups, or add only very minor therapeutic effects (and often considerable side-effects) to serious conditions which are inevitably killing patients very shortly (as is the case with many new cancer medications), the fact that the targeted condition is either rare or very serious cannot by itself be a disclaimer from applying a rational bargaining strategy that also takes into consideration therapeutic effect, cost and opportunity costs in terms of what other treatments to other conditions may may be funded by the same money.

In any case, however, the many difficult priority setting issues which follow from the state and responsible agencies thus taking its responsibility to citizens are handled, the fact remains that the state does have such responsibilities. As much as society has reasons to allocate resources to be able to offer its members publicly available health care services, it has strong obligations to the very same members not to unnecessarily waste these resources. Avoiding the money pump position in relation to pharmaceutical companies seems like an elementary part of performing that duty.

3. Where we are in all of this
In conclusion, there are two separate arguments for the existence of valid and sound normative reasons to apply to the pricing of pharmaceuticals by commercial companies. Both assume only a very minimal idea of ethical and political reasons, which should be acceptable across most otherwise competing ethical and political positions and ideologies. However, there is an interesting dialectic between the arguments, hinted at when I wrote above that the second argument gains in validity to the extent that the first argument is ignored by the acting parties – owners of and investors in pharmaceutical companies. But who are these owners? As pointed out, in the first instance they are probably mostly banks, investment and holding companies, funds and so on, but at the end of the line there will of course be actual people (who hold the ethical obligations claimed in section 1 above). Some of these will, of course, belong to the fabled 1% of repugnantly rich, but most of them won't. In fact, most of them will be like you and me, people who has a bit of insurance, a bank account, a small slice of a pension fund (no matter how modest), loans, maybe even some stock. And even if our possessions of this sort are very modest, we are benefiting from a public health services system, which include funds where the capital to pay for and subsidise pharmaceuticals and public health care investments is stored and managed, and we may even be due for a bit of minimal public pension from funds equally so taken care of to be able to deliver what was originally promised. In other words, we who gasp at the indecent pricing of pharmaceutical companies are the very same people who in section 1 above were claimed to have moral obligations to lower their expectations of return on invested capital. In view of the apparent fact that this seems to imply that most people have to lower their pension-, insurance, savings- and welfare demands, one may quite plausibly doubt our collective capacity to effect such an adjustment, no matter how persuaded we are of its rationale on a theoretical level.

Therefore, as in so many other cases, the most rational solution would seem to be the second one: to press the reasons for the state and involved public agencies to apply effective and rational bargaining strategies against the pharmaceutical companies. Of course, to have effective such systems, it is rational to abandon the subsidiarity system, where each county government make their own bargain, and centralise the process nationally. But that's only the first step, of course, as the same logic tells us to accept multinational bargaining cartels, possibly across the entire EU. That will probably have quite a bit of bite, although it will also necessitate difficult issues of health care policy priorities, due to the need of sometimes actually saying no to the offered goods. Moreover, it will, as in so many other cases where we are unable to do collectively what we should be doing together, force us to accept the concessions (in terms a lowered returns on investments, savings, pension fund, insurance benefits, what have you) we were obliged to accept by ourselves, but failed to do.
  

*) There is, of course, a comparably much more pressing issue about the cost of and access to pharmaceuticals in developing and/or economically deprived settings. This issue has attracted the attention of ethical reflection for a long time, and there is a rich debate addressing its many levels to dip into for whoever feels like it – just make some searches using "orphan drugs", "orphan disease", "ethics" and "access to healthcare in developing countries", and you're set.

**) Granted, there is also in many of these countries stark health inequalities. However, if we plot the curves from the start of these modern health policies at the beginning of the 20th century, even the worst of worst-off groups of today come out considerably better. This is not to say that inequalities of the present are unimportant or that it shouldn't be a priority to decrease them, and to lift the worst off even higher (it should!). But the point remains that also the worst off of today cannot be made much better by primary prevention, but will also need the same shift to expensive reparative treatment of basically incurable conditions and mere aging. 

***) The qualification of "undeserved" is inserted merely to silence objections based on considerations of desert.

****) The classic "money pump argument" regards only the case when such a strategy is the result of a choosing party entertaining intransitive or "cyclical" preferences, and used to motivate why a rational actor must avoid such preference structures. However, the argument apparently rests on the assumption that being "pumped of one's money", as may result in this instance, is a general fault to be avoided by a rational actor, no matter the explanation.