Is This the End of Premium Pricing in Drug and Device Innovation?

11/27/13Follow @kaushalmohit

Healthcare costs in the United States today account for approximately 18 percent of our gross domestic product—far more than any other developed country. Americans’ average life expectancy and the efficiency of our healthcare system are ranked near the bottom of countries with advanced economies.

It’s not just a healthcare problem, either. It’s an economic problem. The purchasing power of the average American couple with two children has largely stagnated over the past decade. According to a Rand study, increased family contributions to healthcare absorbed almost half of the growth in our before-tax income from 1999 to 2009. Starbucks CEO Howard Shultz famously said his company spends more on healthcare than it does on coffee. General Motors spends more on healthcare than it pays for steel. What’s very clear is that healthcare spending is affecting the US economy, and we must all work together on a solution.

Against this backdrop, the Affordable Care Act has triggered an intense political struggle and sent traditional biopharma and medical device companies scrambling to understand precisely how their core business models will change as healthcare reform rolls on. Amid all this turmoil and uncertainty, what is clear is that these large industries are in a period of flux.

So far, most of the early changes have been seen among payers, healthcare providers, and other elements of the delivery system. However, pharma and medtech are also coming under increasing pressure to change. The real drivers for this change are macroeconomic. Policy is simply accelerating the change.

In my opinion, one major trend affecting the biopharmaceutical and medical device industry will be an erosion in premium pricing for many disease franchises.

In the pre-ACA world, device and drug products would be priced at a premium based just on improvements in quality. Even marginal improvements could often command a price premium. Premium pricing has long been a core assumption of healthcare innovation. But premium pricing typically becomes an easy target for disruption through … Next Page »

Mohit Kaushal is a partner at Aberdare Ventures in San Francisco. Follow @kaushalmohit

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  • Billiam

    would you trust the prices for goods from Cuban government, or Venezuela? no the official price is meaningless. Why do you trust the price of goods from an socialized system, you are either naive or dumb. What are the percentage of doctors to patients in each country or hospital beds to patients? If you go by efficient resource utilization America is always at the top. If you go by government set prices, well that just is dumb.

  • Del Merenda

    It’s not just expensive pharma and devices. It is also the exorbitant expense associated with how they are used and the litigation mitigation processes inherent therein.