Yale School of Management

Contemplating a New Model for Drug Pricing

October 9, 2015

Can drug pricing be understood through the basic principles of the market—the role of competition, the laws of supply and demand? Peter Bach MD, physician and director of the Center for Health Policy and Outcomes at Memorial Sloan-Kettering Cancer Center, says no.

Speaking as part of the MBA for Executives Healthcare Colloquium on October 2, Bach told students he came to this conclusion after he, Leonard Saltz, and Robert Wittes announced in a New York Times op-ed that they would not prescribe the cancer drug Zaltrap to their patients because it was too expensive. Zaltrap’s manufacturer, Sanofi, responded by lowering the price of the drug—revealing, Bach said, that the cost had been determined arbitrarily.

“When they lowered the price, it allowed me to start making this point: that this thing is a house of cards; that these prices are not being carefully calculated,” Bach told EMBA students.

Bach said that this experience also got him thinking about what value means when it comes to pricing drugs. He began by considering what patients, academics, society, and those in the industry value in a drug—some of these value “domains” might be low toxicity, number of lives saved, or potential for scientific breakthrough. Bach used this concept to develop the DrugAbacus Project, an experimental pricing mechanism that uses a multi-variable equation to determine the cost of a drug based on its value.

“The core idea is that if this were to be useful, if this were to be used to find prices, it assumes a completely different market than what we have now,” said Bach. “It assumes that prices are linked to value. It assumes we know what the domains of value are and it knows how much to count each one, and it identifies all of the needs of stakeholders better than the current system.”

About the author

Meredith Crawford

Associate Director for Editorial and Design