May 19, 2026
Welcome to Perspectives, a signature podcast series from The Leerink Center for Pharmacoeconomics. Hosted by Dr. Mel Whittington, a health economist and Head of the Center for Pharmacoeconomics, we will be hearing from individuals across the industry to better understand and appreciate the societal impact of healthcare innovations.
Mel Whittington: Today I’m joined by Dr. Tomas Philipson, professor emeritus at the University of Chicago and former acting chair of the Council of Economic Advisors during the first Trump administration. He’s recently developed a new insurance model for biotech investors that essentially insures against clinical trial risk. So lots of questions about that today. And I can’t let him go without picking his brain on all that’s going on in drug pricing policy right now. Dr. Philipson, I’m so glad you’re here. Can you kick us off by telling us about this new insurance mechanism you’ve developed?
Tomas Philipson: Yeah. So, it’s developed for Lloyd’s of London, which is one of the biggest insurance conglomerates, if not the biggest in the world. They are now insuring biotech investors into investments, into clinical trials that don’t meet their end point. So, in plain language, if your drug fails in a trial, you get your money back, essentially. So, think about investing ten million dollars into a phase two trial, let’s say. And then the drug does not show that it’s efficacious relative to the placebo. You get ten million dollars back if you’re covered by Lloyd’s essentially
Mel Whittington: Is this the first of its kind? Does this exist elsewhere or is this really pretty novel?
Tomas Philipson: No. This is first in the world that this type of insurance is offered by Lloyd’s and they usually pride themselves for being very innovative. So, this is a new innovative product that they’re putting out there. We just launched it at JP Morgan’s conference in San Francisco this January, and we just had the first client sign a contract a couple of weeks ago. So, it’s being launched as we speak with a pipeline that’s filling up pretty heavily.
Mel Whittington: You were going to say something about premiums. What are the premiums?
Tomas Philipson: So, the premiums that we’re shooting for is about a thirty percent premium on this insurance. So essentially, instead of investing ten million in a trial, if you would invest thirteen million in that company with a trial cost and the premium cost added together, you would then be secured back, let’s say seventy five percent of thirteen million through the trial insurance. So, it’s a downward protection. That’s one of the benefits if you’re an equity investor. Usually, equity investors lose one hundred percent of their investment for a single product company that fails a given phase it is hard for them to go on. That’s one of the benefits. The reason the premium can be so low relative to the failure risk in trials, which is larger than thirty percent, is that there’s an exclusive underwriter for Lloyd’s of London, or MCI, which is the syndicate of Lloyd’s of London that operates this insurance. And that company, the underwriting company, is called GATC health. It’s GATC after the components in the genome. And it’s a merger between Human Genome Project personnel, eBay personnel, and the innovator, some of the innovators in that space essentially, to use AI to predict in silico the probability that a given molecule has activity on a given target. They’re the only company in that space that has a third-party evaluation of their platform. Meaning UC Irvine, University of California chemistry department, were not involved in this with GATC in terms of commercial business, so it’s a third party, sent them ten thousand molecules. Tell us which ones have activity on the target. And they were correct ninety percent of the time, which is far better than many investors in this space in predicting activity on target. So they’re the in silico exclusive underwriter for MCI Lloyds on this product, which means if you’re an equity investor and you use this insurance, there’s two benefits. One is the downward protection, financial downward protection. The second is if you’re insured, you have raised your probability of success essentially through the Lloyds or MCI underwriting of the molecule. So higher return at lower risk, which is unusual in finance.
Mel Whittington: Right. And that’s, you know, a lot of problem that we’re always intending to solve is how do we reduce risk. And this sounds like it does that in two ways. One, through the insurance mechanism and then through the underwriting with, you know, AI enabled underwriting. So, the premium is around thirty percent of the investment.
Tomas Philipson: It has been that for the companies we’ve talked to in terms of binding term sheets for them, essentially. And that’s what we’re shooting for with underwriting capabilities of GATC. But I mean, the insurance itself is an enormous increase in the value of deployed capital. So, if you, if you get, if you don’t lose your money on failures, essentially, it’s the simple way of thinking about it. Deployed capital becomes much more focused on successes. Obviously, you get your money back. If you get cost less your money back, then, you know, if it’s a fifty percent failure chance, that means you double your rate of return on capital because you only deploy when you’re successful, essentially. So, so that, that that’s the real value of this, of basically not losing money when you fail on investments, which are substantial, as you know, in biotech.
Mel Whittington: Yeah. And so, because of that, does this distort any of the incentives and in a way result in investors taking on weaker science because this risk is partially protected or does the AI enabled underwriting alleviate that?
Tomas Philipson: Yeah. No. Exactly. There’s no adverse selection because the GATC is the prime method to avoid adverse selection for insurance, essentially. So, think of a GATC as being the blood test you take for an individual life insurance policy. You rule out essentially information that people are selecting into the life insurance because they have cancer or whatever. You can rule that out with underwriting, and GATC serves a similar or there’s other forms of underwriting not only on the molecule, but also on the trial design, etc., that MCI or Lloyd’s are undertaking. But from the molecule perspective, it’s an information barrier that you have to go through essentially to get the coverage. But that’s a substantial assurance to the investor. Even if some people are more skeptical of AI than others in this space, but certainly the AI will raise your probability of success. It won’t lower it. Once you get the coverage, essentially the question is how much people believe in that delta between the underwriting they would have without AI assistance with underwriting they would have with AI systems.
Mel Whittington: Sure, sure. And you mentioned life insurance in the blood test. Now, life insurance premiums can vary based on, you know, the health of the insured. Is there any, you know, varying of premium based on the underlying risk that could be, you know, informed by this underwriting or is it right now pretty fixed?
Tomas Philipson: Yeah. No, it’s definitely informed by the risk. Certain things are less risky than others, for example. We love to insure biosimilars, because those trials have very low risk essentially compared to other novel ones. But there’s a there’s a risk factor that MCI is obviously confidential, but they are not, you know, charging the same premium to everyone, depending on how risky they perceive the trial to be.
Mel Whittington: And so, what investments would benefit most from this? The AI enabled underwriting is interesting where I could think anybody could benefit from running this through that formula. But what other investments would benefit most from this? Is this like therapeutic areas with, you know, riskier science or less established frameworks, rarer conditions?
Tomas Philipson: I think, I mean, in general, I think if you have downward financial protection, if you obtain the insurance, I should say, there’s an enormous upside on, on, on downward protection financially and improved success through the more rigorous AI underwriting, essentially. So, I think, and they cover a vast amount of disease classes to ensure trials for essentially. They also cover anything from phase one to phase three. What’s more limiting is sort of the budget size of the trial. Anywhere from five million to forty-five million currently is being considered, but they don’t want to do the big phase three of hundreds of millions of dollars because they want to build a portfolio, essentially. We have some large law of large numbers kicking in where some failures are offset successes, etc. and if you have two or three big phase three trials deployed in your capital, that could be sort of a not a very healthy portfolio risk diversification. So initially that’s the case. Hopefully, if this is a successful program, they will go on to the bigger targets of one hundred million dollars phase three trials.
Mel Whittington: Got it. But right now, phase one, phase two is kind of that sweet spot. What are you hearing from investors?
Tomas Philipson: Some face one, you know, rare disease phase three is very small. So it’s more a budget size than the phase.
Mel Whittington: And so, what are you hearing from investors? Is this exciting? Are there reservations?
Tomas Philipson: The first reaction is this is too good to be true. What are you talking about? We don’t believe you. There’s a lot of education that’s going to come in this. I think a lot of VC funds we have talked to are very excited about it because they can lay off, uh, certain parts of the portfolio in the future on this when they think it’s too risky, essentially. But we’re currently involved in, you know, trying to marry the investors that are interested in deploying this, what we believe is a superior use of capital, marrying them with the biotechs who have a hard time getting funding currently in this. It’s a pretty dire space out there now for biotech funding on the private level, essentially. Partly responsible for that is that people are scared, investors are scared by previous failures. And this is sort of getting rid of that fear or de-risking the space by essentially downward protection in AI, preserving a better return on capital. So I think it’s a very prime opportunity for us to come into VC funding in biotech, given the, you know, the risk averseness now of investors, which this can alleviate.
Mel Whittington: You often hear about the clinical risk and now the policy risk in biotech. And I know we’ll talk about the policy risk here in a little bit. So, I’m interested to hear, you know, later on, how this could impact the potential policy uncertainty too. But it’s a good point about the clinical risk and how we can reduce that. So, I guess kind of the bigger picture question is, if this does lower risk, what is society going to get from this? Will this increase the innovation we might be getting?
Tomas Philipson: Yeah, no, that’s the whole goal, right? I mean if this is successful on a large scale, you can bring in much more risk averse investors into biotech. In fact, we’re in discussions with lenders as well. So, you can bring in essentially secure debt into biotech, meaning the lender lends you the ten million dollars for the trial. The company uses the insurance as collateral for the loan, essentially, and if the trial fails, they pay back the trial ten million dollars through the insurance, through Lloyd’s. We don’t have debt in this industry because it’s such a high failure rate. So, default risk are too prohibitive to make the debt available. But this could essentially allow for secure debt market into biotech as well. But that’s a general illustration, I believe. You can increase the capital of much more risk averse investors. Debt investors are much more risk averse than equity ones are. But also, you know, ultimately getting pension funds and other people into biotech investment, which would be an enormous gain in health for the younger population. I’m probably too old for seeing the benefit of that. But, you know, if you’re in your twenties and 30s and 40s, that could be a massive improvement in the available treatments for you once you get a little bit older.
Mel Whittington: Yeah. So, more biotech investment eventually leads to more innovation. And I think realistically, that could also lead to more competition in the marketplace and potentially lower drug prices.
Tomas Philipson: Yeah. No, exactly. Therapeutic competition is very good for drug pricing. We saw that with the GLP-1s that have now been cut in I don’t know how many multiples. And that is similar to many other diseases. Very much reminds me of hepatitis C where Sovaldi came in very high. And then a year later it was cut in half or something. So therapeutic competition many times is very valuable for price competition. So, if you have that coming through, more innovation, a thicker pipeline at FDA, that’s certainly something that would help drug pricing.
Mel Whittington: John O’Brien was on the podcast a couple months ago. And, you know, he often talks about we’re in this kind of golden era of biopharmaceutical innovation. But the way we pay for it has not advanced as much as the innovation that we have seen. And so, we’re stuck in this gap of like, you know, we have these amazing innovations that we want to incentivize and do tremendous things for society over the long term, which we’ll talk about here soon. But then it’s like, how do we pay for these things that are worth, you know, tens and hundreds of thousands of dollars and some a million dollars. And so, this seems to be answering a really interesting gap of like, how is this changing the future of how we are developing and then subsequently rewarding and paying for innovation?
Tomas Philipson: I had a company that I founded that exited in 2015, but we proposed around Sovaldi launch the idea of basically using credit more widely for health care purchases. So, if you buy a house, you don’t buy it on cash, you take out a mortgage and you pay while you benefit from the house over ten or twenty or thirty years. It’s the same with health care. Genetic engineering is sort of the poster child. If you pay for genetic engineering, you benefit your whole life. Why should you pay at the time you purchase it? You should pay throughout your life essentially for the product that benefited you. The credit market issue in health care makes upfront payments so outrageous, even though the benefits many times are much larger than those upfront payments and could more easily be handled by having a credit market, right.
Mel Whittington: It’s more of a, you know, payment reform rather than, um, you know, a pricing reform. So, what are next steps with this? It sounds like this is already happening. I would imagine that to create this insurance pool, you need more people paying these premiums and paying into this. So, what are next steps?
Tomas Philipson: I mean, we’re launching it right now. So, we’re involved with investor groups, banks and companies and lining them up. It’s a lot of activity going on currently. Also, we are potentially starting a fund that will invest in only insured trials ourselves and therefore we believe have much higher superior rate of return on deployed capital because we’re not wasting capital on failures, essentially. And so there’s a string of activities that is ramping up and it’s now finally taking shape. It was a long time coming. It’s hard to develop a new insurance product. It takes a long time. It’s not something you just put on the market next week after you have an idea.
Mel Whittington: That’d be nice.
Tomas Philipson: So, we will see how receptive the market is to this product. But we hope they’re as receptive as we are, and we’re willing to put our money there and start our own fund to show it.
Mel Whittington: How long did it take to build something like this? And is it all possible now because of where we are at with AI, to be able to make that underwriting, make the engine work?
Tomas Philipson: I mean, I wrote a paper for Milken Institute in 2014 or 2015 on using swaps for FDA approval. That was the original idea that I had on this. The fact that I joined the advisory board of GATC health, then sort of a light bulb went up like, wait a minute, here’s the solution to this problem of how are we going to price it in an acceptable way given the high failure rates, etc. So that was a big shift in launching this. You need to get the premium down for people to be interested in. And I think the evolution of AI has made that now feasible.
Mel Whittington: So, if people are interested in this, who do they contact? Do they go to, you know, Lloyd’s of London website?
Tomas Philipson: Yeah. There’s a web page at MCI. They’re the syndicate. The syndicate, number 1902, under MCI that runs this insurance policy. If you Google that, they have a web page about the this particular coverage. They’re sort of the leader in clinical insurance, uh, insurance in general, meaning other forms of liability insurance, if a patient dies during a trial, etc. So, they have been in the clinical trial insurance space for a very long time. And this is sort of a natural extension of their expertise in this area.
Mel Whittington: Understood. Before we switch to policy, is there anything I didn’t ask or anything you want to add?
Tomas Philipson: Uh, no. You can also contact me directly and I can have a discussion for those people who are interested if they want to. I’m not licensed to sell insurance. As a product developer, I can talk about the concepts behind the insurance and what it can do for you, but I’m certainly not licensed to sell insurance, which Acrisure, the sixth largest insurance broker in the world, is the broker for this kind of coverage through Lloyd’s.
Mel Whittington: Very cool, very cool. All right. So, policy. A little bit of a pivot. But not really because I think this all fits into the innovation that we’re getting is remarkable. It’s you know, priced high. And therefore, we’re in these kind of short-term budgetary pressures of how do we pay for these things. And so we’re starting to see a lot of US drug pricing policy and policy proposals. You were former acting chairman of the White House Council of Economic Advisers during the first Trump administration. So, I’ve got to ask you about all of these things going on. Let’s start with IRA. More specifically, the drug price negotiation provisions within IRA. We just kind of wrapped up earnings seasons. You here on earnings calls, management teams say the IRA is being managed. Or maybe you don’t even hear about the IRA on these calls. We see analyses suggest that the drugs selected for negotiation were already headed toward substantial revenue erosion just from generic or biosimilar competition. So maybe the revenue impact is modest. So, there’s like that world happening. But then separately, there is research suggesting there are fewer small molecule clinical trials starts, which makes sense given the different time clocks for negotiation for small molecules versus biologics. We’re seeing fewer post-approval studies. And so, these things are signaling the shift in capital allocation. So how do we reconcile these two different things. And are we underestimating the dynamic effects of the IRA because the near-term revenue impact looks modest or is being managed. But really the long-term innovation incentives underneath the service are changing?
Tomas Philipson: Yeah, I think the foregone health of patients in terms of foregone innovation is the key that people don’t. Certainly, CBO screwed that up dramatically. They claim that five drugs over thirty years would be impacted in terms of lost innovation. Uh, we’re way past that currently with a couple of years on our hand. And we at University of Chicago did a very influential study that pretty much everyone against IRA on the floor in the House and the Senate used, which basically did a very simple calculation. We took CBO’s own number on what the revenue loss would be from IRA. And then we say, what does the large economic literature tell you about the elasticity of R&D? That is to say, how much R&D responds to revenue losses, in terms of a given cut in revenue will give you a certain amount less R&D. We took that literature. We took the average number of about twenty papers in the literature and said, here’s the reduction in R&D that will take place, and therefore, here’s the reduction in new drugs, and that will give you about one hundred and twenty five drugs lost over, I believe, a ten year horizon or similar, roughly twelve, maybe. So, uh, that’s a huge difference between CBO and us, essentially. And then we collect it on earnings calls after IRA was implemented. What companies were saying on these earnings. Public companies only obviously, the effect is multiplied by private investment shrinking. But public companies that basically noted that they’re cutting back due to IRA. And those numbers were larger than our numbers, essentially in terms of per year cutbacks. So, I think it’s going to a have a dramatic effect. Obviously, policymakers are not so affected because it’s unseen, right? It’s not something we can see and measure. We can measure R&D cutbacks, but we can’t measure really what would come out of that R&D if it wasn’t cut back. So, I think it’s a very difficult thing to convince people. It’s also a short-term benefit of budget cuts and relative to a long-term gain of future patients having better health. But it’s clear that, you know, health is so valued. It’s the most valuable thing people have. For most people, they wouldn’t really care about the material life if they didn’t have health to enjoy it, essentially. And so, it’s very valuable that shows up in studies on how much people value health in terms of foregone money they’re willing to give up for, for better health. And so, when you have this innovation that is really the driver of improved health in past health economic studies, and we find people like David Cutler and others have found enormously large share of longevity gains that are due to medical innovation. When you have those things being cut back, it’s a hard battle because it’s so intangible relative to the cut in copay by a thousand dollars this month or something. So, I think that’s a tough battle to fight, but I think it’s a very real battle that nevertheless happens.
Mel Whittington: Well, yeah, and related to that, you also have another paper about the economic value of eliminating cancer, which just the health outcomes and the preference for eliminating cancer is huge. But then the economic value that is created from doing that. And I think your calculations were, you know, nearly two hundred trillion dollars in economic value over several decades. But it does go back to this like short term budgetary or political pressures, where biopharma is often a long-term game where there could be high prices up front. And another thing that’s special about biopharma, besides increasing health, is things go generic or biosimilars enter. And so, when you’re working with policymakers, how do you help them balance this like short term budgetary, political pressure with like, you’ve got to see the long term with biopharma.
Tomas Philipson: I mean, that’s not unique to health, right? We run deficits for a reason in general in government, because politicians have very short horizons. And uh, their kids, not so much, essentially. But I think, I think it’s a general issue that short term gain will win in politics over long term benefits. Not unique to impacts of innovation on price controls, etc. I think it’s strange that this industry is so vilified and maybe that’s a marketing issue of the industry. I mean, it’s almost like they’re cigarettes, cigarettes kill people. These people spend their life trying to extend life as opposed to shorten it. And they’re vilified, especially after Covid. It’s amazing. They basically saved the world. Opened up the world economies around the world through the vaccine development that was, uh, done so quickly, partly, I would say because of Operation Warp Speed, but there was a lot of private initiative by Pfizer and others that were outside that initiative. Uh, but essentially, I think its very puzzling why people are so against it, but it has to do with this fact that some people believe you shouldn’t have profits in health care. That’s, I think, the underlying issue.
Mel Whittington: Well, then we can’t have private capital funding it.
Tomas Philipson: Yeah, no, exactly. So, I mean, my take is whenever you make a biotech billionaire, you have tremendously multiplied the value through his effort. You know, he earns a very small share. It’s estimated about five percent of the value of the product. And you want as many biotech billionaires as you can out there in terms of patient benefits being generated, essentially. So, I think it’s a strange sort of bipartisan view of this industry now as being a villain as opposed to doing one of the most, you know, admirable things you can do, which is trying to help people get rid of their diseases. I mean, what could be more admirable than that kind of activity. I don’t get it.
Mel Whittington: Well, one thing I think the industry could do better is because I hear you. I agree with you. I consider myself a cheerleader for the pharmaceutical industry. I have had loved ones who have had conditions and died from conditions where there was no treatment. Like I’ve seen the devastation that can happen when the industry hasn’t created a solution. So, I’m all in on biopharma, but I think the industry does a pretty poor job talking about the impact, like why their prices are worth it. And, you know, you do a tremendous job putting out, you know, robust and rigorous research on the economic value of doing these things. You have another paper out looking at HIV, GLP-1s, statins and breast cancer treatments, looking at just the economic value created from those innovations. We’ve talked about Sovaldi. Sovaldi might have been priced in the $80,000 range. Now it’s like $12,000. Lou garrison has done a paper where the innovator has received about six percent of its value. And, you know, we don’t even have generics entering yet. But I don’t feel like there’s enough people out there talking about that. And instead, it’s left with high prices that do seem high if you don’t anchor it on like, you know, actually in fourteen years, this price is going to fall off a cliff. And if you consider all the things that it’s doing, this is a bargain. But nobody’s doing that.
Tomas Philipson: I mean, W.H.O. recommended drugs are all generic, right? But they came from patented drugs in the past. So, I mean, the fact that you can have a ten-year window of which, you will have less access to generate a continuous future with mass access. And it’s a lot of, like I said, it’s a lot of price competition. Even during those patent periods. Like I said, we’ve seen recently and many times in the past that therapeutic competition greatly reduces prices within a drug class. So, I think, I mean, I don’t know why people are so myopic, I would say, in their views, given the enormous value, once these things go generic, then you got to obviously compensate for the investors who risk capital. We come back to our previous discussion. This is a very risky business to be in in terms of failures. One hope is that this kind of clinical trial insurance essentially is a guard against a political risk of price controls. Essentially, if you have a massive earnings risk in the future from government intervention, you need less risk in the development pipeline, which is what this clinical trial insurance aims to do as well.
Mel Whittington: We’ve always had clinical risk. Policy risk was lower. As it’s increasing, how can we reduce the clinical risk to kind of net out the risk. So, while we’re talking about policy risk, let’s talk about MFN, the White House Council of Economic Advisers, which you were previously on, they recently released a report on the expected savings from an MFN drug pricing policy. And in the section about newly launched drugs, I think they assumed that, okay, you’d have this convergence of drug prices between the US and ex-US countries, and that would drop US net prices by thirty percent in ten years. But this is really predicated on international price convergence. So do you find that realistic and I’m assuming no. And if so like what happens next. Just narrower global access and compulsory licensing pressures.
Tomas Philipson: I think MFN is more dangerous to innovation and incentives than IRA was. The reason is because MFN hits at the beginning of the product cycle, it comes in directly when you enter the market. IRA is at the end of the product cycle. So, if you look at net present values guiding R&D investments, that is not so harmful. That is to say, IRA relative to the whole product life cycle, being forced down in prices tied to foreign countries. I also believe that MFN will ultimately, if it is implemented as prescribed, will have very little effect on U.S. prices and actually increase free riding as opposed to decrease free riding. The reason it’s not going to have effect on U.S. prices is, of course, that U.S. is about seventy percent of world global earnings in biopharma. You’re probably going to get sued by your shareholders if you come down with your U.S. price down to foreign prices, essentially. And so, they will not sacrifice their earnings in the U.S. Take Canada. There are about five percent of sales in the U.S. You’re not going to accommodate a Canadian price to jeopardize the margins and larger volume in the U.S., essentially. So, I think it’s going to have very limited effect on U.S. prices. And if that’s the case, you’re asking foreign countries to come up to U.S. prices. They may not be willing to do that. Certainly, they haven’t in the past, obviously. And if they’re not willing to do that, they will either walk or they will compulsory license your drug because you’re not willing to sell it to them, essentially. And in either case, you get more free riding being accomplished because then US pays all innovator returns, as opposed to now where the foreign countries pay some innovator returns, even though it’s smaller than it should be now. MFN in general, this is an important point. US is already the most favored nation for public drug pricing, because if you look at the average prescription in the US, it’s cheaper than abroad. And if you say that people think you’re crazy.
Mel Whittington: But across the life cycle.
Tomas Philipson: No, it’s basically because ninety three percent of prescriptions in the US are generic, and generic prices in the US are about half abroad. So, the ones we’re talking about are seven percent of prescription brand prices, which are about three or four times as expensive in the US as abroad, on average. So you have ninety three percent of prescriptions that are cheaper. In the US, half the price. You have seven percent of prescriptions that are more expensive, three or four times. In the U.S., on average, or even if you take deciles, the seventy five percent decile, the median, whatever you have is cheaper therefore than abroad. And so that is just recognizing that U.S. has a much healthier balance with Hatch-Waxman basically increasing generic competition dramatically, therefore having a higher generic competition much quicker, much larger price drops when generics come in and therefore much larger volume because they are so much cheaper relative to other countries. Some European countries that only have like seventy percent of their prescriptions as generics. The generics are twice or more expensive if you look in Spain, for example, than the US market, essentially. This is the interesting part in trade negotiations. I have argued that US should be doing exactly what they did with the UK. They can actually rebalance their spending by taking away from generics to brands, and they could overall spend less on drugs and promote more innovation by doing that, essentially. Which also sounds counterintuitive, but I think that’s the way to go with these agreements is bilateral trade agreements with the US obviously have a lot more leverage when we do bilaterally than multilateral, because then we’re swamping the other countries in terms of bargaining power and then increased GDP share for them on innovative medicines. But we can do that at the same time while lowering their overall drug spend. By arguing that they should have more of a Hatch-Waxman framework where generics are more freely competing.
Mel Whittington: Got it. So even an increase in branded drug spending may not translate to an increase in total drug spending. If adopting things like Hatch-Waxman. Quick access for generics and getting those prices to drop quicker and steeper. So, is that the better policy? If the Inflation Reduction Act and MFN weaken innovation incentives, what is a better policy? I’ve read your work on the NATO style approach to drug pricing. Is that the future?
Tomas Philipson: Provide any global public good. If you take defense in terms of NATO, or if you take the global public good or providing innovative returns for innovation by governments, it’s a little unique here. This market is run by government. It’s not run by individual buyers like cars or whatever. Right? So, governments are who are buyers here. And it’s very easy to understand why a small European government imposes price controls. Because they’re a tiny share of the global market, which drives innovation. You can shut down I have always argued UK you could shut down the whole country. Nothing would happen to medical innovation in the world. They are about two percent of global sales in medical products essentially. So NICE is influential at UK because they are basically imposing price control with cost effectiveness thresholds. And they do that because there’s no impact on the flow of products coming into the country. When they impose lower prices, there’s only a benefit of lower prices. There’s no innovation, negative effect of lower prices. Essentially, if U.S. did that, it would dramatically lower the new innovations coming into the not only the US but the whole world, essentially. So it’s easy to understand why they’re doing it. It’s classic free riding, essentially, just as NATO would be if you want to rely on other people’s defense to defend you. In providing global returns to innovation is also a global public good, and therefore you need some kind of agreements on what share of GDP you’re spending on providing global, innovative return. If you’re going to solve this problem. Leaving countries to their own, we see they do what’s rational for them, which is, you know, massively, unilaterally, basically constraining prices because they’re not taking any innovation hit essentially from doing that individually.
Mel Whittington: But I do fear that the influence of NICE is what gets us into things like MFN conversations and people in the US starting to question whether their drug prices are worth it. If there are other countries that get a better deal and are very explicitly talking about impacts and saying, well, this does seem reasonable if you’re thinking about just health system costs and quality adjusted life years and you know, this is the price, why is our price different? And so, I do think their influence could be kind of across the pond as well. And that could be harmful for the US’s engine and biopharma innovation. I’ve been surprised how many people in my pharmacoeconomic circles now support a NICE version in the US. And they typically respond to that as like, well, it’s a less bad alternative to MFN. And I’m like, I don’t know if that’s a way to look for things. It’s like the less bad version. Um, I build cost effectiveness analyses all of the time. I’m a pharmacoeconomist. I love building cost effectiveness analyses. I certainly don’t think they should be unilaterally used to set a price. I think they’re very good tools to inform, you know, what are the long-term costs and outcomes of these things. But value is very different from like, well, this is the optimal price to the innovator and how much we should reward them for their innovation. Um, you know, cost effectiveness analyses don’t consider population size, which is clearly an important factor in um, pricing and investment decisions. They don’t consider unmet need. You know, if a condition is really, really difficult to treat with super high clinical risk, the reward has to be commensurate with that. Um, and so I personally don’t think that the cost effectiveness analysis methods are sophisticated or robust enough to be able to translate to this is what the price needs to be in the US, given that the US is this engine for biopharma innovation. And so, you know, I want to hear from you. Do you think HTA methods adequately capture the incentives needed for innovation? And are you hearing talks of, you know, the importance of HTA as a less bad alternative to MFN in the US?
Tomas Philipson: A couple of remarks there. One is it’s clearly the cost effectiveness threshold used in Europe and Nice and other places is clearly just another name for a price control. A price ceiling, essentially. Right. So, the important point is that what emerges as the cost effectiveness of innovations is endogenous to that control, right? So, if you set a control of thirty thousand pounds per QALY, you know, guess what’s going to happen. The company is going to price up to thirty thousand pounds per QALY. That’s what’s going to happen. So, it’s not like you’re selecting cost effective treatments over less cost-effective treatments. Oh look, we’re selecting these cheap ones over the expensive ones. No, they will just use that in setting their price essentially. And therefore, it becomes an endogenous level of cost effectiveness dependent on the policy, not something where they’re sorting through bad and good, cost effective and not cost-effective investments for the NHS in the UK, for example. So that’s one aspect of it. It doesn’t serve the purpose of what it claims to serve, essentially because of endogenous pricing around those thresholds. And the second is that if you look at what they use as the value of a QALY, I would be fine if they just triple or quadruple, whatever that value was. And to reflect the science, the UK in particular, and I pushed the white House on this, and that actually came through in the UK trade agreement, have held that the QALY is the same for the last twenty years. And not even inflation adjusted. So, the value of life has gone down dramatically even though we’re getting richer and richer. So basically, it’s just a cost control method. It’s a price control in disguise. You can talk about it being scientific. It’s not essentially, it doesn’t reflect. Now you go to the scientific literature and on top of it you go to US federal agencies outside HHS. They will value a life year by about half a million dollars. Okay. EPA wants a very high value of life because then all the green regulations has enormous future benefits in health. Okay. So same with the Department of Transportation. They want a very high value of health because any kind of highway mortality their regulations prevent shows this enormously beneficial. We took an average across all the departments in the executive branch. And it’s about a half a million bucks per life year, essentially. So that’s ten times or more what they’re using at NICE, essentially. And also, five times as more than what they’re using in private institutions like ICER in the US, essentially, which is the back door analysis to the new pricing center at CMS, essentially. We are not allowed to use cost effectiveness, obviously in public programs in the US. But the back door. How do you set these prices in the new price control center at CMS? Well, you go to ICER and say, what did you guys think in terms of the price? How valuable this was essentially. So, it becomes a back door to using cost effectiveness analysis for public reimbursement in the US, where the back door is valuing at about a fifth or less of what the rest of the government values held. So the bottom line is if the private sector generates health is valued a fifth of when the government produces better health. So that’s a little off, I think. And I’ve written about that problem.
Mel Whittington: I think to me, it just shows how the evidence is not strong and what threshold we should be using, whether you know, how that should vary country to country, what we should be using in the US, how that varies based on population size or unmet need. And, um, you know, I think that the field of pharmacoeconomics tries to stick to this single or relatively narrow threshold band. And there’s a lot of uncertainty around that and what it should be. And the challenge is it can have really big implications, you know, like, uh, this is, this is, you know, sending signals of what innovation we are going to reward and, you know, determining future innovation. Um, I’ve probably already held you longer than I was supposed to. I do want to close. This was so good. I could talk to you for hours, but maybe just a final question to close. What do you think investors and biopharma execs misunderstand right now about the implications of US drug pricing policy?
Tomas Philipson: The policy landscape has become, from one party being pro-industry, helping patients, to both parties being against the industry. It sounds like at least that’s the rhetoric that’s currently in place. I think that has to change going forward. I think people have to realize the benefit that comes out of this industry is enormous relative to some other industries, and that we need to sort of prevent a collapse in R&D, which would occur if policy essentially restrained U.S. pricing similarly to other countries. I think that would be a tragedy for the health of our nation. And I think it’s very shortsighted and myopic of government officials, whether in Congress, Senate or the White House, if they hold that view.
Mel Whittington: Understood. Well, thank you so much, Dr. Philipson, and this was a pleasure.
Thank you for listening to this episode of Perspectives. If you’re interested in participating in future podcasts or would like to learn more about the Leerink Center for Pharmacoeconomics, please email cpe@medacorp.com.
