Upon perusing through The Atlantic, I came across an article accompanied by the following eye-opening graphic (see above). Entitled “Why Are College Textbooks So Absurdly Expensive?”, I was reminded of the frequent exhortation during my college days when each semester’s textbook list scorched through pockets for every last dime. It seemed like every class required an epic hardcover tome containing pages upon pages of monotone prose, colorful graphics, tangential sidebars and cartoon clouds pointing to the “important” stuff (because of course, a lot of “unimportant” content was needed to set the context or simply fill the pages). These textbooks would sometimes be shrink-wrapped with a paperback study guide and/or a solutions manual which naturally only contained solutions to the odd-numbered problems that were not divisible by 3. I can go on but you get the point.
The graphic above pours from the research of University of Michigan Economics professor Mark Perry who has devoted attention to tracking historical textbook prices over at the American Enterprise Institute. The chart shows that since 1978, the cost of college textbooks have risen by an incredible 812% as captured in the Bureau of Labor Statistics’s consumer price index data. Prof. Perry recently commented:
The 812% increase in the price of college textbooks since 1978 makes the run-up in house prices and housing bubble (and subsequent crash) in the 2000s seem rather inconsequential, and the nine-fold increase in textbook prices also dwarfs the increase in the cost of medical services over the last three decades.
The typical college student encounters many of the factors that contribute to this dynamics. Most students enrolling in courses generally want the textbooks that are listed as required on the syllabus to make sure they have access to the homework or review questions and also with the paranoia that a teacher will extract a seemingly insignificant detail and put it on the exams. Most students buy them without any hesitation about the cost since hey – much more is already spent on tuition and room & board so what is another $300 down the chute for a textbook? As cost becomes an issue, students will try to purchase second-hand copies or e-versions of the text, and in dire circumstances, they will borrow from the school library or mooch off a paying classmate.
So where are the parallels with pharma? Let me count the ways…
1. The high cost of development
Academic publishers often recite how the “modern” textbook is a massive, resource-intensive, capital-risk undertaking that requires multiple inputs from academic experts, illustrators, graphic designers, editors, etc. Such incredible efforts surely demands high prices. And added onto that, having the authorship of a highly influential academic should command a higher premium. This was the argument of publisher Cengage when they filed suit against an online site compiling academic content, claiming “The Research Papers in Economics project has ranked Dr. Mankiw as the 25th most influential economist in the world based on his academic contributions.” Of course, this was only for a rudimentary intro-level microeconomics textbook, and not some specialized academic work that you may have expected. Indeed, putting together a comprehensive and cohesive textbook is no easy task, and having the backing of academia’s most respected scholars should mean something, but one must consider to what extent this should justify ever-rising prices.
The pharma industry also invokes the enormous cost of research and development for innovation as the guiding principle for hefty profit margins and monopoly protections (more on monopoly protections later). The most frequently cited figure is the $802 million price tag for developing a new drug (or new molecular entity) estimated by Joseph DiMasi and his group at the Tufts Center for the Study of Drug Development. This figure has been challenged as being either too high (Slate calculates closer to $40 million) and even too low (Matt Herper at Forbes pushes closer to $4 billion for big pharma). While the precise cost continues to be argued, but it’s no surprise that drug development is an expensive endeavor if one were to simply think about the cost of clinical trials and how many drugs fail at each development stage.
But while high development cost continues to serve as the foundational logic for high pricing, the more realistic assessment is that companies simply charge what the market is willing to bear. Price high enough and people will stop buying. The next two points describe how the market can bear these high prices.
2. Prescribers are not the ultimate payers
While students ultimately purchase the textbooks, college professors and instructors are the ones that ultimately make the decision to include a textbook as required material for a course. James Koch, professor at Old Dominion University, wrote his opinion piece that “several studies indicate that most professors don’t even know the cost of the textbooks they recommend, or that this is a minor factor in their choices.” In my experience, only a few professors expressed sensitivity to cost when choosing textbooks.
In healthcare, patients cannot prescribe drugs for themselves; doctors and nurse practitioners generally do the prescribing based on their diagnosis of a patient and assessment of their medical needs. Doctors do no bear the burden of the cost of prescription drugs; patients do. And this disconnect between the prescriber and the end-consumer makes the decision of which drugs to use virtually independent of price. Of course, even patients don’t pay the full price of the drugs when they have insurance, so another layer of disconnect makes the decision to prescribe drugs even one more degree removed from the health insurers who pay for the drugs. (Naturally, health insurers design plans with formularies, copays, coinsurance and even prior authorizations to bridge the disconnect between the prescribing and the buying of these expensive drugs.)
3. Inelastic consumer demand
Given that college professors are the decision-makers, when they do select a textbook, students then naturally rush to the bookstores or Amazon to purchase it. If they choose not to include a textbook or simply designate it as optional, students will generally not purchase the textbook. Nobody is forcing students to purchase a course textbook, but it’s either a reflex of being a student or the easy-route common-sense decision to ensure access to all the relevant material in the course. And also there are those ramifications that you may not have access to important readings or assignment problems and that you may miss out on exam material that may be found in the textbook and not necessarily in other reference sources. Students can seek more cost-effective ways to gain access to the relevant material but it may take considerable work and effort, or the patch solution may bring about too much inconveniences.
In healthcare, the stakes for not taking one’s medications are presumably higher, being to the detriment of the patient’s health status. Patients are never completely compliant with their medications as they often skip a dose, an entire course of treatment or even drop out of drug therapy altogether, but the degree of compliance is often correlated with the severity of not taking the medication. There are indeed cost sensitivities that may lead patients to have lower compliance or even request for cheaper alternatives, but patients generally need some form of treatment one way or another, and will often purchase the drugs they need, even if it’s just the minimum adherence that they can get by with.
So what are some other quirks or distinguishing features of the textbook industry and pharma alike?
4. Intellectual property protection
Intellectual property protection is often necessary and present in many industries, but they are particularly impactful in the textbook industry and pharma. While knowledge is generally free and open, there are different and unique ways knowledge can be presented and consolidated that allow academic publishers to place strong copyrights on their work. But the extent to which publishers claim copyright protections have bordered on ludicrous. Kevin Carey at Slate describes an example in which several large publishers sued a website owned by Boundless which essentially “curates” open educational resources on the web into an organized dashboard that could serve as “replacement textbooks”. These publishers are not claiming that open education resources plagiarize their textbook material, but they do argue that “order of chapters is sacrosanct” and that the finished product may be in violation of copyright claims. Other accusations raised by publishers can be found here.
In the pharma industry, the notion of intellectual property protection is captured both in strong patents (20 years monopoly) and also through marketing exclusivities enforced by the FDA, the regulatory body that approves drugs on the market. Patents grant drug companies a monopoly to market their drugs, which generally lasts between 5-8 years based on how quickly companies navigate their drugs from the lab to the clinic. Patents are not only issued for the chemical composition of their drug (“composition of matter patent”) but can also gain patents for formulation and use in different indications. Drug companies aggressively defend patents on their drugs and actively seek ways to develop additional patents for their drugs. The additional marketing exclusivities afforded by the FDA for new molecular entities (5 years), new formulations or indications (3 years) or pediatric studies (6 months) are often additional legal padding, unless of course the drug patent has already run out.
5. Innovation-driven costs & “evergreening”
In many industries, technical innovation certainly does draw a pricing premium due to the added value it provides, but innovation has also substantially brought down the costs of certain goods – just think about the cost differential between the earliest computers (>$100,000 for a supercomputer) and the computers available today ($200 for a netbook). Some would say that with innovation in digital media that has made access to information more flexible and diverse, the cost of textbooks should decrease. But Kevin Carey observed that the textbook industry has not only insulated itself from this trend but also exploited it for additional price premiums:
Yet the college textbook industry has not only managed to insulate itself from this trend—it has moved in the opposite direction, using digital content as a way to charge more money. Add-on software gets packaged with physical textbooks and often has an expiration date, undermining the resale market for books.
Additional modifications that publishers have made to drive commercial value include coming out with new textbook editions that may have no substantive changes in content and only cosmetic changes to formats, color palettes and the ordering of questions and problems. Students often reluctantly buy these new editions and forego cheaper second-hand copies because of the inconvenience of re-mapping content sections and assigned homework problems and the paranoia that even small changes in text content and examples will hurt them in exams.
In the pharma industry, innovations are almost always associated with price increases in comparison to existing competitors. Even me-too drugs often tend to launch at a premium (albeit small) to the first-to-market drug. The only dynamic that remarkably decreases drug prices is the loss of patent protection and the accompanying launch of generic versions of the drug. To avoid the dreaded loss of market exclusivity, drug companies often resort to incremental “innovations” such as changing the formulation to an extended-release version or making chemical modifications that only slightly but noticeably change the efficacy-safety profile. The pejorative term for this kind of life-cycle preserving strategy is called “evergreening” and drug companies always pursue various ways to prevent generic competition from eroding their revenue streams.
So now what?
To draw a parallel between the textbook industry and pharma is an informative intellectual exercise. The lessons of one industry may not necessarily help us solve the issues of the other, but we should not dismiss the practical outcomes that can result from understanding the parallels that do exist. What these “practical outcomes” are could surely be the topic of another blog posting, and we will soon see if it is. It’s worth simply chewing on this comparison in the meantime.
Filed under: Drug Development, Drug Marketing Tagged: college textbooks, drug pricing, healthcare costs
