[ applause ] thank you very much for that, pat. That was very inspiring to think about health as being much bigger than health kcare and trying to find the solutions to get us there. Now we are going to turn to avic roy who has just returned from his money moon. Hes the opinion editor at forbes. He has an interesting back glund includes both medicine and finance. Hes a leading conservative change agent and a sought after president ial campaign advisor. Hes currently advising senator marco rubio and has previously advised rick perry and mitt romney. Hes the principal author of the apothecary, the influential forbes blogs. And he also serves on the Advisory Board. Join me in welcoming avik roy. [ applause ] thanks, nancy, and let me just second what you just said there. Its i really enjoyed what andrew and pat had to say. I think its inspiring to see some people focused on improving the quality of the delivery of care. Its been a tough problem, as you all know, and its been actually difficult to prove in many cases that Health Insurance improves Health Outcomes and the great work you are doing is starting to move the needle on that. Im going to talk about a slightly different issue which is the high price of Prescription Drugs. I know this has been a concern for many of you for decades. And what i want to argue today is that i think one of the challenges with tackling the problem of the high price of Prescription Drugs has been its been seen as an ideological or partisan issue. And what i want to argue today is that it shouldnt be. That its actually extremely important for both parties to put their Heads Together and think about ways to tackle this very important problem. As i was mentioning, its been sometimes difficult to prove that expanding coverage improves health, believe it or not. But what is incontra verdictable is that innovation in Prescription Drugs does improve health. Just take the class of cholesterol lowering drugs called statins. Theyve dramatically improved life spans and health and reduced incidents of heart attack and other cardiovascular events. At a traction of what we spend on conventional Health Coverage. So the more we can do to expand pharmaceutical innovation at an affordable price will make a huge different in both the quality and the cost and the access to Quality Health care that all americans can achieve. I should make the disclosure, as nancy mentioned, im advising senator rubio and his president ial campaign. These are my views only. Please do not associate these views with the senator. He would get very mad at me if you did that. [ laughter ] there are two flawed theories might not be the right word, maybe its oversimplifications. There are two oversimplificati n oversimplifications that have dominated the debate about Prescription Drug pricing in the United States. The first is that its all about greed. That the reason why Prescription Drugs are so expensive because these forprofit Drug Companies are greedy capitalists and theyre basically exploding the fact that we dont have price controls and other government measures to prevent profiteering for Prescription Drugs and, of course, the poster child for this now is martin skriel who increased the price of an old drug used to treat toxoplasmosis. But heres the thing thats important think about is that if greed is the reason why Prescription Drugs are so expensive, well, Car Companies are theoretically greedy, too, right . They have a profit motive. Tv companies have a profit motive. What makes them less greedy or more greedy than Drug Companies . Why do we not need price controls for High Definition televisions. We dont seem to need that even though theyre just as motivated by the profit motive as any other drug company. And why is it drug prices have gone up so much every year . Has there been an increase in greed by 14 a year or is it perhaps that there are other economic factors at play . This is something thats very important to understand. Weve been talking a lot in the last 12 months and the reason why drug pricing has been in the news over the last 12 months has been the new drugs new treatments for hepatitisc and you can see that dark blue ban on the right most bar there. Thats the increase in Prescription Drug spending last year due to new drugs and thats mostly hepatitisc and multiple sclerosis drugs. But the light blue band is the important one which is price increases for drugs that have been on the market. Often in cases often that these drugs have been on the market for five, ten years. And thats a bigger driverover what we spend on branded Prescription Drugs than these innovative drugs. Its the older drugs where Drug Companies where choosing to charge more. The touring pharmaceuticals example is an egregious one but its a very common practice for Drug Companies to raise prices of drugs that have been on the market for many years. Now the other theory that you hear a slot that innovation is expensive and that thats why we have to charge what we charge in the United States for Prescription Drug and Mark Zuckerberg is laughing at that theory because as you know his product doesnt cost anything at least for you to use it as a user. As someone who joins the facebook social network. Google Search Engine costs zero to use. Those two companies dont argue that, well, i have to charge you a thousand dollars to use my Search Engine otherwise i wouldnt Fund Innovation. Youll never hear google say that. Youll never hear facebook say we need to charge a thousand dollars a month for you to use our social network otherwise we wouldnt be able to innovate. So why is it pharmaceutical companies and biotechnology Companies Argue that high prices are necessary to Fund Innovation . In fact, in most sectors of the economy its low prices that drive innovation. Clayton christian son, the professor at Harvard Business school who wrote a whole book about this called Disruptive Innovation, his point is that most innovation happens at the bottom of the price scale. When japanese Car Companies dime the United States they didnt compete in the luxury market. They competed for the most affordable cars, the honda civics. And as they gained market share they moved up the price chain and now they make acuras and incindys and lexuses and dominate those markets, too. But they first found out how to deliver a highquality reliable car at a low price and then moved up the value. Why is it that thats not happening as much in pharmaceuticals. Lets take another case. I mentioned google and facebook. You can say those are internet companies, thats software, those arent physical products. Maybe thats somehow different. What about apple . App apples products are not cheap, as we all know. Theyre Premium Smart phones. They cost more than the typical smart phone. How has pricing with apple products evolved over time compared to description drugs . Its hard to imagine and hard to believe but the first iphone is only eight years ago, it was launched only eight years ago. The iphone 1 we can call it now had eight gigs of memory. It has a 320 x 480 screen. Lets not get into microprocessor, theyre slower than the ones we have today and it cost 599 when it was first launched. The most recent yes mere iphone launched this year is the iphone 6 s plus. It has 128 gigs of memory. So thats 16 times the amount. It has a screen thats 13. 5 times the resolution and on inflation adjusted basis costs 27 less than the original iphone. So i bring this up to say when was the last time you heard of a new drug because we talk a lot about innovative pharmaceuticals. When was the last time you heard of a new drug that improved Health Outcomes by 16 times and cost 27 less than the prior standard of care . By that standard, the pharmaceutical industry has failed to deliver value and innovation in a scale that were accustomed to seeing and expect from the Retail Technology industry. Heres an example that i stole from one of my forbes colleagues peter bach whos a cardiologist at memorial sloankettering. He was talking about gleevec which was launched in 2001 and was the harbinger of the revolution we experience routinely where weve identified a molecular target for a disease and designed a drug that targets that molecular defect and in the case of gleevec cures chronic my lodges now leukemia. The price of a gleevec this year the patent expired in the United States earlier this year but at the end of its patent life novartis was charging more than double for gleevec what it was charging when the drug was launched and thats despite the fact that two other similar drugs launched were approved by the fda over that 15year time frame, 14year time frame, including a drug manufactured by novartis. And so what has happened historically is that Drug Companies will say, you know what . Im going raise the price of my older drug because and make my newer drug less expensive that way insurers have incentive to cover the newer drug and move people off the older drug because theyll save money and then when the older drug goes off patent everybody is on the new drug and companies have been using that technique, Drug Companies have been, to extend the lives of their branded pharmaceutical franchises. And thats perfectly legal. Insurance companies are going along with that or at least have historically. But thats one of the reasons why you see these older drugs, the prices go up over time. And think about that again. Imagine if apple said the ipod from 2001, they were going to charge 2. 5 times for that today than they did in 2001. Wed think they were crazy. If samsung did that with High Definition televisions wed think they were crazy but this is what happens in the pharmaceutical industry. So this isnt because of greed, i would argue. Its not because of innovation or the need to Fund Innovation. Its actually because federal policies have distorted the way we pay for and use Prescription Drugs in such a way that those conventions of, say, the Technology Industry dont apply to Prescription Drugs. One thing thats actually the most important thing to point out i think is this is not merely a matter of affordability, description drugs, for people who need the them. Its also a fiscal problem. We spend 2 trillion a year in terms of Government Spending on Prescription Drugs and a big part of the reason why is because we subsidize as many of you know, if not all of you, the cost of Health Coverage for so many americans. We subsidize it through medicaid and medicare but also tax exclusion for employersponsored Health Insurance the value of which is just as large as what we spend on medicaid and almost as large as what we spend on medicare. So if you include the lost revenue to federal state and local governments to the employer tax exclusion and add that on to what we spend on medicaid, medicare and the aca exchanges, were talking about nearly 2 trillion of subsidies for Health Insurance every year. So is it any surprise that providers of health care services, including Prescription Drug manufacturers, charge a lot for their services knowing that the consumer is insulated from the price and value of those services and products . This is the cbos projection of future federal spending and ive simplified their data into two buckets, health care and everything else. So the blue bar is defense, bridges to nowhere, unemployment benefits, whatever you like or dont like about the federal budget and the red is health care. Except for, of course, interest on the federal debt so well never get to 2050 on this chart because china will pull the credit card and we will face a pretty significant financial and economic crisis. And Prescription Drugs are a part of that problem and it cant be avoided. Is so the point i want to make to my republican friends this room, i think there has been this unstated assumption and sometimes explicitly stated assumption that we shouldnt mess with the way we pay for Prescription Drugs in america. The way we do it today is perfectly fine, its a free market capitalist system. Its not. Its not a free market system when a tenyearold drug costs 2. 5 times as much today than it did 15 years ago. When it doesnt actually increase the value to the patient. Thats not how free markets work. Free markets work by delivering better products at a lower price with more quality over time. Thats what a truly innovative industry does. And we should be holding the pharmaceutical and Biotechnology Industries to that standard. What are the biggest reasons why we dont a free market in pharmaceutical drugs spending today . One of the biggest as i mentioned is that we dont pay for this stuff directly thats the biggest driver of innovation in most other sectors. Consumers want affordable products, they demand affordable products, when products arent affordable they dont buy them so companies have an incentive, a huge economic incentive to deliver those products at a lower price point with more quality one thing we dont talk about you have . A regulatory mandate within the aca which i worry will be a precedent for the Broader Health care system which is that the aca actually requires that Insurance Companies in the aca exchanges cover branded drugs regardless of whether theyre more effective than generic alternatives. For every pharmaceutical class aca Insurance Products are required to at least cover one branded drug. Now, there may be cases where theres entirely appropriate. But there may be cases where its not appropriate where the generic alternatives are just as good if not better for a fraction of the insurers dont have the option to lower premiums and make them more affordable by rationalizing their formularies where they should. Another problem is that even if Insurance Companies try to use things like deductibles and copays to incentivize patients to choose generic drugs over more expensive branded alternatives, pharmaceutical companies will often say hey, well have patient assistance programs where we will cover the copay and deductible. So the patient doesnt have to worry about it. For the drug company thats a winwin because the patient gets on the drug which makes them far more money than whatever theyre paying for copay and obviously it looks good to be able to help people for drugs that they otherwise wouldnt be able to afford so it seems nice but the end result is theres a lot of utilization of branded drugs where its not always obvious the clinical value is there. Where it is, great, but it isnt always. The second very, very important area is, of course, that its extremely difficult to develop Innovative New drugs. The fda has gradually layered on more and more requirements to the point where it now costs according to Tufts University an average of 2. 6 billion to launch a new drug if you incorporate all the times drugs fail in development for every one that succeeds. Theres also the fact of course there are patents. The patent extends on average about ten years after the fda approves your drug and thats a monopoly. Thats okay. The constitution provides for that. Thats meant to be a reward for innovation. Thats a totally appropriate way to restrict competition in the short term but it does mean far period of the patent life, for the monopoly, there is a monopoly a and this can be a barrier to competition because its difficult to develop new drugs. Where the free market is allowed to work in the pharmaceutical industry it actually works very well. One thing we dont spend enough time thinking about and talking about is the fact that for all the complaints about the high price of branded Prescription Drugs, the United States leads the world in the percentage of prescriptions that are actually generic because of a visionary law passed in 1984 by representative waxman and senator hatch Drug Companies in the United States, generic Drug Companies in the United States have much broader access to the patient pool once a drug goes off patent. So when the statin drugs i was mentioning before, the cholesterol lowering drugs went off patent like zocor and lipitor, generic drugs came in and took over