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All opinions are my own.

Monday, June 1, 2009

Process of Continuous Improvement and Pharmaceuticals

In every industry, “process of continuous improvement” is a religion as it improves their profitability. A recent article "Drug CEOs Switch Tactics on Reform" in The Wall Street Journal discusses new strategies being developed by the Pharmaceutical companies. Pharmaceutical CEO’s believe that the drug costs do not contribute to the high health-care costs. The following points are mentioned in the article.

  1. Prescription drugs account for "just about 10% of the overall (health care) cost".

  2. Reforms shouldn't force doctors and patients to choose a drug based on cost if the more expensive treatment would have a better outcome.

  3. The drug makers have been pushing through hefty price increases. Prices for many drugs were up more than 15% in the first quarter from a year earlier, according to data from Credit Suisse.

  4. Drug industry executives are worried about Medicare’s authority to negotiate the prices for drugs dispensed through its Part D benefit. That could limit the prices pharmaceutical companies can charge.

  5. Pharmaceutical executives argue that such steps (negotiated drug prices) would hamper drug makers' ability to pay for costly research into new treatments. "It would knock our legs out".

If the health-care costs are to be reduced, it has to be full court press on every element of the costs and that includes drug costs. Drug costs cannot and should not be excluded even if they are small part of the overall costs. The pharmaceutical companies should make any effort to lower drug prices as part of their continuous business improvement process. Point #5 suggests that the drug companies want to fund the development of new drugs through raising drug prices only. If an effort is made to improve their R&D methods and manufacturing technologies, which is definitely feasible and possible, the pharmaceutical companies will not only have more funds to develop new drugs will also have higher profits.

It is well known that the current drug manufacturing technologies and methods are inefficient. Effort needs to be made to improve the manufacturing technologies. Improvement in API and drug formulation yield e.g. from 60% to 90% might not seem to be major improvement in the cost but every dollar saved adds up. These savings might be in billions of Dollars or Euros and will be more than sufficient to pay for new drug research and development.

We all need to work together to reduce healthcare costs rather than saying problem is some place else. Suggesting that the problem is elsewhere is an indirect acknowledgment by the pharmaceutical industry that we do not believe in “process of continuous improvement” thereby cannot reduce drug costs. With the effort being made by every government to reduce health care costs, I hope the pharmaceutical companies are not saying that we have no room for such improvements and “do not tread on me.”

Based on the fundamentals taught in engineering schools, every student will say that the current manufacturing methods can be improved. The real question is why such effort has not been made and what is blocking the path of “continuous improvement”. It is well known that if manufacturing methods are improved, they will improve profit margins to levels that are much higher than the current levels and some of the savings can be passed on to the customers to make it a win-win.

Question is “can and/or should an effort to reduce drug costs be made?” The answer is we should and if someone says it cannot be done then the question is why not.

Girish Malhotra, PE

President, EPCOT International

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