What Healthcare Can Learn from Netflix

Watching Arrested Development with my kids, my mind started to wander after the eighth episode or so. How can Netflix let us gorge ourselves on so much television and – if it makes business sense – are there any lessons for the health care industry? The surprising answer turns out be yes, and it has to do with drugs.

Some background is needed. Despite the modest contribution of pharmaceuticals to overall health care spending, rising prices have raised concerns about access to life-saving drugs. The most important consequence of this trend may be the dramatic increase in patient out-of-pocket spending, and how it affects adherence.

The health community has been worried about high out-of-pocket costs for awhile. Physicians often distribute free samples to patients with financial need. Pill splitting – wherein patients divide higher dose tablets to avoid expensive co-payments – is common. Illinois’ Medicaid program even required the practice at one point. But pill splitting entails risks and is not possible for all drugs – especially extended release formulations.

The fundamental public health problem is that high prices discourage compliance with prescribed regimens. And this poor compliance worsens health outcomes through uncontrolled hypertension, high cholesterol, untreated psychiatric illness, and resistant bacterial infections – just to name a few. Non-compliance also has social costs – particularly because it can reduce productivity and significantly increase medical costs as well.

The most commonly proposed solution is to lower prices, as some prominent physicians argued in the New York Times recently. This is just wrong. Regulating prices works in the short-term, but it will reduce incentives for future pharmaceutical innovation. The evidence on this link between prices today – and innovation tomorrow – is clear. Malaria afflicts 200 million people annually, but there was little innovation to treat the disease. It wasn’t until The Global Fund was set up – with the involvement of the Gates Foundation – that innovation started to appear. R&D for rare diseases is another good example. In the 16 years prior to passage of the US Orphan Drug Act, approximately 34 drugs were approved for rare conditions. Since its passage, 347 drugs treating orphan diseases have emerged. The bottom line is that we have good evidence that price controls harm long-term population health by reducing innovation.

So what can we do? The trick here is to think of drugs as any other consumer good where there are high fixed costs and low marginal costs. Numerous examples surround us: Netflix, internet service, cable and satellite television – even all-you-can-eat buffets. But perhaps the most relevant example is software. Rather than charging us every time we boot our laptops, Microsoft and Apple charge a one-time fee for the use of their operating systems. In each case, consumers pay a fixed fee upfront, after which they pay a very low (or nonexistent) amount for use of the good or service. Because usage fees are lower than they would be if charged on a per-unit basis — the manufacturer makes up for this cost with the license fee — those purchasing the product end up consuming more than they would if prices were higher.

Tomas Philipson, Anupam Jena, Eric Sun, and I have proposed a similar model that would involve licensing drugs, rather than purchasing them. We demonstrate that license fees, when combined with zero or low co-payments, could improve compliance with statin therapy, in the same way that Netflix encourages more viewing. And because increased utilization is beneficial to patients, everyone – patients, health plans and manufacturers – can share some of the added value generated by the licensing model.

The bottom line is that the pharmaceutical and insurance industries could learn a thing or two from Netflix, Microsoft, and Apple.

Post originally published on Linked in