New study says Hepatitis drugs could cost state taxpayers billions

Jaws dropped earlier this year when Gov. Jerry Brown told the Legislature that he wanted to set aside $300 million for two years' worth of specialty drugs for Medi-Cal users, state prisoners and others covered by state health programs. Even with a general fund of more than $110 billion, $300 million is nothing to sneeze at.

This week, a new study suggested that Brown may have been low-balling the cost of those new drugs. By a lot.

The study -- done by the Taylor Feldman Group for the California Assn. of Health Plans -- estimates that the state could face up to $5 billion just for two specialty Hepatitis C drugs in the coming 12 months. Anything close to that number would blow a giant hole in the budget the state adopted, which included only $228 million in extra specialty drug funding.

It's worth remembering that the insurers who paid for the study are desperate to lower the price of these new drugs, which threaten to lead a parade of stratospherically priced specialty meds into the market. And the high up-front costs are offset in some cases by significant savings on treatments that won't have to be performed, such as liver transplants.

As the study points out, though, the near-term budget impact of the drugs could be huge. We the people clearly have an interest in lowering the price of these specialty drugs, especially if they represent the first of many such costly treatments.

If only we could find a good way to do that.

The study relies on a mix of solid data (on Hepititis C infection rates), educated estimates (on the percentage of people with the disease who receive treatment) and guesswork (about the discounts the state may receive from the drug maker). Nevertheless, it makes a couple of points that are hard to argue with.

First is that a lot of Californians -- about 408,000 -- are likely to have Hepatitis C, and more than 40% of this group relies on the state to pay for their treatment. These include low-income residents, state inmates, retired government workers and enrollees in the AIDS Drug Assistance Program.

Second, it notes the sky-high cost for the average non-discounted course of treatment with Sovaldi or Harvoni, the two new drugs by Gilead that have captured 90% of the specialty-drug market for Hepatitis C: $117,000.

How much the state will spend depends in large part on the percentage of people with the disease who receive the drugs, which have thus far been prescribed only to people with advanced Hepatitis C. Using data from health plan pharmacists, the study puts that figure at 10%, although it calculates the results higher and lower percentages too.

Another important factor is how far below the drugs' retail price the state manages to pay. Other large users have been negotiating sizable discounts, including 41% for the Department of Veterans Affairs, the study notes. It runs the numbers for discounts ranging from 0% to 50%.

Assuming a 10% treatment rate and a 30% average discount, the study says the cost to taxpayers will be $1.4 billion in the coming 12 months. That number could be as low as $512 million (with a 5% treatment rate and a 50% discount) and as high as $5.1 billion (with a 25% treatment rate and no discount).

That's a lot of money not spent on other priorities, whether it be child care subsidies for low-income parents, repairs to aging state highways or dental care for the poor. On the other hand, the drugs are remarkably effective at curing Hepatitis C, a disease that gradually disables the liver. So there's little interest in making the drugs harder to obtain; instead, the question is how to make them less costly.

I don't have a good answer. The track record of government-imposed price controls is so lousy, not even insurers are asking for caps on specialty drug prices. On the other hand, purely free-market approaches have limited effect because healthcare doesn't function like an ordinary market. Patents and high regulatory costs restrict competition among drug makers. Consumers aren't well equipped to challenge their doctors' diagnoses or treatment recommendations. And the only limit on the price patients will pay to cure a potentially lethal disease is their insurance coverage or their personal wealth.

Nevertheless, market forces could be enhanced if doctors and patients had more information about the value of drugs -- that is, how effective they are relative to other sorts of treatments. When the Food and Drug Administration reviews a new medication, it measures only whether it's safe and effective, not whether it's safer and more effective than drugs already on the market. There needs to be of a focus in the United States on the comparative effectiveness of drugs, so that patients aren't being pushed continually into new, high-priced treatments that are no better for them than cheaper generic drugs.

It's also hard for the state to get the best deal on prescription drugs when each of its healthcare and insurance programs deals separately with manufacturers. The state should negotiate prices on behalf of all enrollees in the various programs. It would help in that process to have a clear picture of the manufacturers' costs, and the Legislature briefly considered a bill (AB 463 by Assemblyman David Chiu, a Democrat from San Francisco) that would have required the makers of expensive drugs to report more of those details. But the bill never came up for a vote in the Assembly Committee on Health.

For their part, drug-makers say the prices of specialty medicines should reflect the cost of the treatments a patient would avoid by taking the drug. But that standard hasn't been used for other medications, largely because it would make them unaffordable. For example, imagine how high the price of the HPV vaccine would be if it were based on the cost of cervical cancer treatments. No one could afford to be vaccinated.

Alternatively, the state could unilaterally set the price it wants to pay for specialty drugs, and see whether manufacturers will take it.  The problem with that approach is that if the Gileads of the world refuse and the drug is denied to Medi-Cal patients, inmates or others with state coverage, patients are likely to blame the state, not the drug companies, for rationing care. How long would it take for someone to sue?

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