Seen as a narrative of soulless profiteers versus innocent, needful patients, the crisis of high pharmaceutical prices has produced a convenient gallery of villains: the board of Gilead Sciences, for instance, which priced its hepatitis cure at what it thought the market would bear (nearly $100,000); Martin Shkreli, for another, whose Turing Pharmaceuticals bought the rights to an existing drug used by HIV patients and jacked up its price 5,000%.
But a new analysis of the drug-pricing landscape by Ari Friedman and Janet Weiner of the University of Pennsylvania explains why this picture is incomplete — and why the issue is far more complicated than the prevailing narrative leads us to believe. In doing so, they point to the need for varied solutions, not just one.
Friedman and Weiner break down the drug price story into several discrete storylines. Let's start with across-the-board markups for "not very effective drugs."
Their prime example is a price increase instituted on Jan. 1 by Pfizer for 105 existing drugs. The increases didn't appear related to the efficacy or manufacturing cost of any of the drugs, and exceeded inflation. They were just aimed to fatten Pfizer's bottom line, and they were possible because most patients are price-inelastic — outside an often nominal co-pay, the price is covered by insurance. Friedman and Weiner say the solutions include making patients more sensitive to the real drug costs by raising the co-pays to reflect the ineffectiveness of some of these treatments.
Another category is the Shkreli story: "Dramatic price increases for formerly inexpensive generic drugs." These are increases based on a business model that exploits the lack of competing manufacturers for a low-demand drug. No one wants to go through the onerous FDA process for permitting generic drug manufacturing, so pricing power remains in the hands of the one company willing to supply the treatment. The solution here is to expedite the FDA review process to lower the barriers to entry for potential competitors.
Then there's "pay-for-delay" pricing. This is what happens when a manufacturer whose patent on a drug is about to expire pays generic companies to stay out of the market, or threatens them with a patent fight. This variety of collusion has been a problem for years — we reported on it in 2011. but it's been reduced by aggressive antitrust enforcement by the Federal Trade Commission, assisted by an encouraging 2013 ruling by the Supreme Court.
That leaves the thorniest problem of all: highly effective drugs, even outright cures, that are stratospherically expensive — the Gilead/hepatitis C problem.
Gilead's hep-C drug, Sovaldi, was list-priced at $84,000 for a 12-week regime that was more than 90% effective in clearing the virus from the body with minimal side effects. (A follow-on formulation, Harvoni, cost close to $100,000 and was slightly more effective.)
This is "a shocking price," Friedman and Weiner agree, but they add that by conventional drug value metrics, "even at that price, the drug is cost effective because it cures a disease that has severe health consequences and poor existing treatments." It makes sense to spend $100,000 to rid a patient of hepatitis C if that means saving that much or more in that patient's lifetime medical costs. Studies have shown that, on average, Sovaldi and Harvoni fall within that cost-benefit curve.
That's true on a society-wide basis. The problem, however, is that in most cases, "society" doesn't pay the bills — insurers, government agencies or employers do. They may not be the same entities that reap the benefits of lower liability from the patients they've paid for. An added complication is that for government agencies, the up-front cost of the treatment is a budget-buster. A leading health economics institute found in a 2014 study, the institute found that if only half of the estimated hepatitis C sufferers in California sought treatment with Sovaldi, that would cost the state $22 billion in a single year. That's about 20% of the state's entire general fund. The benefits would unfold over decades, and at that rate wouldn't fully offset the up-front cost.
The ad-hoc solution crafted by payers up to now has been to limit access to the hepatitis C wonder drugs only to patients already showing liver damage from the diseases, in some cases only to patients with advanced damage. That's not a sustainable solution. Just last week, a federal judge ordered Washington state's Medicaid program to provide the drug to all its hepatitis C patients, not just those with the most severe disease.
Plainly, the solution to this problem is to spread the cost for the drugs society-wide. Friedman and Weiner don't offer a suggestion on how to do so, but the best option is obvious: make hepatitis C sufferers eligible for Medicare. This would effectively spread the cost over all federal taxpayers. As Allan Joseph observed on the Incidental Economist healthcare blog, there's precedent for this in the treatment of end-stage renal failure patients, whose dialysis costs are ruinous. But it would require congressional action — these days a major obstacle.
The hepatitis riddle underscores how the problem of drug pricing breaks down into at least two problems: how much to pay for a drug, and how to pay. If you want to know why so little progress has been made in solving the problem, there's a start.