OMG drug pricing, cures and value

Last week, a judge ordered Washington State Medicaid to pay for all Hep-C treatments that previously were being rationed to only patients with significant liver scarring due to costs.

U.S. District Court Judge John C. Coughenour granted a preliminary injunction Friday that forces the state Health Care Authority (HCA) to halt a 2015 policy that restricted access to the drugs based on a fibrosis score, a measure of liver scarring….

Harvoni is among the newest highly effective drugs that can halt the hepatitis C virus, posting a cure rate of at least 90 percent.

The injunction orders HCA to begin covering Harvoni “without regard to fibrosis score.”

There is an interesting article out of Penn that looks at high drug costs.  Harvoni and the other Hep-C cures fall into a bucket where the long run benefits are  significant:

Storyline 1: New, highly effective drugs that are extraordinarily expensive
Example: Sovaldi (Hepatitis C treatment)

Economics of the problem: Sovaldi (sofosbuvir) was released in December 2013 at the cost of $1,000 per pill, or $84,000 for a course of treatment. This is a shocking price, and scrutiny was entirely justified. But by conventional standards, even at that price, the drug is cost effective because it cures a disease that has severe health consequences and poor existing treatments.

Researchers often use a cost-effectiveness ratio (CER), defined as costs divided by benefits, to analyze the efficiency of various treatments. To properly judge a new treatment, they use an incremental CER, to compare the costs and benefits of the new treatment with the next best alternative. To standardize these analyses, they measure benefits as “quality-adjusted life years” (QALYs). Think of a QALY roughly as a “year of life in full health,” or the equivalent number of years in poor health you’d be willing to trade for that year of life in full health.

Although there is no official threshold in the U.S. for our willingness to pay for a new treatment, we typically consider upper bounds of $50,000-$200,000 per additional QALY to be cost-effective. One study estimated the incremental CER of Sofosbuvir as $54,000 per additional QALY, putting it firmly in the range of cost-effective treatments.

This same story line could come into play with the introduction of a new class of gene therapy treatments for rare, high cost and debilitating diseases that are due to hit the market in the next couple of years.  There are three major questions for those types of therapies.  The first is how much will the treatment actually cost, secondly, who will pay for the treatment, and finally how will the payment be structured to minimize negative incentives.  This led to an interesting conversation on Twitter about what an “appropriate price” should be:


The pharmaceutical companies will try to benchmark their pricing on costs averted. If a hemophilia treatment is able to avert an expected life time costs of $5 million dollars through lower prophylatic costs combined with no emergency bleed-outs, the initial bid for the treatment cost will be $4.9 million dollars. The new treatment would be cheaper over the long run than the current, next best alternative but that is still an Oh My God expense.  Another valuation methodology would be the lifetime price of the next best alternative plus some more as there is utility gain.  A little boy with hemophilia has to be extremely careful in their play but if there was a cure, they gain a lot of value in being able to ride their bike on a gravel path while only worrying about skinned knees, broken bones and concussions instead of a three month hospital stay to control a bleed.  Another approach would be a regulated guaranteed profit margin (including any value of the Orphan Drug bonus) which would produce a lower net cost of a cure than current lifetime treatments.

There are a lot of pricing methodologies that produce wildly divergent price points.  And each of those systems have some logic and consistency to some values that we as a society hold.

I am not a bio-ethicist, all I can do is tell you what some of the implications of a particular proposal will do.  But we as a society need to have some discussion about what the appropriate price is for a cure of very rare but expensive diseases and then a discussion as to how we are going to pay for it.

24 replies
  1. 1
    Gelfling545 says:

    So, if I’m understanding this, the state wanted to continue less effective treatment until a level of damage was reached and then give the expensive, effective treatment. How does that make economic sense as they’ll pay for both treatments and any effects of the damage as well? It’s quite possible I’m missing something here as it’s making no sense to me as it is.

  2. 2
    Cermet says:

    More than likely, the drug in question was developed/invented at/in a government lab (such as NIH) or a university lab funded by NIH. The big Pharm that put it on the marked spent, at most (far less more likely) maybe ten to twenty million dollars for the human trials. Over 90 – 95% of the cost they claim is either fiction or mostly free trips for the hordes of MD’s they paid to promote said drug. The entire cost structure of any newly developed drug is NEVER based on the real development cost – if so, 99.9% of all new drugs would cost a small fraction of the price we do pay. These are real low life’s and the ones who really are the people who create real ‘death panels”.

  3. 3

    @Gelfling545: three things from the state’s perspective.

    A) some proportion of hep-c infections never cause damage so a cure is at best an infection chain breaker.

    B) hep c from f-0 to f-3/4 tends to be a slow mover. A cure in three or four years won’t cause much additional harm

    C) churn, make someone else pay for it.

    The cure has long run budget improvements but it is a massive short run budget buster

  4. 4
    NJDave says:

    Actually this was a discovery of industrial pharma research. It was being developed by Glaxo, IIRC, which didn’t see its value. The researchers were able to get outside funding, bought the rights and formed a new company Pharmasset to continue development. After some impressive early results, big pharma got interested and there were multiple bids for the company. Gilead was the winning bidder, paying $11 BILLION for the company. That $11 billion is Gilead’s “development cost”.

  5. 5
    Cermet says:

    @NJDave: Wow, proves my point more than my own points – get greedy, over pay for a company and using forced payments by a handful of desperate people, so as to rape them … I mean reap unjust rewards from these victums. These are truly sick people – the owners.

  6. 6
    PAM Dirac says:

    @Cermet: I don’t really get these claims. As NJDave points out these compounds were invented and developed in industry and those facts are not hard to find. Maybe the claim is that the inventors on the patents are not the real inventors. In that case the patent is invalid and if you have info that that is true, why are you withholding it? If it is general knowledge why isn’t anyone else working to invalidate them? The more general claim that there are “free” drugs sitting around just waiting for a few tens of millions of dollars to turn into sure thing blockbuster drugs also doesn’t pass a reality test. There are plenty of charities with a few tens of millions of dollars to spend, why aren’t they buying up at least some of the free drugs and getting them approved?

  7. 7
    PAM Dirac says:

    @NJDave: It looks like you are talking about sofosbuvir. It looks like ledipasvir was developed by Gilead itself.

  8. 8
    NJDave says:

    @PAM Dirac:
    You are, of course, correct. Sofosbuvir got the pricing ball rolling, basically setting a ceiling for all that followed.

  9. 9
    David Cater says:

    @Gelfling545: I suspect there are two aspects to that logic. a) Presumably not everyone’s disease will progress to the point of serious damage. If someone will never have serious repercussions, it doesn’t make sense to pay to cure them. If a relatively large percentage of people avoid serious repercussions, the unnecessary expense could get quite large. b) You would be likely to avoid the bulk of the “lifetime cost” of treatment vs. cure if you wait to administer the cure until damage can be seen (but while the patient still has a long life ahead of them). tl;dr: it’s probably just math.

    (Which is essentially what Mayhew said. I didn’t read his comment before I replied.)

  10. 10
    Feathers says:

    One issue with pricing based on QALY is that we now have multiple “vendors” trying to base pricing on an individual’s future life. Someone can have not only Hep-C, but also knee problems, or develop cancer later on. We also have the education-industrial complex basing skyrocketing tuition increases on how much more someone with a college degree will earn. So do we say “Sorry, no Hep-C treatment for you. Already spent down your future life earnings getting that fancy degree.”

    Overlapping greedy markets = market failure.

  11. 11
    No One You Know says:

    Cost aversion makes sense as a hypothetical way to justify a price to people who won’t ever see those numbers in a real budget. It’s like the people who think running a nation is exactly the same as running a household.

    And while I agree with Richard that pricing is tied to values we have, some of those values are heavily weighted towards abstractions that mean little by the bedside or the graveside.

  12. 12
    Fair Economist says:

    I was initially outraged by the price, but I’ve backed off. If it were a surgical approach, nobody would bat an eye at an 84K price tag to cure a nasty disease. Heart bypass surgery has a similar cost, and it’s downright routine. Obviously it’s an enormous profit for the developer of the drug, BUT that profit has to cover all the unsuccessful development attempts and, as pointed out above, this really is a product of industry. Looking at the QALY pricing makes me suspect it was deliberately priced to be at the low end of new interventions, which is more of a “fair price” than a gouge. Gouging would be pricing to the high end of QALY pricing, or perhaps even above, hoping for the courts to force payment.

    Interrupting transmission would be a huge additional win, although my gut reaction is that it won’t do much good.

  13. 13

    @No One You Know: No one will ever see the dollar figures of treating high cost rare diseases unless you’re either a state Medicaid official or an insurance company bureaucrat. That is with best current treatments, and it will still be true with the potential for actual cures. These figures are so big that any plan that has the patient paying a double digit percentage of the costs is laughable. It is a cost that must be borne by society as a whole. The question is how big of cost and how is it paid for.

  14. 14
    Cermet says:

    @PAM Dirac: Are you serious? The FACT that many such drugs are developed by NIH or universities funded by NIF is a fact. Patents? Last I checked they can be sold and or the rights to the patent are sold. This is well known – you really think what you are saying isn’t over-the-top silly about me uncovering this super secret information? LOL.
    AS for the rest of your post – sorry, it is so in left field I don’t see any point in discussing those even more silly arguments.
    What I said in the original post is both accurate and how many drugs are developed. AS for the cost of bringing a drug to market, the over-top costs are mostly fabricated.

  15. 15
    Dennis says:

    The “free” market doesn’t work because the largest buyer by far is not allowed to negotiate price. Therefore, the price should be capped at a level that still rewards the owners handsomely, which you do at far below $84,000. I remember Dean Baker writing a column about this–he multiplied 84K by the number of Hep C infected and arrived at a cost that roughly matched all other drugs sold, combined. That is obscene.

  16. 16
    jl says:


    ‘ Gilead was the winning bidder, paying $11 BILLION for the company. That $11 billion is Gilead’s “development cost”. ‘

    If the $11 billion bid was based on expected prevent value of sales of the drug while under patent, I don’t see how that reflects real development costs. That reflects the value of the patent protection. That issue is the source of of the wide disparity of estimates of the cost of drug development. Some researchers include the value of the patent as the opportunity cost of the funds devoted to research.

  17. 17
    jl says:

    Also, I think the Penn link was pretty good. Except, in the patent section, I think it skipped over the problem of overly generous US policy on follow-on patents and patent thickets. Docs and pharmacists I talk with say that the policy for follow patents on different dosages and frequency is way too generous, leading to drugs effectively being on patent far longer than the 7 to 12 years.

    Also, the cost-effectiveness estimates aren’t justification for high prices. In a competitive market, the price should equal marginal cost of production once the R&D costs are paid. Much of that value should go to the consumers.

    Also an interaction between distribution, pricing, and incidence of costs. Monopoly with one market price leads to less production than socially optimal, again after R&D costs paid. Perfect price discrimination based on willingness to pay leads to socially optimal level of production, with those who value the drug most paying more. Price discrimination based on volume typically leads to largest and wealthiest buyers paying less. The drug distribution system in the US is very highly concentrated, and increases in price transparency are making price discrimination based on willingness to pay more difficult.

  18. 18
    cahuenga says:

    What rubs people the wrong way:
    Harvoni cost in:
    – the US ($94,500)
    – Canada ($80,000)
    – the UK (£39,000)
    – Germany (48,000€)
    – Egypt ($1200)
    – India ($900)

    I understand the idea of profit. But where health is involved this more closely resembles extortion.

  19. 19
    Hob says:

    @Gelfling545: Besides what Richard and others said— I think the other thing is that there isn’t (*) really an alternate “less effective treatment” in the way you might be thinking of, like another medication that you’d take every day to mitigate the disease. There’s the previous generation of interferon+antiviral therapy, which you can use in an attempt to cure the disease, but you would do that for six months to a year and then basically if it didn’t work, that’s it (some doctors might try a repeat course of treatment but it’s rare). But there isn’t really anything that just slows it down or makes you feel better in the meantime; it’s basically “try to avoid things that would put further stress on your liver, and keep hoping you don’t get cancer.”

    (* Disclaimer: this stuff used to be my job [nurse case manager for hep C patients], but it’s been a while and I’m not as good about keeping up with the field as I used to be, so I may be out of date… but based on how the newer drugs have been reported on, I think I’m still basically right about what one would do without them.)

  20. 20
    Hob says:

    @jl: I don’t see how that reflects real development costs

    I don’t think anyone was disagreeing— I assumed that was why NJDave used scare quotes.

  21. 21

    Like a pharmaceutical researcher I once knew was fond of saying, “It’s a chemical.” F’in market ideology.

  22. 22
    PAM Dirac says:

    @Cermet: Sometimes reality sucks. Sometimes sucky reality can be changed, but it is usually hard work and it always requires a solid understanding of the current reality. I don’t think you have the faintest idea of the current realities of drug discovery. For example one of the most careful studies of the origin of new drugs (see discussion at In the Pipeline) suggest about 15% of new drugs are discovered in academia. But I suppose careful study is silly and probably a conspiracy and EVIL!!! Reminds me of the rabid purity trolls in the political arena. Bravely manning the keyboards to spread the truth with smug contempt for anyone who is getting their hands dirty trying to do any work.

  23. 23
    JDS says:

    Two comments. First a conjecture. Many of the drugs developed by industry are based on knowledge developed in nonprofit (federal or foundation supported) academic laboratories which until recently have not “patented” their ideas. That of course has changed over the last 10 to 20 years as universities have identified a revenue stream made possible by the research environment. Unfortunately, that environment is now responding to the opportunities presented by that revenue stream and is becoming application (ie. patent) driven. This is analogous to the situation in the 1960 and 70’s when basic research laboratories at the large industrial companies (Goodrich, Firestone from my personal experience) were phased out as being an inefficient use of resources. If the university environment is altered enough the source of those novel ideas will begin to dry up.

  24. 24
    Flea Dope says:

    @David Cater: There’s also the possibility that prices for a cure will drop in the intervening time, either from discovery of a new treatment, or that pressure from other areas causes a drop in the price of the drug.

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