More than 3 million Americans carry the hepatitis C virus, and many don’t realize it. It’s a public health concern since the disease can be transmitted by contact with infected blood, and sometimes through sexual activity. Health officials advise all baby boomers to get tested. The illness is complex, with distinct virus types requiring different treatments. While it progresses gradually, it can ultimately destroy the liver. An estimated 15,000 people died from hepatitis C in the U.S. in 2007, when it surpassed AIDS as a cause of death.
It costs about $500 million to get a new drug approved by the FDA. So it’s not surprising that sometimes, newly approved drugs are priced far above marginal manufacturing cost in order to recoup research and development expenses. Early last year a blockbuster new drug from Gilead Sciences named Sovaldi came to market with the ability to effectively cure 90% of patients with genotype 1 of hepatitis C, a form of the liver-destroying virus that accounts for 70 percent of the estimated hep-C cases in the U.S. Patients will not have to take an older combination of drugs that can cause flu-like side effects and which have cure rates of around 60% after six months.
Sovaldi came to the market at the then astonishing price of about $1000 per pill. A full course of treatment cost about $85,000 per patient, leading some pundits to warn that such drugs will bankrupt ObamaCare or rates will need to rise astronomically. According to Karen Ignani, CEO of America’s Health Insurance Plans, a trade association with 1,300 member companies
“Specialty drugs, which only make up 1% of prescriptions, already account for 25% of total U.S. drug spending, moving toward 50%. The amount spent on these drugs is expected to quadruple over an eight-year period to more than $400 billion. For perspective, the country spent $263 billion on all prescription drugs in 2012. Specialty drugs contributed to a nearly 12% increase last year in the average price of brand-name medicines.”
By July, Senators Charles Grassley (R-IA) and Ron Wyden (D-OR) began a Senate Finance Committee investigation into how Gilead had determined the sales price.
Under federal law, developers of newly approved drugs are granted the right to be the exclusive providers of that drug for a set period of time, similar to the advantage patent holders in other industries enjoy. However, the prices for other products are constrained by what consumers are willing and able to pay. The market dynamic is different with pharmaceuticals because insurers or government health programs typically pay all but a small portion of the tab. Insurers and government are expected to pay – no matter the cost.
Most health insurance policies kick the can down the road by offering less effective treatments at lower annual costs that can limit the damages caused by the hep-c for years, so longer term costs will likely be borne by some other insurance provider over time. Most policies restrict access to drugs such as Sovaldi in several ways. Many simply do not include these drugs in their formularies, so they pay nothing if a patient chooses to fill a prescription. Other policies require large annual deductible amounts (NY Health Policies are around $6000 for Silver plans) and 20% co-pays that could amount to as much as $20,000 per patient. Some policies simply limit the total amount of pharmacy coverage. Many policies use combinations of these tactics to control access to expensive drugs as they treat patients with significantly less expensive medicines.
Even as it was subjected to withering criticism in the US for it’s pricing policy, Gilead Sciences announced in September that it had signed a licensing agreement with seven companies in India to make generic versions of Sovaldi, and sell it in 91 countries. Those countries are home to more than 100 million people with chronic hepatitis C infection, or more than half of the world’s patients. Sovaldi is going to be sold in the developing world at a 99% discount to it’s US list price. (By law, the VA gets drug discounts of over 40% and Medicaid gets 23% on US pricing.)
So despite the high price in the US, Sovaldi is being sold near cost in developed markets that would otherwise have essentially no access to the drug. In this, the US company is exhibiting humanitarian largess towards the rest of the world. Critics counter that Gilead bought a smaller company that developed Sovaldi for only $11 billion in 2011, and yet stands to make nearly $200 billion if it were to treat the over 2 million Americans who could benefit from the drug. While acknowledging that Gilead should be allowed to recoup it’s investment, doing so would require treatment of less than 10% of the patient population. Sovaldi, which is estimated to cost no more than $30 per month of treatment to manufacture, generated revenue of $12 billion in its first year.
Others defend Sovaldi’s price because the drug is about half the longer term average cost of older treatments. The new pills are easier to take and cause fewer disabling side effects than other medications. Older regimens included up to 12 pills a day for six months, plus the immune drug interferon, which can cause severe flu-like symptoms, including fevers, nausea, fatigue, mood swings and other side effects.
In December, Express Scripts, the largest US Pharmacy Benefits Manager (PBM), announced that it had struck a (discounted pricing) deal with AbbVie, Inc. for it’s newly approved hep-C cure named VeiKira Pac whereby it would exclusively dispense the drug to its hep-C patients. The rumor is that the prior PBM discount was only 8%, and Express Scrips got substantially more. Not to be outdone, rival PBM CVS announced it’s own exclusivity deal with Gilead in the last couple of weeks. So it seems the market is working exactly like it’s supposed to, with competition forcing down prices. Gilead officials have acknowledged that average discounts in 2014 were about 22%, but expects that competition will force discounts of up to 46% this year.
Now that the genetic code has been cracked, watch for amazing new drugs to appear that will cure ancient scourges. We are likely at the advent of an amazing flow of innovation just as we have seen in the last twenty years with computers. Let them be encouraged to be brought forth by the profit motive of the markets. Government should stay out of the way in private company pricing decisions.