Paying for Medical Breakthroughs
I want to talk about a number: $5,880,000,000. That is the revenue made by a pharmaceutical company in one year from the sale of one drug, Sovaldi. Solvaldi is a cure for hepatitis C. It costs $1,000 a pill and $84,000 per patient for the treatment, just for the medicine. Is Solvaldi worth the price.
In an interview with Gregg Alton, a vice president at Gilead, with RadioLab at time stamp 15:16, he makes the point that this is a cure. If patients had to take the pill for the rest of their lives the cost would be prohibitive. Instead they take it for 12 weeks and are free of the disease. The total cost to the healthcare system over a 20 year period is significantly less if insurance companies pay a one time price of $84,000 instead of paying for the alternate treatments that don't cure the disease but instead manage the symptoms. Looked at from this perspective you could say that they are in fact undercharging. After all a cure is worth more than just managing the symptoms.
The cost is paid out all at one time. This makes it very difficult to afford. The insurance company actuaries had the money planned out to pay the lower incremental charge to manage the symptoms of their insureds. They did not and could not have planned for a sudden cost of $84,000 per person. Looked at from this perspective, you could say that the price is far too high as it prevents many people who are suffering from the disease from getting treatment. After all the point of medicine is to help people.
A third way to look at this is in an NPR article:
But Andrew Hill, a researcher in the Department of Pharmacology and Therapeutics at the University of Liverpool, says $84,000 per cure is too much, based on his estimate of Gilead's cost to produce the drug.
"Even when we were very conservative [with our estimate], the cost of a course of these treatments would be on the order of $150 to $250 per person," Hill says. He questions whether the $84,000 price tag represents "a fair profit."
Hill estimated the cost of producing Sovaldi by comparing it to similar antiviral drugs used to treat HIV, which cost about a $1 per gram to make.
"The amazing thing with hep C is you only need a few grams of these drugs to cure the infection," Hill says. "You need 10 grams or 30 grams of drugs."
Assuming that is true, that looks like around $30.00 to make something that they then sell for $84,000. That seems like a healthy profit margin to say the least. That same article, however, pointed out that Gilead purchased the company that developed the drug (Pharmasset, Inc) for $11 Billion dollars. It certainly needs a healthy profit margin on the sale of the drug in order to recoup that cost. You can see the Gilead press release for details on the merger. Its important to note that Gilead purchased Pharmasset, Inc in January 2012. Sovaldi wasn't approved by the FDA until Dec. 6, 2013. So not only did Gilead pay $11 Billion, it made a bet when it did.
Something that I don't know, and perhaps can't know, is how much money was spent first by Pharmasset and then by Gilead to get Sovaldi approved. After all, that is an important number for determining how much Gilead needs to get in revenue just to break even by selling Sovaldi.
All of the above,however, misses out on an important issue: We must know how much Gilead spent on drugs that failed. Developing drugs is an incredibly expensive and risky way to invest your money. It takes large amounts of capital and years to go from concept to FDA approval and that assumes the drug works. The people purchasing the successful drugs must also pay for the costs incurred by Gilead for the drugs that don’t get FDA approval. Many drugs fail.
That leaves us with conflicting needs. Gilead paid large sums of money and took on a significant amount of risk to get Sovaldi to market. In order for that to work it needs to charge enough to recoup not only its costs but also get enough profit to repay the investors at a reasonable rate of return, considering the risks taken. It also needs to have enough revenue to continue developing new drugs that will be able to manage or cure other diseases.
On the patient side, the prices Gilead is charging make it impossible for many people to get. As laid out in the RadioLab piece, Sovaldi is being rationed by insurance companies because they simply can't afford to pay out all the money required at once to cure everyone currently living with Hepatitis C. This leaves many people without access to the drug.
However, according to the RadioLab episode, 70,000 people received Sovaldi in a single year and, according to this information sheet on the University of Washington's website, the annual infection rate for Hepatitis C is approximately 17,000. Since those receiving the drug every year exceed the new cases, eventually everyone with Hepatitis C and insurance will be able to access the drug, as the total number of people with the disease will be less than the number of people that society, through insurance, can afford to treat in one year. Once that happens the need for rationing will disappear. In the mean time, however, many people have to live needlessly with the complications of having Hepatitis C.
The solution to this problem at first seems intractable. It costs a lot of money to make drugs. Therefore, when they come out, they are going to be expensive as the company that made them needs to recoup its expenses and pay profits to the investors. I believe its important to remove the specifics and look at the general way that we create new drugs.
Society uses companies to develop new drugs. Those companies are started with money from private individuals who want to earn a profit. The investment is more risky than US Bonds, and is locked in for long periods of time. As such they want to earn a better rate of return on their investment. Society has to pay both for the initial investment and the rate of return on both the successful drugs and the unsuccessful drugs. When the successful drugs are first released, society has to pay for all of that at one time.
It is reasonable to ask why society has to pay for the unsuccessful drugs; after all, no one ever buys the drugs. Society pays for those failed drugs in the form of higher expectations on the rate of return by the investors. The more drugs that fail, the higher the rate of return investors will demand. The higher the rate of return required to get them to make the initial investment, the more the companies will have to charge for the finished product. The system we have now doesn't remove the risk of failure from society; it simply shifts when society has to pay for that failure.
The result is that society cannot pay the price demanded when a new drug is released. Especially those drugs that actually cure a disease because then the company that makes the drug needs to recoup its expenses over the course of that single treatment.
The solution to the problem comes in the form of public investment. Adam Smith himself said that private industries should be used where they work best, and government should step in when they don't. The United States government, along with all of the other governments with the capital to do so, need to invest directly in the development of new drugs by paying research grants to individuals and groups working on new drugs to help solve the medical needs of the population. The drugs, once developed and tested, could then be licensed or sold to pharmaceutical companies. Those companies, much as the generic pharmaceutical companies do today, could produce and sell the drugs for much cheaper than drugs are sold for today.
Of course, then society is directly paying the costs of development for both the successes and the failures. The benefit comes by changing when those costs have to be paid. Instead of society facing incredibly large one time costs that it cannot afford, society would face small installment payments over the course of years that it takes to develop a drug. Society has to pay for the advances that are made. Either through taxes or giving investors the ability to earn a profit off of their investment. Societies would be far better off to pay for the advancement of medical science through taxes than in profit for the investors.