$84,000 Drug Now or $600,000 Liver Transplant Later?

Sovaldi. It's cheaper than a new liver.A new drug called Sovaldi promises to cure 9 out of 10 patients with hepatitis C. Hep C is the leading reason for liver transplants.

Sovaldi’s price has led to an outbreak of sticker shock in the U.S., home to roughly 3 million hep C sufferers, many of whom qualify for publicly funded health care.

A 12-week Sovaldi regimen retails for $84,000, over four times the price of standard hep C therapy with drugs interferon and ribavirin. However, Sovaldi (taken with ribavirin) requires as little as one-fourth the time and stands to cure twice as many patients. It also has fewer side effects.

The drug’s price still alarms health insurers, including the public programs Medicaid and Medicare. U.S. lawmakers have requested financial documents from Gilead Sciences, the biotech firm that makes Sovaldi.

Gilead argues that the slower acting, less effective, and sometimes highly invasive treatment hep C patients might otherwise get ends up costing more than Sovaldi.

In this post, I’ll suggest that Gilead’s long-term savings argument offers a fleeting and superficial defense of the high price Americans pay for Sovaldi.

Various news outlets, including Reuters, Newsweek, and the LA Times, have reported Gilead’s claim that, over the long haul, Sovaldi replaces even costlier care. Some independent experts appear to agree with the drug maker. Speaking with NPR, Harvard hep C specialist Dr. Camilla Graham suggested Sovaldi’s roughly $100,000 price tag may in fact be “a worthwhile investment.” The NPR story elaborates:

[I]t can now cost up to $300,000 to treat patients with advanced hepatitis C, using less effective and more harrowing [drug] regimens.

Health Affairs Blog (HAB) suggests future savings may offset Sovaldi’s present cost to public programs, particularly Medicare.

Medicare beneficiaries with hepatitis C have three times the average overall medical costs as other Medicare beneficiaries. If these higher costs were eliminated or substantially reduced, the savings achieved over a longer term could offset the one-time cost of the drug.

The HAB analysis is cited in the Senate Finance Committee’s letter to Gilead. However, the lawmakers highlight what HAB says about the up-front cost of Sovaldi. If Medicare provides the drug to less than a quarter of its 350,000 infected enrollees, the program’s drug spending will rise about $6.5 billion, causing premiums to spike. The Senate letter adds that over 1.8 million people with hep C are incarcerated. Prisoner health care is publicly funded.

Lawmakers and private insurers (who also warn of Sovaldi-induced premium hikes) appear to worry that the price of Sovaldi, multiplied by the millions of Americans who now have hep C, places too heavy a financial burden on the health care system in the short-term. If it does, then the prospect of long-term savings has little appeal.

Rival treatments may also undercut Gilead’s long-term savings argument. As early as fall 2014, other companies could debut similar drugs that surpass traditional hep C therapies for less money than Sovaldi.

Looming competition for Gilead’s hep C cure leads us to the more fundamental argument for the drug’s price. Defenders say it’s the price of innovation.

Getting drugs to market costs more than $1 billion on average. Most drugs suck up a company’s research dollars but go unsold due to a lack of FDA approval. So drug makers recoup costs and reap profits on the drugs that make it to market.

In 2011, Gilead paid $11 billion to buy Sovaldi’s original developer when the drug was still being tested.

Some health care economists, according to Vox, say that a huge payday is Gilead’s just reward. These same economists also think Sovaldi is a better deal in the long run than typical hep C treatments. However, they emphasize that drug makers, as aspiring profit makers, need big financial incentives to pursue major medical innovations.

Here’s how the price of innovation argument appears to go: Cures are in high demand. They’re also in short supply. Most new drugs make only small advances in treatment. Sovaldi offers a cure. It gives patients what they want most. But it doesn’t give Gilead the repeat business that non-curative (and now obsolete) treatments do. Prohibiting a high price for Sovaldi would weaken drug makers’ incentive to undertake the difficult and expensive work of finding cures. Thus, Gilead should be permitted to charge a high price for Sovaldi.

Even if persuasive, the price of innovation argument doesn’t establish how high a price is reasonable. Gilead’s critics point out that Sovaldi costs just $900 in Egypt, roughly 1% of the U.S. market price. However, a 99% discount for a country that, based on 2013 per capita GDP, has 94% less wealth than the U.S. isn’t hard to fathom. Gilead wouldn’t want to price itself out of the market in Egypt, home to the world’s largest hep C epidemic.

But then if Gilead can make a profit at $900 in Egypt, why do they charge $84,000 in the U.S.? Presumably, the reason for either price is the same: it’s what the market can handle. If so, then the reply to either argument (price of innovation or long-term savings) is the same: the U.S. market can’t handle the U.S. price. Economists and lawmakers will have to sort out whether that’s the case.