Would You Pay $84,000 for a New Liver?

Instead of complaining about the price of new drugs, let's talk trade-offs.
Drugs over transplants? Yes, please. Photographer: David Paul Morris/Bloomberg

There's a new drug called Sovaldi, manufactured by Gilead Sciences Inc ., that can cure hepatitis C. Not every case of it, mind you, but most. John LaMattina of Forbes provides this rundown:

Up until recently, treatments for hepatitis C were modestly effective. Patients were given a cocktail of drugs plus injections of interferon for 24 - 48 weeks and cure rates range from 40 - 80%, depending on the severity of the disease. However, these drugs are poorly tolerated, particularly the interferon component which causes flu-like symptoms in patients. As a result, many with hepatitis C often eschew treatment.

However, there is new hope for hepatitis C patients. A breakthrough drug from Gilead, Sovaldi, is a pill that cures hepatitis C in more than 90% of patients in just 12 weeks. Furthermore, it is safer than the older regimens and is roughly 20% cheaper than the older treatments. One would think that the maker of such a wonder drug would be hailed for providing a major medical advance.

This is exciting news, because 3.2 million people in the U.S. have a chronic hepatitis infection, and statistics suggest that 5 to 20 percent of them will end up with cirrhosis of the liver, and 4 percent will develop liver cancer. Those are big numbers, which makes Sovaldi a big deal.

The catch is that Sovaldi is priced at $84,000 for a full course of treatment. Medicaid programs and prisons are dithering about whether to pay for it, and insurers aren't so happy, either. The implication is that Sovaldi should cost a lot less so that insurers and the government don't have to pay so much for it.

But wait, you will say -- Sovaldi is cheaper elsewhere. Clearly the company can sell it for less, so shouldn't it?

As always in the development of pharmaceuticals, we have once again washed up on the shoals of marginal versus average cost pricing. Drug development has a very high fixed cost, thanks to all the research needed to find drugs and bring them to market. The cost of actually making the pills, on the other hand, is trivial. So the optimal pricing strategy -- for everyone, not just pharmaceutical companies -- is to charge rich countries a lot and sell the drug at near-marginal cost in poor countries. If the rich countries insist that they should also get the drug near-marginal cost, then they benefit in the short term. But over the long run, the company loses money on its products, and then we don't get any new drugs.

That gets the drug in as many hands as possible while still providing the incentive, and the cash flow, to research new drugs. This is one reason we shouldn't be that unhappy that the U.S. shoulders a disproportionate share of the cost of drug development.

Yet when I look at it, Sovaldi seems like a bargain. Here's a drug that likely cost hundreds of millions to develop and bring to market. It has a 10-year patent life to recoup its costs and make some money for the developers. It's better than earlier treatments and, according to LaMattina, 20 percent cheaper; it largely negates the need for liver transplants, which cost a few hundred thousand a pop. It also, of course, means longer and healthier lives for people infected with hepatitis C.

Why does this make us so angry?

I suspect it's for the same reasons that we get upset when we hear of people working for nonprofits who make healthy salaries.

Ever noticed that? How bitterly folks complain when some guy working for a charity makes ... well, somewhat less than what he'd make if he were doing the same thing for a similar-sized private firm but more than he'd make if he'd taken a vow of poverty? Cue the outrage. Occasionally from people who make more than the vilified executive.

We seem to have the deep-seated idea that if someone is helping other people, they ought to be doing it from the wellsprings of goodness, rather than to pay the mortgage. What is he to do about his mortgage? the critics never ask. It is not enough to devote your life to doing good works. You must also donate a substantial portion of your earning power to the people you are helping -- often a far higher percentage of your earning power, I must point out, than any of the people complaining about how well you are paid.

Then we complain that government executives and nonprofit leaders don't do a very good job. That these complaints often come from conservatives, who are otherwise very good at explaining that markets work and incentives matter, is a matter of no small amusement.

So, too, with almost any corporation in the health-care field, and especially pharma. The more valuable the drugs they create, the louder we complain that they expect to be paid in cash money, rather than the love and admiration of their fellow man.

Now, maybe Sovaldi actually doesn't provide good value for the money. Maybe the insurance lobby and Medicaid administrators have good data showing that it's just not worth that much to cure hepatitis C quickly and with minimal side effects. But so far, I haven't seen that -- just complaints that they don't want to pay that much.

This is an argument you can expect to hear a lot more in the future. Drug discovery is hard and getting harder. Third-party payers are getting more centralized and more cost-conscious.

The good news is that we're actually having a conversation about the cost of drugs, rather than blindly telling third parties to pay for anything at all, or, conversely, having them stealthily make these decisions out of the public eye. The bad news is that this conversation isn't yet very good. Instead of complaining that Sovaldi is expensive, we should be discussing trade-offs. Do we want to cure hundreds of thousands of cases of cirrhosis, at a cost of tens of millions of dollars? Are we willing to risk reducing the return on pharmaceutical research to so low that we lose a lot of valuable new drugs?

That's a debate worth having. "Should people in the helping professions make a decent income" probably isn't.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

    To contact the author on this story:
    Megan McArdle at mmcardle3@bloomberg.net

    To contact the editor on this story:
    James Gibney at jgibney5@bloomberg.net

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