Pharmaceutical Pricing-- The Story That Just Keeps Going

After last week’s foray into patents and pharmaceutical policy, which is perhaps the most technical and specialized area of pharmaceutical policy, I will return to the never-ending story of pharmaceutical prices and the controversy over Sovaldi, Gilead's break-through Hepatitis C drug.  Sovaldi has a "sticker price" of $84,000 for a 12-week course of treatment, at the end of which 90% or more of patients would be expected to be cured. Since Sovaldi is a pill that is given once a day, the 12-weeks of treatment means that there are 84 daily doses. The math is easy, even if the price, unlike the pill, is hard to swallow--$1,000 per pill. The drug has been a huge financial success for Gilead, which reported $2.274 billion in sales in just the first quarter of 2014.   However, the backlash has been equally huge.  In a rare display of bipartisanship in Washington, Senator Ron Wyden (D.-Ore), the Chair of the Senate Finance Committee and Senator Chuck Grassley (R.-Iowa), the Ranking Member of the Finance Committee, sent a demand for information concerning the development costs of Sovaldi and Gilead’s pricing decision.  However, even more than the investigation by two senior senators, the impetus for today’s post came from the blog RxObserver, which featured a post entitled Sovaldi: A Poster Child for Predatory Pricing [sic].  Before discussing the epithet “predatory pricing,” the perspective of RxObserver requires a bit of explanation.  RxObserver is a site that primarily provides the views of pharmaceutical benefit managers (PBMs), or as the blog itself states its purpose: “the Clearinghouse of the Future for Pharmacy Benefits.” It is, in general, a very high-quality blog, with an editorial staff composed primarily of well-recognized academic and government experts in health care policy.  I regularly read it and find it useful, although I was taken aback by that “predatory” epithet.   Download PDF

Why would I take issue with referring to Gilead’s pricing of Sovaldi as “predatory”?  Because Gilead’s business strategy is not any more worthy of condemnation than any other pharmaceutical company.  As I previously posted, pharmaceutical companies are like virtually all sellers in a basically free market—they set their prices at what the market will bear.  Alexion’s price for Soliris, a drug for the very rare disease paroxysmal nocturnal hemoglobinuria, was $409,000 per year back in 2010. Shire’s price for its drug, Elaprase, for the even more rare Hunter syndrome, was $375,000 in 2010.  Are the people whose lives depend on Alexion’s or Shire’s drugs less victimized by predation?  After one $84,000 course of Sovaldi (perhaps a second course for some patients), the patient is cured and the insurance company is off the hook for further Hepatitis C-related expenses.  But patients who take Soliris or Elaprase will be paying (actually their insurers will be paying) those far higher prices for life, year after year after year.  So while the much higher prices of those drugs also engendered significant backlash and controversy there is one significant difference—the patient populations were much smaller.  Why did smaller patient populations make the controversies over those much higher prices, not to mention their recurring nature, recede into the background so much more quickly? 

The reason that Sovaldi’s price has generated more controversy than even much more expensive drugs is because the patient population is so large that Sovaldi could have a significant impact on the entire national health care system.  RxObserver’s post relies for its data on an article in Health Affairs (a very well-respected health policy publication) that estimates the overall impact of Sovaldi on Medicare costs under Medicare Part D.  Tricia Neuman, Jack Hoadley and Juliette Cubanski, the authors of the Health Affairs article estimate that the cost of Sovaldi alone could cause a 3% to 8% or even greater increase in the overall cost of Medicare Part D depending, of course, on the number of patients treated.  Moreover, while Medicare Part D costs are insured in the private sector by Medicare Prescription Drug Plans or Medicare Advantage Plans, Medicare patients would still shoulder a significant financial burden of $7,000 or more each because of the copayments and caps of Medicare Part D plans.

So is it “predatory” to charge more people a high price than to charge fewer people a much higher price?  I don’t think so.  Rather, Gilead’s pricing of Sovaldi put a spotlight on pharmaceutical pricing that is undoubtedly brighter and harsher than Gilead anticipated and engendered a healthy debate about pharmaceutical prices.  Neuman, Hoadley, and Cubanski suggest that a result of this controversy might well be to give Medicare the power to negotiate prices, a power which the VA used to get a deeply discounted price of $44,000 for Sovaldi.  I could devote an entire post to the question of whether Medicare should have the power to negotiate prices, but the short answer is it is complicated and it is also unlikely that it will happen.  It is complicated because even though Medicare cannot negotiate prices, the insurers providing Part D coverage can. Through their PBMs the insurers actually have significant market power to wield in those negotiations.  It is unlikely because Congress is unlikely to come to any agreement on such a proposal in the near term and because the pharmaceutical industry is still the biggest kid on the block called “K Street.”  What is more likely is that Gilead will make price concessions in confidential negotiations with major insurers; insurers will limit coverage to those patients clearly in greatest need of treatment, and the system will muddle through. In pharmaceutical policy terms, billions spent for breakthrough life-saving drugs is not really a bad thing at all.  It is the tens of billions spent on the marketing and consumption of me-too drugs that is the real problem.