The Good, the Bad and the Ugly Truth about Specialty Drugs

Recently, my colleague Linda Gorman wrote about Sovaldi, a new treatment for Hepatitis C that actually cures about 90 percent of patients taking it within three months. A regimen of this drug costs $1,000 per pill — or about $84,000 for a course of treatment. Despite its high cost, drug maker Gilead Sciences argues the lifetime costs of treating patients with Sovaldi are lower than older, less effective drugs that merely suppress Hepatitis C, as though it were a chronic condition. The ability to actually cure the disease is a huge bonus, which definitely bolsters Gilead Sciences’ argument. When deciding how to price Sovaldi, Gilead Sciences undoubtedly took the efficacy and cost of competing drug therapies into account. For example, a liver transplant can cost $600,000.

But what if Sovaldi merely held the disease Hepatitis C at bay, and only as long as it was taken regularly? What if Sovaldi had to be taken 6 days a week — year in and year out — at a cost of more than $300,000 per year? That is the type of question Joe Nocera tackles in a recent New York Times article.

Writing in the Times, Nocera actually discusses another wonder drug, Kalydeco, developed by Vertex Pharmaceuticals. Kalydeco targets a specific subset of people with the genetic lung disease cystic fibrosis. For this small subset of patients, the drug works wonders. According to the New York Times:

…it is the first drug that attacks not just the symptoms but the underlying cause of cystic fibrosis, a genetic lung disease that usually kills victims by the time they reach their 40s. It doesn’t work for every sufferer of the disease, but rather for a small subset — probably around 2,000 people — who have a specific genetic mutation that the drug targets. But for those it helps, it is life changing.

Nocera’s question isn’t about the merits of Kalydeco, or Sovaldi for that matter. His question is more basic: what happens when there are possibly hundreds of really good drugs like Kalydeco and Sovaldi on the market at costs that are a multiple of the average household income? What happens when there are millions upon millions of people who could benefit from a very expensive drug? The question isn’t an academic one. Although specialty drugs are currently only about 1 percent of prescriptions, they account for one-quarter of all prescription spending. By the end of the decade, that figure is expected to grow to nearly half of drug spending.

The premise of orphan drugs and many specialty drugs is they mostly treat only a small number of people. These drugs are expensive, and the cost is spread over a larger population when Medicare, Medicaid and health insurance covers them. Nocera argues that the day of reckoning will come when too many people stand to benefit and the aggregate costs grow too large. Yet, Nocera provides no answers — just food for thought.

Comments (15)

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  1. Devon Herrick says:

    At its core, this is a debate about the dreaded “R” word — rationing. At what point should rationing be used? Price rationing is used in every other market — outside health care. Think about it. Insurance theory assumes that very small risks (that are unknown) are spread across large risk pools. People who don’t expect to get cancer or heart disease willing pay a little more than their expected costs for the assurance that the small likelihood of extreme illness is covered.

    But what happens when, say, 25 million seniors stand to benefit from a personalize drug regimen at a cost of $200,000 per year? Lets assume the drug is so effective that seniors live an extra 10 years — all the while taking the drug. At $5 trillion, it is more than double our current health expenditures. It’s one-third our national income.

    Are young people willing to stand by paying additional taxes to fund health expenditures that climb to nearly half our national income? Will the credit markets allow the government to boost borrowing to cover the cost? Will seniors voluntarily turn down the high cost therapies to save their grandchildren’s financial future? Will Americans ratchet down their standard of living (smaller houses, older, cheaper cars, less clothing, less dining out, fewer vacations, etc.) to accommodate the higher cost of medicine?

    I’ve laid out quite a few questions; but no answers. I suspect the answer is all the above is “no” — but that’s not really an answer.

    • Barry Carol says:

      The fundamental questions being implicitly raised here that we all need to address are (1) how much is a life worth and (2) how much should society be prepared to spend to keep one person alive? It is much easier to deal with these questions at the broad population level in such areas as environmental regulation. For example, we may decide that requiring businesses to pay more than $5 million in aggregate for new pollution control technology to avoid one premature cancer death is too much. It is much harder, to tell a specific individual that he or she can’t have a lifesaving drug because it’s too expensive and we’re not willing to pay for it or we decided that we can’t afford to.

      I can envision an approach to expensive drugs evolving that’s similar to rationing organs. In the case of Sovaldi, for example, we could stipulate that we won’t pay for more than 10,000 courses of treatment per year and once those slots are allocated, nobody else can get the drug unless they can self-pay until the following year. For organ transplants, we have elaborate protocols to determine who gets the available organs. For expensive drugs, it could be first come first served or there could be age based rationing or some other approach.

      Drug therapies lend themselves especially well to QALY metrics. Maximum spending of $150K per QALY would implicitly value a life at approximately $12 million ($150K X 80 years). I think that’s adequate and well above what the UK allows.

  2. Roger Waters says:

    Ahh, but what about the less dreaded “i” word (although some fear it – innovation). Let’s acknowledge the enormous innovation these drugs bring. But what about technology innovation that shall soon make it much less expensive to find these drug? Have you ever wondered why Kalydeco only works for 2,000 persons, and Sovaldi for 90 percent – but for these fortunate persons it is a complete cure! Let me repeat that – A Complete Cure – now that is almost never heard in the health or care businesses.

    It only works for certain persons because the root cause of the disease is different for each person. Finding and addressing that root, which some refer to as the “omics” world (genomics, proteomics, etc) is just one aspect of P4 medicine – the study of underlying causes of disease and the differences between individuals resulting in “predictive, preventive, personalized, and participatory” healthcare.

    Technology is advancing to the point where we can target the research and treatment to the individual, and not have to go through expensive research that takes a shotgun approach because we don’t know who may, or may not, benefit. Of course, to develop this technology takes funding, and guess who is funding this technology – the drug companies, that charge the high current prices so they can fund this kind of technology development.

    And so, the circle of life goes, and behavioral economics reigns, and capitalism may actually come up with some good things? To every thing, there is a season.

    • Devon Herrick says:

      Obama health advisor, Prof. David Cutler (Harvard), wrote a book a few years ago titled, Your Money or Your Life. In it he explained Americans spend a lot on health care and we get a lot for the money spent. That is definitely true.

      Moreover, prescription drugs are arguably the most efficient form medical therapy. We currently spend twice as much on doctors and three times as much on hospitals as on drug therapies.

      Nocera’s New York Times article was somewhat of a philosophical question; Is it possible to have too much of a good thing? Being an economist, my opinion is that innovation is very beneficial. But there needs to be a feedback loop allowing consumers to signal how they want resources allocated; and which technologies deserve rewarding. For instance, $84,000 for Sovaldi sounds like a bargain. But, $300,000 annually for a competing drug that merely manages hepatitis C like a chronic condition, maybe not so much.

  3. George Sack says:

    This question underlies the notion of “Orphan drug.” Ironically, the progress in research promises many more of these for “niche” markets and a large group of them are already well-established. Development costs cannot be spread over millions (e.g. Lipitor). This category may be the fastest growing in drug development – many “niche” groups have strong advocates. This may be the “reductio ad absurdum” of “personalized medicine.” (Most of us strongly support the latter idea for effectiveness and, ironically, cost-savings!)

    • Devon Herrick says:

      Years ago I had a friend who was a drug researcher for a large pharmaceutical company. She said drug makers only wanted to make drugs for chronic conditions with huge target populations. The FDA, on the other hand, had signaled that it was tired approving “me too” follow on drugs. As a result, the bar for approval for, say, the 10th cholesterol drug in a given class would be much higher than the first cholesterol drug in a new class.

      • Bill B. says:

        This makes sense as chronic conditions that reach a large population have tremendous upside to them. But as multiple drugs get passed through that target the same ailment, unless it is a significant improvement, it should have to pass over the higher bar.

  4. Thomas says:

    Would these drug companies really determine price based on the amount of people that the drug will potentially help? If a drug is costing 6 figures per year, and only a small subset of people benefit from it, but they are buying it, what incentive would drug companies have to lower the cost if the drug is selling?

    • James M. says:

      I agree that is seems like its radically high cost is fine as long as the people who it treats is 20,000, and not 2 million. I don’t see how more people receiving the drug means the price should fall, unless they are receiving some sort of cost sharing which makes it unstable.

  5. Bill Sidhu says:

    The solution may be simple: If a drug, does not matter how wonderful it is, does not benefit millions of people it should not be covered under Medicare, Medicaid or even private healthcare markets. The industry will very quickly rationalize to reprice it down to the affordable pricing levels.

  6. Yancey Ward says:

    Kalydeco’s target population in the US is about 2,000 right now. The costs of developing and getting Kalydeco approved were not, a priori, any less than developing Lipitor, for example. The costs of that development must be covered somehow, plus provide a profit. If you cannot spread that cost over 20,000,000 people, but must spread it over 2,000, then the drug is going to cost roughly 10,000 times as much per patient in this case. The bright side, however, is that orphan drugs still go off patent eventually and the cost will fall.

  7. Frank says:

    This is a difficult. We should no doubt try to bring about drugs that can suppress or cure diseases that affect major ailments, no matter how many people they affect. It is difficult to tell someone that because not enough people have cystic fibrosis, there isn’t an incentive to really produce a drug for it. But then again, how do manufacturers of these drugs recoup their losses without imposing extraordinarily high costs. I don’t know if government rationing is even sufficient in this case because even if the drug were made, if it isn’t sold at the market value then drug companies will simply go under. Does the government foot the bill? At what point is it too expensive?

  8. bob hertz says:

    Let me raise two points, one sort of left wing and the other just plain Robin-Hanson-like idiosyncratic.

    1. The development costs are overstated in many ways.
    See Dr Donald Light’s piece called Pillars of Pharmaceutical Policy for more details.

    I do not think that even the overlong clinical trials ever cost more than $100 million, and specialty drugs are allowed to come in with fewer trials. That is just one example.

    2. Obtaining an extra year of life is almost always a blessing, some would say it is a beautiful thing in the eyes of God.

    But it has no financial value, no QALY or anything like that. It is a huge expense!!

    Especially for a senior citizen. They will draw more social benefits in their longer lives and pay rather little in taxes.

    Tbis does not mean we should not save lives. But we must shed this fiction that we are doing anything but spending.

  9. John Seater says:

    As usual, I find this kind of debate misconceived, and I don’t see any problem, except one that society itself has created by making a mess of the health care market. Medicare should not exist. Health insurance should not be given a tax subsidy. Drugs should be treated the same as steak or salmon and made available to those who can pay for them. That last point means that rich people will be able to buy drugs that other people cannot buy, but then that’s what the term “rich” means: you can buy more stuff. Bill Gates can buy a lot more than I can. So what? He produced something that benefits literally billions of people. We know he did that because billions of people freely give up some of their wealth in exchange for what he created. He deserves his wealth and what it can buy. If you are worried about truly poor people, give them vouchers.

  10. Rich Osness says:

    There have been a lot of interesting comments that show a lot of thought, but I agree with John Seater. Everything suggested will only make things worse. The whole discussion seems to be about what and who to cover within our current regulatory system.

    With our current health care finance system, providers will lobby to get their treatment “covered”. Patients will lobby to get the treatment they want “covered”. This consigns the debate and decision to the most corrupt and inefficient institution in our (or any) society, the government.

    Think about it. Do you really want your congressman or any of the last several presidents making these decisions? How about that Senator and National guard officer who apparently cut and pasted his entire master’s thesis?

    Maybe the discussion should be how to get around or eliminate the regulatory structure.