Sunday, 3 August 2014

The $1000 pill

How do you price a drug ?  Its a question almost impossible to answer without vehement and justifiable criticism, whatever your answer may be. Nothing typifies this better than the absolute storm raging over Sovaldi.

Sovaldi is a new drug introduced as a cure for Hepatitis C, which was hitherto very difficult to cure. Almost a miracle drug with something like 90% success rate.  In six months it has already become the largest selling drug in the world. In these six months, it has clocked sales of $5.7 billion. Its maker, Gilead, has seen a 50% jump in share price.  Fantastic, you would think.

The only fly in the ointment is that each pill costs $1000 in the US. Or Rs 60,000 if you prefer. You need to take the pills for a six week period, twice a day. That's a bill of $ 84,000. In the rupee equivalent it sounds even more expensive - Rs 50 lakhs.

A veritable storm of accusation and counter argument has arisen. $ 1000 a pill ?? That is criminal argue the opponents. The big bad corporate world is simply gouging the sick to make greedy profits. Bad Bad.

Counters the company - the $ 84,000 treatment bill is significantly cheaper than any alternative which can all be proved to be more expensive with lesser chances of success.  This is therefore a cost saving to patients and instead of being deified, the company is being villified, they say.The trouble with this argument is that the alternative is really liver failure.

This being the US of A, there are all sorts of complications. Medicaid, their programme for providing free medicines for the poor, estimates that it would cost it $ 55 bn if every person eligible for Medicaid and is suffering from Hepatitis C is given this medicine. And the law says no drug that has been approved by the FDA can be withheld from Medicaid.  Of course, there isn't the $ 55bn lying around.  It has also been estimated that the premiums for Medicare (their programme for the elderly) could go up by upto 8% on this single drug alone.

Free market and freedom of pricing is a fundamental tenet of the capitalist world. America, to its credit, defends this even under difficult circumstances. The pharmaceutical industry is a special one - most research results in failure and blockbuster drugs are extremely rare. For every success there are probably 100 failures. If you do not allow blockbuster drugs to make very high profits, there will not be the pipeline of innovation. For all the noise from the rest of the world, the fact is that most of medical innovation comes from the US.

What about the rest of the world, indeed. In previous cases phramaceutical companies have been pilloried for pricing drugs so expensive in the third world that the most needy have no access to them. Gilead, mindful of these pressures, has priced the drug at $11 a pill in Egypt. This has resulted in a storm of protest in the US. If you can sell it for $ 11 in Egypt, why are you charging me $ 1000, shout the American customers (insurance companies, actually, for it is they who foot the bill in the US). They are cursing that America is subsidising the rest of the world on medical innovation. Gilead is shaking its head saying heads I lose, tails you win.

So back to the basic question - how do you price a drug. Yes, free markets and freedom of pricing is important. Yes, huge profits are the attraction for costly R&D which mostly fails. And yet when something succeeds, it creates a monopoly and it is an accepted principle in capitalism that monopolies will be regulated by the government. It is also a fact that, unlike in other product categories, the consumer does not have freedom of choice and is in an extremely vulnerable position at the time of consumption.  Difficult issues to grapple with.

The last body you would expect to give a sane solution to this, is the US Senate, filled with pompous gasbags of doubtful literacy and questionable intelligence. But in this case, this blogger is actively looking to the US Senate to provide an opinion. For the issue has been taken up by Ron Wyden , one of the (only ?) respected, principled Senator from Oregon (Sriram take a bow for electing him). He is one of the few capable of producing a position of substance.

What do you think. Even this blogger, a champion of free markets and rewarding innovation, is blanching at the thought of a $1000 pill. The logic may be impeccable. But to swallow Rs 60,000 twice a day .......


  1. @Ramesh: You have a gift for picking these ethical and moral dilemmas. No one can argue with the basic principles - Innovation needs to be rewarded, You cannot gouge the poor, etc.

    I think drug companies worldwide miss a very big trick by not being upfront with the consumer class and not introducing different levels of pricing for different segments, and leave the government to administer it. For example Medicaid and Medicare might be able to buy the drug at a much reduced price from Gilead. They would also need to stick with a completely different price in needy emerging markets. And may be give the drug away for free in dysfunctional countries.

    All this sounds like too much of work. But these prices are the reason countries like India laugh at product patents. They would protect their long term interest much better if they did this, and they were upfront in making their position known.

    Unrelated to this subject is a thought that struck me at the brouhaha over the CSAT in the Hindi belt. Will the BJP explain to these people that English is a link language and some basic literacy is needed in the administrative service? They dont do this.

    Back to your topic -I think communication is the key. In these days it will be possible to state your position clearly. Not many people will like it. But not many people (other than Gilead's stockholders) like choosing between living and bankruptcy.

  2. @Ravi - In some ways, this is what Gilead have done. Discounts are applicable to medicaid by law. In Egypt they have priced it very low. The paying (rich ?) American consumer is starting to protest asking why he should subsidise somebody is another corner of the world. The US Senate has started an investigation precisely because of this. Gilead is discovering that whatever they do, somebody is unhappy.

    The issue is very real, because a few anti cancer drugs from biotech companies are coming up for approval stage, with precisely the same issues confronting them too.

  3. With anything in healthcare, pricing becomes a huge issue, not only for the challenge of developing an appropriate "selling price" for the drug or the service, but also because of the moral challenge associated with not providing that drug or service to those who cannot afford it. Thus, at one level, this is not a new story at all.

    On the other hand, this is merely the latest in that storyline is a reminder of how we humans, in whichever country we live, have not yet figured out how to address such issues, even when we fully know that healthcare will become more and more important in any country's economy and the newer drugs and treatment protocols won't get any less expensive--we have taken care of the low-hanging fruit.

    When Apple makes humongous profits from its iDevices, and sits on a pile of cash so high that we can't even see the top, we dare not question why Apple has to sell the device at that stratospheric price, and why it cannot make it more affordable to everybody. (You looked at the company's profit margins? Even phrama folks are envious!) We think that is ok only because an iDevice is not a matter of life and death, as is the case with this drug.

    Societies have failed, and failed miserably in figuring out the place for healthcare in their social contracts. Politicians, and we people too, can be in denial for all we want--all it means that every time a new miracle drug at high prices is introduced to the market, we will have the same discussions over and over again!

    At some point, we will have to face up the reality--we can't have all the best of the best healthcare for everybody. Which is why Oregon is seriously considering highly restricting the subsidy for that drug under Medicaid. (Such an idea of restrictions in the national healthcare discussions became the critics' "death panels for grandmas" remember?)

    In fact, such high-priced drugs are quite a distraction. The number of patients with such specialized problems and their treatments and the noise we create about them completely overshadows the urgency of the gazillions who have to battle out malaria or ebola or ... the fact that we--affluent people and our market institutions--rarely every invest in those is itself a statement on the social contracts we have with our fellow humans.

  4. @Sriram - Yes, healthcare has to be rationed; whether voluntarily or implicitly. Poor countries have long accepted this. It is the rich countries which are having enormous difficulty in grappling with that concept. And idiots like your former VP candidate.

    On a tangent, the healthcare industry has as much to do as the education sector in terms of cost control. One of the reasons why development of drugs is so costly is because of the extreme stringency of FDA approvals, driven largely by fear of lawsuits. That is a typical US problem, but then US leads in the field of innovation. Countries such as India have the opportunity to develop alternate models - and it can hugely win there. In eye care for example, a few institutions, notably Sankara, have pioneered low cost eyecare which are a fraction of the costs in the US. A great opportunity here.

  5. Oh, I am all in support of the FDA's ultra-tight testing/regulatory framework. There is no way I would like them to water down the approval process. We are talking about introducing potentially harmful and lethal chemicals into humans and there is no way we want to do that unless and until we know well, to a high degree of confidence, about that those chemicals can do.
    Naturally, this process will drive the costs up. Which is fine.

    We certainly need alternative models. If societies like India are ok with a huge asymmetry between the healthcare provider and the patient, to an extent that the patient often has zero rights to sue for malpractice, then that is something that Indians have to figure out for themselves. If India's patients are willing to be subjects for various pharma experiments, and the society is ok with that, then across the waters I have no hassles with that, though will feel it is not right.

    I don't mean to say that the Sankara example you write about engages in unethical practices. But, I do know one example of an eye-surgery that went wrong--my father went in for what was supposedly a "routine" cataract surgery and came out practically blind in that eye. (It wasn't at Sankara) There were then additional treatment/surgery that has left him with a way-less-than-satisfactory result. In the US, a lawsuit would have established wherein lay the fault ... so, yes, lawsuits drive up the expenses, but the frivolous ones that we hear about are more the exceptions than the rule.

  6. @Sriram - Wow ; a comment I can disagree with on every line.

    There is no 100% safe product in the world. I am all for 3 sigma safety at reasonable cost rather than 6 sigma safety which is unaffordable.

    India's patients are not willing subjects for pharma experiments. Far from it. There are many cost reduction initiatives that are not by short changing customers. Sankara's success rates are better than almost any place in the world. At a fraction of the cost.

    And I for one have zero desire to be in the litigious medical environment you live in. Thank you very much.

    I'll let you have the last word (no doubt disagreeing with all of this) and then add it to the growing list where we have agreed to disagree :)

  7. hehe .... thanks.
    This blog is your soapbox ... so, I will leave it at this ... thanks for your offer though ;)

  8. Hey, I am sure you read this update:
    "India has become the latest country where the Sovaldi hepatitis C treatment will be offered for $900 per patient"


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