The $1,000 Pill: How Pricing is Decided and its Effects on the Marketplace

In the more than three decades during which I have worked in the pharmaceutical industry, prices have been a point or contention and public debate every day. As far back as 1968, prices were referred to as the “Achilles Heel” of the industry and there were predictions that everything would soon come tumbling down because the prices just weren’t sustainable.

So the current controversy over high pharmaceutical prices is just a continuation of an ongoing saga and not a new phenomenon. Not that we should ignore it, but we must understand that nobody will ever be happy with the prices charged for medicines.

The negative response to the price of Sovaldi was instant and nearly deafening—but why?

First, as I said, nobody will ever see a price that is low enough for any drug. Critics are simply used to complaining about the prices of medicines. This is due, in part to the nature of medicines. They are necessary but not popular: Nobody wants to be sick, so paying not to be sick imposes an additional negative. Because medicines are the product of faceless for-profit entities with
a handy bad guy label, “Big Pharma” drug firms are a custom-made bad guy.

Top that off with the sheer volume of direct-to-consumer advertising, much of which I believe is wasteful and misguided—and most of which is misunderstood and misinterpreted by the public—and we have a villain right out of central casting. Don’t believe me? How many movies in the past decade or two featured pharma firms as the bad guys? They outnumber just about any other business as the font of evil.

Insurers Hit Hard—In the Short Run

Another major reason for the controversy over the price of Sovaldi is that health insurers didn’t budget for it. Although we can make the argument that this breakthrough has some compelling pharmacoeconomic evidence on its side, the fact remains that paying for Sovaldi for millions of patients over a short period of time will hit insurers hard—but only in the short run. Clearing the backlog of Hep C cases will save billions in the long run but health insurers, for all their talk about long-term healthcare costs, are really only interested in the short run. Don’t blame them for that. Between Wall Street’s quarterly expectations and the ACA provisions that require a fairly high medical loss ratio, the insurers could not make up for their losses with later gains. Because they have limits on what they could recover from the short-term high expenditures their businesses would suffer—this isn’t fair or right, but it is driven by the structure of the industry and its regulations. This is even truer for PBMs, who are not responsible for non-drug costs. They are screaming the loudest!

If the health insurance industry can force any drug prices lower they believe they will be more profitable, and it seems as though public opinion is starting to favor the insurers—I hope the industry isn’t content with that. This industry has done a singularly poor job of helping the public to understand the value of medicines. Many in the industry don’t appreciate that drugs are the most cost effective healthcare intervention available; the use of medicines prevents or postpones the need for many costlier and less effective interventions.

Congressional Budget Office Weighs In

The Congressional Budget Office itself, when evaluating the impact of prescription drugs on healthcare expenditures, essentially assumes that every dollar spent on drugs will offset $2 in costs elsewhere in the healthcare budget and every $1 reduction in drug spending will increase total costs by $2. When was the last time you heard PhRMA or anyone touting that amazing fact?

Specifically for Sovaldi consider this: The pegylated alpha interferon plus ribavirin regimens that were used to treat Hep C had about a 30% rate of effectiveness and cost roughly $35,000 for a course of therapy. Incivek, the Hep C drug from Vertex that was considered a miracle just a short time ago, had about a 60% cure rate at a cost of $60,000 per course of therapy. Sovaldi, with a 90% cure rate at a cost of $84,000 is actually less costly per cure than any of its predecessors—but nobody in our system calculates value that way.

The problem for Sovaldi, or any new medicine, is not a pricing issue—it is a problem of the lack of recognition of value combined with the overall negative public opinion of the pharmaceutical industry and its products. Imagine that a surgeon announced the availability of a new procedure that would cure 90% of Hep C patients. If that surgery cost $200,000 people would be lined up to get it, insurers would pay for it, and the surgeon would likely be in line for a Nobel Prize. But because it is a drug for less than half that cost we have an outcry over the price.

Peak Sales May Make Sovaldi the Biggest Drug in History

Not discussed in the controversy—you cannot possibly call it a debate—is the fact that regardless of the uptake and potential sales of Sovaldi, which may become the single biggest drug in history when measuring peak sales, it will never approach the total lifetime sales of Lipitor (estimated to be $130 billion) or even Plavix ($73 billion) because, unlike those drugs, which patients must take for a lifetime, Sovaldi cures with one course of therapy—once this huge backlog of Hep C patients is treated and cured they won’t be coming back for more. The peak sales year will be reached early then sales will sharply decline to a much lower level—resulting in long-term savings, which as I said before, nobody cares about.

The Sovaldi pricing controversy is about piling on and opportunism. Anything in “pharma” is fair game and the complexity of the issue makes it difficult to combat sound bites with reason. If the industry, companies alone and collectively, took the time to understand the value of pharmaceuticals themselves then helped others to do so, much of this controversy could subside. It will never disappear. As I said, nobody wants to use medicine so they will never truly come to appreciate the fact that the products of this industry help most people to live longer and better.

Sidebar: Gilead Sued as Plaintiffs Say Sovaldi Pricing is “Injurious”

It was recently announced that the Philadelphia Transit Authority has sued Gilead over the pricing of Sovaldi. The lawsuit contends that Gilead is abusing its patent rights “by charging discriminatory prices that apparently have no other rational basis other than to inflate the company’s bottom line.” It appears that part of the lawsuit is based on the fact that some government programs and other countries have received steep discounts on the drug, while pricing for other customers is much higher and therefore discriminatory. The plaintiffs argue that they have been “injured” by the high price.

Whether courts find merit in the case is yet to be seen, but much of this “discriminatory pricing” is actually mandated by law: The Federal government mandates discounts for Medicaid, Veterans Affairs and 340B institutions. Drug manufacturers are required to price discriminately by federal statue—those entities must receive discounts of at least 23%. In effect, the plaintiffs are suing Gilead for following the law. The courts have also upheld differential pricing for pharmaceuticals in a number of cases over the years, so there appears to be ample legal precedent to follow. This is no guarantee that Gilead will prevail in the case—but a strong defense can be made.

The plaintiffs appear to be casting a wide net in this case, even arguing that the patents for Sovaldi may not be valid and arguing that a pharmaceutical company is, in essence, a healthcare provider under the ACA. This action is seeking class certification, which means the plaintiffs would like to represent all potential customers who would pay for Sovaldi and who are “injured” by the high price. Don’t expect anything to come from this soon—actions such as this can take many years to work through the courts.


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