It’s rare that I get to say this – but we can learn something from the United Kingdom. As our “free-market” health care system deliberates whether Gilead is charging a “just” price for its Hepatitis C (HCV) drug, Sovaldi, the UK’s National Institute for Health and Care Excellence (NICE) just approved the drug as being cost-effective, and recommended it for subgroups of patients.
The battle over Sovaldi – which costs $84,000 in the U.S. for a full course of treatment – has sparked not only outrage from insurers and pharmacy benefit managers (PBMs), but also a Senate investigation into pricing of the drug. And earlier this year, the PBM
What [Gilead has] done with this particular drug will break the country…It will make pharmacy benefits no longer sustainable. Companies just aren’t going to be able to handle paying for this drug.
(DISCLOSURE: I have a long position in Gilead Sciences, the manufacturer of Sovaldi.)
Is Miller right? Much has been written about the costs and benefits of the drug, which I won’t repeat here; instead, I recommend reading Allan Joseph’s posts on the topic at The Incidental Economist. Put bluntly, while the drug is expensive, the “cost per cure” isn’t much higher than existing treatments, and the likely higher compliance rates make the drug enormously effective. Nevertheless, given that there are somewhere between 2.7 and 4 million HCV cases in the U.S., treating all of them with Sovaldi would cost between $227 and $336 billion. So concerns about cost to private and public payers are understandable, though this cost would be spread over time, and not every HCV patient would be treated with Sovaldi.
But the problem is that we’re still having the wrong conversation. The right question to ask is whether Sovaldi is worth the price being charged; this is a 180-degree turn from the reflexive reactions from payers shouting about the cost.
Determining whether a treatment is “worth it” isn’t easy. Generally, there are two points to consider. The first, a simple, naïve analysis of costs and benefits. A paper published by the California Technology Assessment Forum found that Sovaldi is somewhat low-value because of its price – though over 20 years, there would be a cost offset of about 75 percent if all HCV patients were treated (if only those with advanced liver fibrosis were treated, net savings would total $1 billion). Another paper found relatively low costs per quality-adjusted life-year (QALY) with standard treatment (about $11,255).
There’s a second, important point, however, that deals with who benefits from cost-savings. When it comes to treating HCV, because people tend to change insurers fairly often, the insurer paying for the treatment will rarely be the one benefiting from long-term savings. In fact, for many HCV patients , the beneficiary may end up being Medicare because the typical patient is likely to be between 40 and 59 years old – close to Medicare eligibility age. While some of this can be ameliorated with risk adjustment between private insurers, implementing a similar system between Medicare and private insurers would be more difficult.
But let’s assume away the second concern for a moment. If insurers can save in the long-run by covering Sovaldi, it appears that the private (long-run cost savings) and social (huge gain in QALYs and very low cost per QALY) benefits absolutely justify the price. This is where NICE’s decision to recommend Sovaldi becomes instructive.
First, it’s important to dismiss one claim that’s been thrown around somewhat haphazardly – that the UK is getting a better price for Sovaldi that the U.S. This isn’t true. The cost of Sovaldi in the UK is about $59,000, while it’s $84,000 in the US – but does that mean that the UK feels a lighter burden from Sovaldi? Not really. Though the cost in the UK is about two-thirds of what it is in the US, the UK’s GDP per capita is also about two-thirds of the U.S. So the cost burden remains roughly the same at the margins. (Of course, the reason that Gilead is able to price Sovaldi like this is because they are granted a patent monopoly, which lets them engage in price discrimination.)
So what should we learn from NICE’s recommendation? The lesson is actually fairly simple – given that a system with very tight price controls, and what can be described as a true single-payer system, decided to cover Sovaldi for some subgroup of patients, perhaps the mud-slinging against Gilead is a bit unwarranted. The evidence appears to be shifting in Sovaldi’s favor.
But there’s another important takeaway from this entire experience. Drug pricing is very controversial, and even when you have government playing the monopsonist role, prices can be expensive. Payers, PBMs, and patient groups should engage companies like Gilead in a constructive discussion focusing on why drugs cost so much to begin with. Similarly, pharma companies will have to be receptive to calls for more value from the high-cost drugs, and perhaps will need to work with payers to develop payment models that split some of the risk of these drugs (Nayer and Kish propose a multi-year value-based contract, for instance). Vilifying “evil” pharmaceutical companies is counter-productive, and ignores the important nuances that affect drug pricing.
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INVESTORS' NOTE: Gilead Sciences (NASDAQ:GILD), the manufacturer of Sovaldi has had two very successful quarters in 2014. Going forward, the European market for HCV (while markedly smaller than the U.S. market) will help drive revenues a bit. While competing HCV treatments are in the pipeline, Gilead’s earnings per share ratio (at 4.45) is the second-highest in a group in a group of 11 competitors including
