By Tomas J. Philipson and Andrew C. von Eschenbach
Since introduction of its new breakthrough drug Sovaldi, which comes close to “curing” Hepatitis C, Gilead (GILD) has been under intense public scrutiny because the three-month course of therapy “is too expensive.” However, this criticism fails to consider the treatment’s true value in comparison to its cost. All the costs of providing Sovaldi are borne by patients and payers up front, while the benefits of the therapy for the patient and society accrue over a life-time. This mimics other durable goods such as housing, for which construction costs must be paid up front through mortgages while the value of having a home endures over time. We propose and discuss similar credit market mechanisms that can support the discovery, development, and delivery of life-saving products like Sovaldi when upfront costs and long-term benefits of health care are misaligned in this manner.
With recent advances in medical innovation, so-called specialty drugs have come under intense pressure for their pricing. At the forefront of this debate is Gilead’s Hepatitis C drug, Sovaldi, which is currently priced at approximately $85,000 for a 3 month treatment period. This equates to approximately $1000 per pill, but Sovaldi essentially provides a “cure” for approximately 80 percent of people infected with the Hepatitis C virus (HCV) – a stunning achievement. HCV is ubiquitous; approximately 200 million people are infected world-wide, with about 3.2 million residing in the US. After an initial acute phase of illness, it persists as a chronic infection, primarily in the liver. Over time, chronic HCV infection often produces cirrhosis and liver failure, as well as liver cancer and life-threatening bleeding from the stomach and esophagus. There is no vaccine to protect against the virus, and the toll on society in terms of both human suffering and financial costs are overwhelming. Much like the HIV virus responsible for AIDS, there can be little debate over the need to treat infected patients, not only for the direct benefit to those infected, but also for the good of society because eliminating the virus from infected patients would reduce – or even halt – the spread of HCV to the uninfected.
(DISCLOSURE: Dr. Philipson's consulting firm, Precision Health Economics, has worked with biotechnology or pharmaceutical firms with an interest in hepatitis C therapies. However, all opinions expressed here are the opinions of the author, and do not necessarily reflect the views of PHE or its clients.)
Sovaldi may be a poster child for the future of health care. The issue of emerging innovative medical therapies being “effective but (therefore) expensive” is becoming more central to health care financing, as many years of research and billions of R&D dollars are now yielding stunningly effective treatments for a host of devastating diseases. Whether these innovations provide a cure for a devastating virus such as Hepatitis C or extend the life of a cancer patient, the question is not whether to pay, but how to pay.
The key issue with Sovaldi, which is representative of other treatments, is that costs are temporally front-loaded while benefits are delayed. In other words, we face costs now, but the benefits accrue over the course of a lifetime. To infected patients, the benefits persist much longer than the treatment period of three months. Indeed, if treatments costs were averaged out over the years they benefit the patient, the cost per year is substantially lower; for a patient who benefits for 30 years, for example, costs come to $3,000 per year of disease-free living. This provides a better sense of the value of the treatment than focusing on the price per pill. Indeed, a short duration of treatment relative to the duration of benefits of care is highly desirable – ideally, we want one pill with a lifetime of benefit! In addition, reducing the prevalence of the disease protects the uninfected from subsequent exposure. In other words, the incidence of new cases will fall over time with the administration of Sovaldi. Taking into account the future patients who benefit from the treatment of infected patients further reduces the cost per person per year of benefit. However, those who remain uninfected due to Sovaldi never pay Gilead for the improved health that they obtain. Ultimately, regardless of how we think about the costs relative to the future benefits of treatment, reality persists: all of the future benefits of treatment with Sovaldi, whether to the treated patient or to others, are only possible if we pay the upfront costs.
Outside of health care, when there is such a misalignment in time between short-term costs and long-term benefits, various credit mechanisms are efficiently employed to allow people to purchase goods without paying the entire price up front. This is the case for mortgages, which covers the upfront construction costs of a home to be lived in for many years, or for student loans that pay upfront tuition costs for the life-long benefit of an education. The real issue at the heart of the debate about the pricing of Sovaldi is not that it is too expensive, but that we lack proper credit mechanisms to afford to treat all who need it. In a world without mortgages or student loans, how many people could afford to pay upfront for their house or education?
What would better credit market mechanisms in health care look like? On the aggregate payer level, governments around the world could facilitate better credit instruments for public payers. For example, state-run Medicaid programs in the US (like many public programs) operate on full expenditure of appropriations provided annually by lawmakers, without the option of carrying over funds to subsequent years. This makes borrowing over time by public payers impossible or difficult because payers are unable to reliably predict their long term ability to service debt. There are many ways in which the credit mechanisms available to public payers could be enhanced, however. For example, the federal government could guarantee or subsidize health care loans to the state Medicaid programs to achieve lower interest rates. In the case of private payers, unfortunately, these credit mechanisms will be less valuable due to the relatively frequent turnover of beneficiaries in those plans.
On the patient level, those in need of treatment may face significant co-pays, but these costs could also be financed over time through enhanced credit mechanisms. There are, of course, existing credit vehicles, e.g. credit cards, which allow patients to smooth out-of-pocket costs over time. Indeed, existing financing options are already in place through specialized health care loans for some elective procedures such as plastic surgery. Interest rates on these credit sources tend to be particularly high, though. Through more efficient financing mechanisms, such as securitization or government guarantees, interest rates for these loans could be reduced. For high mortality diseases such as oncology, patient-based health care loans for specialty drugs may face particularly high rates because of the risk of the borrower’s death, so additional mechanisms would be needed to better allow third-party borrowing by, for example, family members. For more healthy populations, self-insured payers or employers could offer credit mechanisms that both pool health care costs across participants in a given year, as it does now, but also smooth costs over multiple years.
The value of using improved payer- or patient-level credit mechanisms to finance aggressive eradication programs for diseases like HCV could be enormous. This is because better credit could facilitate an immediate and large-scale public health effort that would save lives and eliminate the enormous future costs of treating the ravages of a deadly chronic disease. Understanding the epidemiology of such infectious and chronic diseases is important for understanding the appropriate targeting of such credit mechanisms. For HCV, most of those infected in the US are baby boomers that were exposed to the disease through blood transfusions. New infections in this population are virtually zero and transmissions by them very limited, making it more akin to a non-communicable chronic disease in this group. The new cases or incidence of the disease – roughly 17,000 new cases per year in the US – stems mainly from the sharing of needles among IV drug users or sexual contact between mainly HIV+ men. Therefore, eradication efforts need to target members of these two populations, many of whom are enrolled in public state-run Medicaid programs. For eradication purposes, the key credit mechanisms needed are thus those designed for Medicaid. Given that the stock of currently infected is about 200 times the yearly infections, successful eradication would require the treatment of a large number of HCV-infected people today. In order to enjoy the long-term benefits of eradicating HCV, substantial costs for treatment must be paid in the short-term, necessitating credit mechanisms like those discussed.
One of the strongest arguments for such debt-financed eradication programs is that, by spreading out payment over time, future generations who benefit from eradication bear part of the responsibility for paying for the treatment of the current pool of infected individuals. Debt-financing is therefore desirable because it allows uninfected individuals who benefit from disease reduction to pay for their improved health, even if they never use Sovaldi. This argument is not limited to eradication of infectious diseases, however. In chronic diseases like cancer or Alzheimer’s, future generations benefit from reduced caregiver burden, better outcomes, and lower long-term health care costs due to advances in treatment today. Debt-financed treatment also allows the future beneficiaries of today’s advances in these diseases to contribute to paying for treatment of today’s patients when cutting-edge treatments necessitate high upfront costs that generate long-term benefits.
In sum, innovators need to be rewarded for enabling patients to live longer, healthier lives, whether or not those benefits coincide in time with the costs of care. Just as there would be fewer home purchased if the full value of a house had to be paid up front without mortgages, and just as fewer kids would attend college without student loans, public and personal health will suffer needlessly unless we develop better credit mechanisms for patients and payers in health care.
Tomas J. Philipson is the Daniel Levin Chair of Public Policy Studies at the University of Chicago. Andrew von Eschenbach, president of Samaritan Health Initiatives, was previously commissioner of the Food and Drug Administration and Director of the National Cancer Institute. Both are members of Precision Health Economics LLC, which consults to public and private payers as well as manufacturers.
