Why Do Some Drugs Cost So Much?

A few weeks ago I had a chance to visit with an old college friend who is a very successful financial analyst.  His career has been built on his special skill in analyzing potential  profitability of companies that manufacture medical devices and drugs.  I asked him why some drugs are so expensive.  I pointed out that many drugs used by endocrinologists have very high price tags.  Drugs such as human growth hormone, gonadotropin-releasing hormone analogues (drugs that can be used to treat certain types of cancer and precocious puberty), and insulin cost a lot.  For example, human growth hormone costs somewhere between about $30,000-$70,000 per year; some types of insulin cost about $100 per bottle with each bottle lasting only 10-15 days.  I told my friend that I did know something about the costs for manufacturing some of these drugs and that the manufacturer costs (this includes making the product, packaging it, and marketing it) tended to be far lower than the selling price.  Also, it seems that in general, drug prices  have no relation to their potential clinical benefit.  He told me that pricing for products and services is complicated stuff and that what might seem like an unreasonable mark-up, might be necessary for a business to maintain reasonable profitability.  I understood the part about actual costs for production of the product or of providing the service being much more than the basic cost of producing the product or the service.  For example, overhead costs needed to include depreciation of equipment, advertising, and costs for developing new products and bringing them to market.  But I didn’t really understand why a drug needed to cost 10-100 times or more to the patient (or his or her insurance plan) than it actualy cost to manufacture.

Sanofi versus Sloan-Kettering

 So, my college friend and I agreed to have further discussions concerning the drug cost stuff, but meanwhile, an article in the NYT the other day (Friday, November 9, 2012, page B3) caught my eye.  It was entitled, “Sanofi halves price of drug Zaltrap after Sloan-Kettering rejection,” and written by Andrew Pollack.  Basically, Sanofi had just introduced a new drug for treating colon cancer.  The price was set at about $11,000 per month, about twice the cost of another drug (Avastin) that was being used to treat advanced colon cancer.  In what must have been a shock to Sanofi, the doctors at Sloan-Kettering, a prestigious cancer treatment center in New York, said “no way.”  They decided not to use the drug,  citing its very high cost and the fact that it didn’t seem to have any significant benefit over Avastin.  So, in a surprise move, Sanofi announced that it was not changing the the cost of the drug but would discount the drug by 50% to doctors and pharmacies- this is the way some drugs, particularly cancer drugs are sold, not to the patient but to the doctors and hospitals who turn around and bill the patients.  Apparently, Sanofi figured that they could still make a pile of money at the discounted price and that their “deal” would make it very attractive for doctors and hospitals to buy their drug since the charge to patients could still be at the retail price.  But, the Sloan-Kettering docs said that they still wouldn’t use the Sanofi drug.  In fact, the docs wrote an op-ed piece in the NYT a while back explaining why they weren’t going to use the Sanofi drug.  I found it quite interesting that in the NYT article the other day, a high-ranking officer at United Health Care was quoted as saying the following: “It was the first time physicians have stood up and said, enough is enough, and I think that was a watershed moment.'”   Good for the Sloan-Kettering docs.

Don’t get me wrong, we should all be grateful for the many wonderful life-saving /life-improving drugs that pharmaceutical companies have developed over the years.  And, no one can begrudge them making money for their efforts.  On the other hand, given the fact that our health care system costs are a runaway train, we must find some way to bring some order to our costs.  Do we control drug costs by rationing availability of the drugs to only those who can pay the sticker price which has been set by the drug manufacturer, or do we find some way to set costs at a level that provides reasonable (I do not know how to define reasonable) profits for the manufacturer?  Remember, we do not want pharmaceutical companies to stop developing new drugs because they do not have any financial incentive to do so.

One more thing

I hesitate to mention that both Avastin and Zaltrap have been shown to increase lifespan in late-stage colon cancer by about 42 days on average (that’s not a typo, it is 42 days not 42 months).  This means that even at high sticker prices, these drugs are not likely to be used by individual patients for a long time.  The cost situation ends up being very different with a drug like human growth hormone; it starts out expensive and one often needs to take the drug for many years, resulting in gigantic total costs.  I know I am opening a “can of worms” (a very big can), but if the US wants to get serious about controlling health care costs, it will need to make some decisions about the medical necessity for this or that drug or procedure, even those that are not incredibly expensive.  It sounds a lot like that ugly word “rationing,” but I predict that someday we will need to decide when this or that drug or procedure is just not worth the cost.  Of course, we would need to have some sort of national health care budget, rather than an open money spigot for there to be any reason for us to think about the “R” word.