Health care costs: why do some drugs cost so much?

I read an interesting article in the NYT today, entitled “Lawmakers attack cost of new hepatitis drug,” written by Andrew Pollack.  The article was about a new drug used to treated hepatitis C, a disease that in most people resolves spontaneously without treatment.  But the disease can lead to liver failure in some patients, and the new drug, Solvaldi (manufactured by Gilead Sciences) is more effective than existing medications in curing the disease.  The furor here is not about the effectiveness of Solvaldi, but about its cost, $1000 a pill; a typical 12 week course would cost about $8000.

Eight-thousand dollars to cure a serious disease does not seem like all that much money, but for Gilead Science, economic experts had predicted sales in the U.S. alone of up to 10 billion dollars per year.  Insurers and law makers have gone crazy over the costs and the result was a large drop in Gilead’s stock price as well as  many other health care stocks.

So, do other medications cost as much as Solvaldi?  It depends.  On a per pill basis Solvaldi is right up there, but if one looks at it in terms of total treatment costs, Solvaldi is a bargain.  For example, medications I use to treat precocious puberty might cost $100,000-$200,000 per patient over 4-5 years; treating a patient with growth hormone injections might cost $250,000- $500,000 or more over 5-10 years of treatment (those costs do not include costs for physician office visits and the many laboratory studies needed along the way).   So, the medications used to treat precocious puberty and growth hormone deficiency are expensive, but far less than $1000 per day.  So how come, the insurers and law makers aren’t indignant about the costs for lots of medications besides Solvaldi?   Beats me.

In my opinion, the real question here about Solvaldi and all other drugs (as well as for medical procedures and doctor visit charges)  is whether the charges are reasonable.  I do not know how to define reasonable.  I am no economist, but my understanding is that in a free market system, prices are set by supply and demand.  If someone sells a light bub for $1000 but someone else sells a comparable light bulb for $1, there won’t be many takers for the $1000 light bulb.  But if the $1000 light bulb is the only product of its type, consumers will need to decide if the costly light bulb is worth it.  I don’t think U.S. health care works like a free market system.  In particular, I doubt if light bulbs are ever medically necessary, but rather, a convenience.  Of course if the U.S. health care system had a budget, it would be forced to decide if it could afford this or that drug or procedure at the offered price.  There would be a negotiation and the seller of the product or service would be forced to determine at how low a price it could still make a profit.  This might result in a much reduced price for the service or product in question, or no deal because the health care budget couldn’t accommodate the projected costs at the seller’s “best offer.”

What amazed me about the NYT article and almost everything else I read about health care costs is that the discussions invariably center on how the health care system can afford the costs, rather than whether the costs are reasonable.  Especially for health care services that are paid for by taxpayers, the government should require some accounting of how the seller determined the charges, and should develop some policy on what is fair and reasonable.  That is already being done for Medicare services and I think it works pretty well.  This approach would allow us to determine if that $1000 pill should really cost $1000 or whether $3.00 would cover overhead (to include development costs and costs for ongoing drug development) and allow for a reasonable profit.  The way things are now, it’s a bit like blackmail; let’s say I have a drug that is uniquely efficacious for some fatal disease.  Should  I be able to dictate what that drug costs no matter what?  It may be legal but is it right?

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