How to Pay for the Next Sovaldi?

Imagine a pill that could cure cancer with one course of therapy or reverse an inherited, deadly disease. If it cost $1 million, could you access it?

This was the question asked at a recent panel discussion held by the American Enterprise Institute. The panel discussed a couple of new proposals to finance new medicines that come at a high price. Because these medicines address the needs of only a small number of patients, manufacturers contend that prices need to be high to make the investment worthwhile.

One proposal was put forward by Scott Gottlieb, MD, (of the American Enterprise Institute) and Tanisha Carino (of Avalere Health). They put forward a redefinition of spending on specialty drugs as capital investment rather than consumption spending. This is because, for example in the case of Sovaldi, the expensive upfront costs of the drug are more than paid for by dramatically reducing costs over the next twenty or thirty years for a patient who might otherwise require a liver transplant.

Gottlieb and Tarino’s paper is not technical, and one way to envision the outcome would be a mechanism whereby the patient or insurer would pay the (estimated) $84,000 cost of Sovaldi over twenty years in smaller pieces, rather than all in three months. (Gottlieb and Carino do not actually give an illustration, but I believe my example is an accurate representation of a potential version of what they describe.)

Another proposal was put forward by Professor Tomas J. Philipson and Andrew C. von Eschenbach, both of Precision Health Economics, LLC. Philipson and von Eschenbach are interested in using credit markets to reduce the immediate cost of paying for drugs. Their model suggests that government should incur a significant fraction of such debt, given that these specialty drugs will benefit future patients (so they should bear a share of the burden through an increase in public debt).

This is a problem that needs solving, and we need “all hands on deck” to find our way there. With respect to Gottlieb and Carino’s proposal, what they are describing is a re-insurance market. Re-insurance markets exists, and we would benefit from a greater understanding of obstacles to such a re-insurance market for very expensive, specialty drugs.

Philipson and von Eschenbach have a great track record of research on the costs and benefits of prescription drugs, so I understand their idea that future generations should finance innovation. However, the government has a pretty miserable track record in this regard, increasingly preferring to load up debt to finance current consumption rather than investing for the future. Do we really need a “Pharma Mac” or “Meddie Mae” on the federal books?

One thing that has been absent from the discussion is the Food and Drug Administration’s role in increasing the cost of researching and development new medicines. Reducing the regulatory burden of the FDA would increase competition and speed new medicines to market, reducing the cost of capital and prices, too.

John R. Graham is a Senior Fellow at the Independent Institute.
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