By John Rother
October 14, 2014 at 7:00 am ET
Perhaps no company has done as much as Gilead to propel the issue of high drug prices onto center stage or to lay bare the pharmaceutical industry’s approach to pricing new drugs. While concern over the ever-rising costs of specialty pharmaceuticals has been building it took Gilead and the pricing of their Hepatitis C drug, Sovaldi, to rivet the attention of policymakers, payers, and patients.
One might wonder what all the uproar is about. After all, Sovaldi is hardly the first drug to cost tens of thousands of dollars and far from the most expensive. However, what sets Sovaldi apart is the fact that it is an exceptionally high-priced drug intended not for thousands or even hundreds of thousands of Americans – but millions.
Most estimates place the number of people currently infected with Hepatitis C at between three and five million, though some experts argue the number might be much higher. Whatever the number – three, five, or even ten million – the reality is that the costs imposed on the system by Sovaldi – and by its follow on product launched this past week, Harvoni, are substantial.
To add insult to injury Gilead announced the price of its new product this past Friday: $94,500. This was a tremendous blow to all of those who had hoped that Gilead would listen to the concerns raised by the health care community. This action is especially galling because the potential for millions of patients to take this drug means Gilead would continue to reap billions in profits even with a meaningful price reduction.
However, their pricing decision came as no surprise. A week earlier, Dr. John Milligan, President of Gilead, appeared on a panel at the Brookings Institution. In his remarks he was unusually candid in explaining how Gilead reached the price of its Hepatitis C treatment Sovaldi: “At the end of the day the pricing analysis was relatively simple: what is the current cost of other therapies.” He went on to say that they would take this same approach to pricing their forthcoming product.
On its face Dr. Milligan’s explanation seems reasonable. However, a closer look exposes the flaws in his reasoning and how that approach makes higher prices a self-fulfilling prophecy. Basing price off of preceding prices without regard to value simply defers responsibility to those who came before. It is often done because there is an assumption that if the market paid before, they will pay again, though perhaps a little more this time than last. The second problem of course is that pricing simply becomes an ever-upward escalator. Using the same logic, Gilead has priced its new product based on the previous cost of Sovaldi plus other co-prescribed drugs. At this point pricing becomes a circular argument. The new product is expensive because Sovaldi was expensive – and round and round we go.
Unfortunately what is lost in all of this is that both Sovaldi and Harvoni are very good and effective drugs that can do a world of good for people. That fact is overshadowed because we have been forced into a debate about the sustainability of this kind of approach to pricing.
Gilead should be applauded for their innovation and perhaps even for their candor in discussing how they price their products. They’ve performed an important public service by bringing these drugs to market and perhaps as important a public service by sparking a debate about how we can sustain innovation and ensure affordability for the entire health care system.