Want to Eradicate Hep C? Fix Medicaid’s Cash Flow Problem.

When Martin “Pharma Bro” Shkreli raised the price of a decades old anti-parasitic drug by 5,000 percent last year, a lot of folks were angry — and they’ve stayed angry. Politicians, insurers and regulators around the country have seized on widespread perceptions of “unfair” drug prices to launch a campaign to bring prices down.

Massachusetts opened a new front in the battle late last month, when Attorney General Maura Healy sent a warning letter to Gilead Sciences, the maker of two breakthrough cures for hepatitis C. The gist of her letter is that the drugs’ list prices, about $1,000 per pill, “may constitute an unfair trade practice in violation of Massachusetts Law because patients can’t afford to pay them.”

The AG suggests that Gilead should price the drugs, Sovaldi and Harvoni, closer to what the company charges in Egypt ($10 per pill) or India ($4 per pill). If Gilead brought prices down below even current discounts, which approach 50 percent, public payers like Medicaid and the Department of Corrections could afford to virtually eradicate the disease in the Bay State.

Healy is correct about the challenge, but wrong about the villain. Gilead, for all of the criticism it has received, got the pricing mostly correct: Based on typical thresholds used to measure cost-efficiency, both Sovaldi and Harvoni are both incredibly cost-effective and, over the long-run, cost-reducing. Previous drugs were much less effective and came with more serious side effects. Ironically, because many patients couldn’t tolerate the side effects, Medicaid spending on hepatitis C treatments and patients was lower and more predictable.

Of course, the absence of a true cure also meant that many patients developed increasingly debilitating complications from the disease and some died from it. According to the CDC, over 19,000 Americans died from hepatitis C in 2013, more than were killed by HIV/AIDs.

Compared to the long-term costs of treating hepatitis C, including severe liver scarring, liver cancer and (eventually) the need for a liver transplant, the newest drugs are a bargain.

Why, then, is the AG skewering Gilead instead of celebrating it?

Remember that hepatitis C cures will save money in the long run, but we want to pay for it quickly, not in 10 or 20 years.  So what we really have is a cash flow problem, especially for programs like Medicaid that are funded by state governments that have to balance their budgets every year.

For instance, using Merck’s new drug to cure the Bay State’s 200,000 residents with hepatitis C, assuming a price of $42,000 per patient, would cost $8.4 billion. And since many of these patients are covered by the state’s Medicaid program, it would quickly run up a large tab for taxpayers or require big cuts to other state priorities.

The other option — treating U.S. patients at Indian or Egyptian prices — isn’t really any more attractive. The U.S. accounts for about 6 percent of the global population, but over 40 percent of the biopharmaceutical industry’s global revenues. Cutting into pharmaceutical revenues harms drug innovation and investment, resulting in fewer lifesaving cures.

What the AG’s letter actually highlights is how inadequate our payment structure is for drug treatments. Consider what would happen if we paid for houses the way we now pay for drugs: Only the wealthy could afford homes by putting down all their cash at once. But mortgages allow most consumers to pay the cost of a house over time. The solution, then, is to create similar credit markets for cures. (My Project FDA colleagues Tomas Philipson and Andrew von Eschenbach first suggested this approach in Forbes.)

Here’s how it could work for Medicaid. The federal government could agree to block grant federal Medicaid funding for select conditions, like hepatitis C. This guarantees a revenue stream for states that, like Massachusetts, want to sharply lower the incidence of the disease quickly.

The state would then sell a long term bond, with interest funded by the guaranteed revenue stream. This is precisely how mortgages work; only the revenue stream is the homeowner’s mortgage payment. The money raised with the bond offering could then be used to buy medicines up front, and fund disease management programs that enable hepatitis C eradication. This way, the state’s Medicaid program could offer widespread access, while ensuring that the treatments don’t bankrupt the program.

By the time the federal grant ran out, the “new normal” would be a far lower incidence of a life-threatening disease and far lower costs to treat it.

That’s the kind of innovative program that Massachusetts, the world’s leading biotech hub, could embrace, and set the paradigm for the rest of the nation.

Morning Consult