Here's how I would fix drug prices
The same system that motivates companies to seek out innovative therapies may also engender bad behavior.
For many Americans, the price of prescription drugs is an enigma. One medication costs a few dollars, while another costs more than a mortgage.
Running a pharmaceutical company under our dysfunctional system is a high-wire act that requires balancing the high-risk, high-cost business of drug discovery against the dubious math of drug pricing. Over the past decade, that balancing act has produced life-changing medical breakthroughs, but also historically high healthcare costs. Last year, Americans spent $915 billion on pharmaceuticals - that's more than the gross domestic product of Ireland.
When the Food and Drug Administration approves a new drug, the company that discovered and developed it typically gets a period of patent protection that controls when a competitor can enter the market with a generic or biosimilar version of the drug. This protection is intended to give the drugmaker time to generate a positive financial return for the money it spent on research and development to bring the drug to the market and to reward it for taking the risk.
In theory, this should work. In reality, the same system that motivates companies to seek out innovative new therapies may also engender bad behavior like setting prices at "maximum" levels, employing questionable tactics to stifle or delay competition, or aggressively creating demand for drugs in a way that increases profit and the overall cost of healthcare but doesn't necessarily make us healthier.
As a result, pharmaceutical costs - particularly for brand-name prescription drugs - have been one of the largest contributors to higher healthcare costs for at least six years and now account for 20% to 30% of a typical health plan's costs. In 2024, brand-name drugs still under patent protection accounted for just one in 10 of the drugs prescribed to patients and 87.7% of the costs.
It started with a $1,000-a-day pill
The drug Sovaldi is a great example of that inherent conflict. More than 2.4 million people today live with hepatitis C, a viral infection that primarily affects the liver and can ultimately destroy it. For years, doctors treated patients suffering from severe, chronic hepatitis C with an expensive drug regimen that required six to 12 months of treatment, had nasty side effects and rarely cured the disease. All of that changed in 2013 when Gilead Sciences (GILD) launched Sovaldi, a direct-acting antiviral drug that could cure most patients of hepatitis C in three months with fewer side effects. The price tag: $84,000 for a daily pill over the course of 12 weeks, or $1,000 per pill.
"Rather than set the price at, say, $989 or $1,021 - at least to create the impression that it was based on some calculation other than 'Let's charge whatever we want' - the company had chosen a simple round number, $1,000," journalist Steven Brill wrote in his 2015 book "America's Bitter Pill: Money, Politics, Backroom Deals, and the Fight to Fix Our Broken Healthcare System," according to the New Yorker.
In 2014, Medicaid spent $1.3 billion to treat just 2.4% of hepatitis C patients. The same year, Indiana alone paid about $40 million to treat 462 people with one of two hepatitis C drugs available at the time. If doctors had prescribed Sovaldi to 2.4 million people with chronic hepatitis C at the time of the launch, the cost would have exceeded $200 billion. Those potential costs led many state Medicaid programs and some health plans to restrict coverage of the drug to the sickest patients.
Sovaldi was a truly amazing breakthrough, and we want the biotech and pharmacy industry to continue its impressive track record of pursuing innovative new therapeutics. Yet we also want treatment options that are sustainably affordable and accessible to everyone - and that is where our current system is failing us.
From Gilead's perspective, you can see the rationale. The company took a risk, paying $11 billion for a drugmaker called Pharmasset, to purchase the drug before it was approved by the FDA. The alternative therapies on the market had similar prices but were far less effective and came with severe side effects. Pricing a superior - and curative - drug at a similar level as the currently available treatment seemed like a good deal.
However, a bipartisan Senate investigation came to a different conclusion, saying Gilead set the price to maximize revenue even though it knew lower pricing would dramatically increase patient access.
What is the value of a medication?
We want to reward innovation, but we also need the price we pay for drugs to be tied to their value. Creating an effective monopoly by issuing a patent to the same company that sets the price has led to predictable results. Often, prices get set far above a drug's objectively measured value.
That was the case with Sovaldi. The Institute for Clinical and Economic Review, a nonprofit that studies the value of medications and issues price recommendations, found it clinically superior to existing therapies but of "low value" to the healthcare system due to the high cost. ICER concluded that an appropriate price for Sovaldi to represent a good value to the American public would be less than half what Gilead was charging. That lower price still would have allowed Gilead to reap a great financial return while giving more people access to treatment.
While there is room to debate ICER's findings, we will never make pharmaceuticals affordable if how to tie a drug's price to its value is solely determined by the companies creating the drugs. There is just too much financial incentive for them to maximize the price.
But it doesn't have to be that way. Congress could pass a law requiring all new drugs with a potential price above 1% of the annual national pharmacy expenditure - about $900 million at current cost levels - to go through an external, objective, qualified third-party review to establish a threshold price during the patent-protection period. The process could be open, transparent and designed to build trust. Drug companies that price their medicines consistently below the threshold could ensure patients have unfettered access to their drugs, meaning no prior authorization, while those that price above that threshold would jeopardize their patent protection. This would continue to provide companies strong financial incentives to discover new, innovative therapies, while also ensuring that pricing is tied to objectively measurable value.
Figuring out the value a new drug brings to the world is not a perfect science. But creating an objective, fact-based way of measuring this and using it to establish appropriate drug pricing is our best chance to ensure we keep rewarding innovation while making healthcare accessible and affordable to everyone.
Paul Markovich is president and CEO of Ascendiun, a nonprofit parent company of Blue Shield of California, Blue Shield Promise Health Plan, Altais and Stellarus. He took over as CEO of Blue Shield of California in 2013.
-Paul Markovich
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