Mike Kueber's Blog

May 7, 2014

Pricing of prescription drugs

Filed under: Medical — Mike Kueber @ 6:57 pm

I’ve often wondered how prescription drugs are priced.  In a typical context, prices are based on supply and demand.  But because of patents, the supply of drugs in many instances is absolutely controlled by the drug inventor.  So if the drug is of the live-saving variety, what is to stop the drug company from charging and the insurance company from being forced to pay exorbitant prices?

An article this week in the SA Express-News reported on a situation that exemplifies this troubling situation.    The maker of a drug that often cures life-threatening hepatitis C charges $84,000 for a 12-month treatment.  According to the article:

  • The industry has set the price at a point which I can’t see how it would be affordable for any health insurance or any system to take this on 100 percent,” said Dr. Rena Fox, a professor of medicine at the University of California at San Francisco who researches hepatitis C in veterans.
  • “Gilead also wants to recoup the $11-plus billion it spent developing the technology.”

I don’t understand how an insurance company can deny coverage for a drug just because it is expensive.  The insurance policies that I am familiar with always provided that they would cover all reasonable, necessary treatment, so there probably is an argument that this treatment is not reasonable, although that would be a tough argument in a life-threatening situation.

Regarding the drug company wanting to recoup its $11 billion development cost, I don’t understand how that would affect pricing.  A company is motivated to charge as much as the market will bear, and the development costs would have no effect on that.  Why not charge $185,000 for the treatment?

When I searched the internet for some information on this matter, I learned that my understanding was pretty the consensus view, with the key being how much private and government insurance would pay:

  • As simple as that explanation is, the calculations behind the price are complicated. They factor in how many people will buy a drug, how many of those people are likely to be privately insured, how many are likely to have Medicare or Medicaid, how many will have no insurance at all, for how long will a given patient be on the drug (on average), how much it costs to make the drug (yes, this does matter), and even what’s at stake (is the drug treating a life-or-death condition, or is it treating something more mild?).”

The problem with more government involvement to fix this problem is that such involvement would probably make matters worse.  But I’m hoping someone comes up with a better system that produces reasonable pricing without stifling innovation.

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