The Greedy Root of Escalating Drug Costs

Last month, the number crunchers at Medicare determined that U.S. prescription drug costs increased last year by 12.6% over 2013. That’s five times as much as the increase from 2012 to 2013 – 2.5%.

What happened?

Blame hepatitis C. Or, more accurately, the availability – finally! – of drugs that not only treat the insidious infection, but for the first time cure it. Per the actuaries’ report in the journal Health Affairs, the increase is “a result of expensive new treatments for hepatitis C.”

That would be primarily Sovaldi, manufactured by Gilead Science and sold to patients for a tidy $84,000 for the 12-week treatment. That’s about $1,000 per pill.

As L.A. Times columnist Michael Hiltzik pointed out, the whopping increase in drug costs boosted U.S. health-care spending last year by 5.5%, a noticeable rise from 2013’s 3.6% bump. It was the first time such growth topped 5% since 2007. But if you cut drug spending from the calculation, the overall increase would have been 4.8%.

The analysts said the Affordable Care Act (ACA, or “Obamacare”) was a significant contributor to health-care costs, as you might expect when 8.4 million more people are getting insurance coverage than the previous year. But that expenditure reflects a smart, responsible social investment in both individuals as well as society – people who need care are more likely to get it, and people in their midst are less likely to be adversely affected, in terms of both health and economic concerns.

As Hiltzik wrote, “That expanded coverage had clear benefits to the newly insured: The nationwide growth in out-of-pocket spending slowed to just 1.3% last year from 3.2% in 2013, because so much more health care was covered by health plans or Medicaid.

“The major cloud on spending patterns was drug pricing,” he said.

Sovaldi was followed onto the market by Harvoni and Olysio, two more hep C drugs that also are widely effective and wildly expensive. No question that they are remarkable additions to the global formulary that cure about 9 in 10 people with hepatitis C, which can cause liver failure or liver cancer. In addition to their healing success, the drugs don’t come with the horrific side effects of earlier treatments, which only managed the disease, not cure it.

So a lot of people with hepatitis C, which progresses slowly and often without people knowing they have it, from getting treated. Because the new drugs were so wonderful, Hiltzik reported, new patients went from 17,000 in 2013 to 161,000 last year.

So many people seeking treatment at such enormous expense, of course, caused much consternation among the parties that subsidize it. Many commercial insurers refused to pay for it except for patients with advanced liver disease. That’s dumb, because taking the drug earlier would prevent the disease from progressing and causing who knows how much more expense and grief along the way. Still, despite their restricted use, the hep C drugs sent prescription spending skyward.

As usual, people in the U.S. were subject to much greater expense than people in other countries. Hiltzik called Gilead’s profit margins on the drugs “stupendous. In the first half of this year,” he wrote, “it recorded profit of $8.8 billion on $15.3 billion in sales, a net profit margin of nearly 58%. For the full year, the company projects gross profit margins of up to 90%.”

How is that not profiteering?

One Gilead executive complained that “there still are a lot of [payer] restrictions in place in the U.S.,” and although the company has given discounts to some payers in exchange for approving more patients to receive the drug, Gilead “plainly has pursued a calculated strategy that the success of its drugs will force insurers to pay for them at a large fraction of the list price,” Hiltzik wrote.

The drug was developed by Pharmasset, which planned to charge $36,000 for a course of treatment. When Gilead acquired Pharmasset in 2011, for $11 billion, it raised the rate. Although drugs are expensive to develop, Hiltzik reported that Pharmasset’s R&D costs were estimated to be less than $63 million. He quoted a pharmacy management executive as calling Gilead’s pricing an act of “unmitigated gall.”

These costs don’t run amok in Canada or Britain; in those countries, Sovaldi costs $55,000, and in Egypt, it’s only $900. But in the U.S., Gilead can charge what it wants, what it believes the U.S. market will bear.

The new report, Hiltzik said, might pressure Gilead and other manufacturers of high-priced drugs to moderate their prices. The reviewers believe that rebates for the hepatitis C drugs will cut Medicare drug cost growth 9% this year, down from 17.3% in 2014.

But can you imagine what it would be if pharmaceutical company greed, and the infrastructure that enables it, instead was common decency?

Patrick Malone & Associates, P.C. listed in Best Lawyers Rated by Super Lawyers Patrick A. Malone
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