Monday, June 9, 2014

What is the Right Amount of Profit in Healthcare?

I have written in the past that while free markets and capitalism work well in most industries, their value in healthcare is less clear. Other industries set prices that balance cost of production and how much consumers are willing and able to pay. I can, for example, decide when my budget allows me to buy a new car or a new computer. However, I do not believe I could ever put a price on a treatment that would save my life.

A new situation has come to the fore that reinforces this view, which is the release of the drug Sovaldi (sofosbuvir). This drug is curative of Hepatitis C in 90% of patients with the infection and has modest side effects [1]. Hepatitis C is a widespread, devastating disease that is mostly symptomatic yet can insidiously cause cirrhosis and liver failure. This drug is truly miraculous for those with this infection.

The problem with this situation is that the cost of the drug has been set by its manufacturer at $1000 per pill, meaning that the standard 12-week course costs $84,000. The drug manufacturer, Gilead Pharmaceuticals, counters that the drug saves the cost of complications and treatment of the disease, up through the use of liver transplantation that costs 3-4 fold ($300,000) the cost of the drug course along with a lifetime of expensive anti-rejection medicine ($40,000 per year) [2].

This really gets to the crux of the dilemma: What is the right amount of profit due to the innovation developed by a pharmaceutical company like Gilead? And when companies carry out less innovative activities, such as development of "me too" drugs [3], should we penalize them?

Sovaldi is not the first drug for which this dilemma has arisen. The cost of cancer chemotherapy, even when there are some competing alternatives, is extraordinarily expensive. Can the market really put a price on drugs that save or extend lives, for which there are few or no alternatives? A number of leading cancer researchers, including OHSU's Dr. Brian Druker, have raised alarms about the prices of cancer drugs [4, 5]. A Forbes Magazine contributor has discussed these issues in the context of both Sovaldi and cancer drugs [6].

This scenario has also played out with drugs for AIDS in Africa, which was documented in the movie, Fire in the Blood. Fortunately in this situation, funding from the US government came to the rescue, with the President's Emergency Plan for AIDS Relief (PEPFAR) initiative by former President George W. Bush credited with success [7]. But there are still many other challenges for high-cost drugs in developing countries.

Asking whether drug companies are greedy or innovative is probably the wrong question. If one accepts that innovation in medicine is risky and should be rewarded when it is successful, and that the cost of drug development is extraordinarily high, with a serious cost for failures (that must be spread across successes for a company's bottom line), then companies such as Gilead should indeed be rewarded. The right question is, how much should they be rewarded?

The answer gets back to the crux of medicine not adhering to the principles of a free market. When someone has a disease, especially a life-threatening but highly treatable one, he or she does not really have "choice" to choose whether or not to treat their disease? If there is just a single drug treatment, then that person is at the total mercy of the company selling the drug. The same holds for any other aspect of treatment, including the cost of physicians [8].

One possible solution to this problem is to adapt a program that has been proposed for drug development in the developing world and reward those who take the risks to develop new treatments by a measure of their health impact. One organization has proposed a plan that creates a fund to reward innovations based on their health impact globally [9, 10]. This is an intriguing idea, even if there are many challenges in the details of implementing such a model.

There are probably other solutions, but clearly society must develop a mechanism to reward true innovation and health benefits while not allowing those who have made the discovery to engage in predatory pricing. Unless solutions are developed, the current situation is only likely to exacerbate, as new discoveries in personalized [11] and precision [12] medicine emerge, which are unlikely to be developed without substantial cost.


1. Sulkowski, MS, Gardiner, DF, et al. (2014). Ledipasvir and sofosbuvir for 8 or 12 weeks for chronic HCV without cirrhosis. New England Journal of Medicine. 370: 1879-1888.
2. LaMattina, J (2014). What Price Innovation? The Sovaldi Saga. Forbes, May 29, 2014.
3. Gagne, JJ and Choudhry, NK (2011). How many “me-too” drugs is too many? Journal of the American Medical Association. 305: 711-712.
4. Pollack, A (2013). Doctors Denounce Cancer Drug Prices of $100,000 a Year. New York Times. April 25, 2013.
5. Experts in Chronic Myeloid Leukemia (2013). The price of drugs for chronic myeloid leukemia (CML) is a reflection of the unsustainable prices of cancer drugs: from the perspective of a large group of CML experts. Blood. 121: 4439-4442.
6. Munos, B (2014). Sovaldi Vs. Cancer Drugs: Price And Value In The Pharmaceutical Industry. Forbes, June 2, 2014.
7. Anonymous (2009). How a Bush Administration Initiative to Combat HIV/AIDS Is Saving Lives. Washington Post. April 9, 2009.
8. Rosenthal, E (2014). Patients’ Costs Skyrocket; Specialists’ Incomes Soar. New York Times. January 18, 2014.
9. Banerjee A, Hollis A, Pogge T. The Health Impact Fund: incentives for improving access to medicines. Lancet. 2010; 375: 166-9.
10. Hollis, A and Pogge, T (2008). The Health Impact Fund: Making New Medicines Accessible for All. New Haven, CT, Incentives for Global Health.
11. Hamburg, MA and Collins, FS (2010). The path to personalized medicine. New England Journal of Medicine. 363: 301-304.
12. Anonymous (2011). Toward Precision Medicine: Building a Knowledge Network for Biomedical Research and a New Taxonomy of Disease. Washington, DC, National Academies Press.


  1. I have only accolades for your position on this most critical issue of innovative drug pricing. It seems to me that the market should be the primary determinant of a fair return on this and other drugs. However, health is different from other consumer commodities so that a fair reimbursement (plus some incentive reward) can take place encouraging further research, discovery, innovation, and curative protocols, as you have alluded to. Would you recommend a fifteen percent cap on the investment plus a nominal monetary reward of $250,000 (USA) for example; the suggestion could be a domestic (United States) limitation with other countries determining similar parameters.

    You point out the alternative to this pharmaceutical intervention as being the standard practice of transplantation and lifetime anti-rejection drugs. Without considering the negative ramifications of this alternative (black-market organ harvesting or traveling to another country where the costs are considerably lower to have the transplant procedure performed, for example), this innovative therapy has not had longitudinal testing and, as yet, we are not fully apprised of its consequences versus the immediate benefits.

    Nevertheless, I am in nearly unanimous support of your recommendations but continue to feel, as you suggest, that pharmaceutical companies should continue to be fairly compensated for the years of innovative research and alleviation of disease they have provided and that we have grown accustomed to experiencing. I believe that governments and private bodies (philanthropic organizations, for example) should not only publicly recognize these companies’ contributions but also establish foundations, for example, to reward and encourage their continued efforts in pursuit of patient disease remediation.

  2. your analysis is certainly interesting, but ultimately incomplete. you are correct to suggest that the emergence of expensive, efficacious new drugs does place both a new financial and ethical burden on the system. a question you did not examine, however, that also gets to your point is: why should the us pay more for innovative treatments so that other countries can pay less? That is, why should the US subsidize drug development costs for the rest of the world. There are two different arguments here: 1) I don't think many would begrudge the discounts given on HIV drugs and antibotics to third-world nations that have limited economic resources; 2) This is not the case, however, with European and UK payers that traditionally pay less for the same drugs, largely due to the fact that they have some manifestation of centralized purchasing functions in a government-run system,