Those working in the pharmaceutical space are used to hearing complaints about the high costs of drugs, and patents often are blamed for allowing pharmaceutical companies to charge “too much” for their products. But are drug prices really too high when you consider the alternatives?

Spotlights On High Drug Prices

Concerns over drug prices are not new, but drug pricing has gotten more attention as new drugs seem to come with higher and higher price tags. In September 2015, the Center for American Progress published a report entitled “Enough Is Enough The Time Has Come to Address Sky-High Drug Prices”. In January 2016, the Massachusetts Attorney General threatened Gilead Sciences, Inc. with legal action if it did not cut the price of its Hepatitis C drugs, and a group of Congressional representatives sent a letter to the Secretary of the Department of Health and Human Services and the Director of the National Institutes of Health advocating the use of march-in rights to control drug prices. A more recent Congressional letter called for hearings on march-in rights, and activist groups are opposing the TPP trade deal on drug pricing grounds.

Changing The Conversation About Drug Pricing

Typical complaints about drug prices cite the price of a specific drug, declare that the price is “too high,” and demand drastic reform. But missing from most of these “conversations” is a satisfying explanation of the benchmarks used to reach their conclusions.

Those who blame patents for high drug prices often compare the price of a patented “brand name” drug with its generic equivalent. But such a comparison ignores the research and development costs and the risks of failure born by the innovator. Another comparator may be an alternative drug useful for treating the same condition. But any such comparison should take into account relative efficacy, tolerability, and safety. For example, a drug that is more effective or that has fewer side effects may be priced higher that an alternative drug, i.e., a price quality effect. For some drugs, surgery may be an alternative treatment, in which case the cost per dose of the drug should be weighed against the total costs of surgery, including the risks of complications and opportunity costs borne by the patient during the surgery and recovery periods. Any comparison should take into account long-terms costs and benefits, including improvements in long-term health and any increased survival.

The following examples illustrate how considering the costs of available alternatives can re-frame the conversation and underscore the value provided by “expensive” drugs.

Psychiatric Drugs

The growth of the psychiatric drug market has raised questions about the costs of psychiatric drugs, but comparisons to alternatives show their benefits. For example, GEODON®–which is approved for the treatment of symptoms of schizophrenia and acute manic or mixed episodes associated with bipolar disorder–was estimated to cost $6500 for a 12 month supply. On the other hand, according to one report, a short-term 11-day hospitalization for schizophrenia may cost $8,500, and hospitalization costs for a mental health crisis average almost $6000. Now that GEODON® is off-patent, costs for that drug therapy may be even lower, but even the original price offered cost savings over in-patient treatment.

In 2003, Nevada sought to determine the costs of switching patients from tricylic antidepressants to newer selective serotonin uptake inhibitors (SSRIs) like Prozac® that revolutionized treatment of depression. At the time, the SSRIs cost nearly 10-fold more, but significantly reduced hospitalization. Thus, when total costs of patient care were considered, the SSRIs could be more cost-effective.

Another comparator for psychiatric drugs could be counseling. For example, the New York Times compared traditional sessions of talk therapy at $200 for 45 minutes with the short, infrequent meetings required to refill prescriptions, and concluded that doctors can treat more patients in a day with drugs than therapy.

Thus, new psychiatric drugs that cost “too much” may actually reduce total costs via reductions in hospitalizations, increased access to treatment, and reductions in long-term costs.

Hepatitis C Drugs

Hepatitis C is a chronic viral infection of the liver which, if unchecked, leads to cirrhosis, liver failure and cancer or other life-threatening diseases. Until the newest drugs that made headlines for their “high” prices, treatments for Hepatitis C often did not eliminate infection and were associated with potentially debilitating side effects. For example, a combination of ribavirin with pegylated interferon showed great promise in clinical trials but only a 3.3% rate of cure in clinical practice in one US study.

Into that market, Gilead Sciences, Inc. launched Sovaldi® as a breakthrough drug that could cure Hepatitis C without serious side effects. Gilead priced this drug at approximately $1000 a pill, reflecting its greater efficacy and fewer side effects. At that price, a full course of treatment is estimated at approximately $80,000.

Despite this price, both patients and prominent health care organizations eagerly anticipated the drug. Indeed, comparing the price of Sovaldi® to the alternative treatments makes it harder to conclude that it is “too expensive,” because the alternative therapies also were costly. For example, a triple therapy based on ribavirin, pegylated interferon and talaprevir cost $189,000 per sustained virologic response (i.e., “cure”). If not cured, Hepatitis C infection may eventually require a liver transplant, which costs $575,000, assuming that the patient is a transplant candidate and a donor is available.

Thus, even at $1000 per pill, Sovaldi® may actually reduce total costs of treating a given patient. In addition, if more patients are successfully treated with this drug, there could be a decrease in transmission and new infections, which would represent a long-term public health benefit.

Looking At The Big Picture

Drug pricing can raise significant public health issues, but simplistic assertions that a drug’s price is “too high” do not advance sound policy. The examples above show that when evaluating drug pricing, it is important to consider many factors, not just the costs of the ingredients. A drug that may seem expensive in the abstract may be more attractive to patients, safer, more effective, and even less-expensive than alternative treatments when all costs are considered.