Healthcare's Problem Is Not High Drug Prices

Is $84,000 too much to pay to save a life? That's a question worth asking now that the insurance industry has declared war on what it has deemed outrageous prices for new specialty drugs. In this case, the complaints focus on Sovaldi, a breakthrough treatment that gives three million people suffering from hepatitis C hope for a cure. That cure isn't cheap -- each of the 84 pills needed to complete a course of treatment costs $1,000. The drug's manufacturer "is asking for a blank check," complains Karen Ignagni, president of the insurer trade group America's Health Insurance Plans. "It will blow up family budgets, state Medicaid budgets, employer costs and wreak havoc on the federal debt." Such short-sighted attacks on the price of life-saving drugs threaten patients' ability to access them -- and discourage companies from investing the billions required to develop new cures. They also invite more government intrusion into our health care -- without doing anything to actually reduce health costs. The idea that $84,000 is somehow too much to spend saving a life doesn't make economic sense. That sum can buy many additional years of productive work -- the economic value of which far exceeds the cost of the drug. The Environmental Protection Agency puts a statistical value of $9.1 million on a human life when considering the benefits of government environmental policies. Vanderbilt University professor W. Kip Viscusi, one of the world's leading experts on the statistical value of life, estimates it at $8.7 million. Second, by fixating on drug prices, the insurance industry ignores the long-term savings that pharmaceutical treatments and cures can engender throughout the healthcare system. The treatment options currently available to hepatitis C patients, for instance, don't cure the disease. They can have terrible side effects -- and lead to liver transplants and premature death. A recent analysis published in the journal Hepatology notes that the cost of treating these side effects can run more than $270,000. If the patient ends up requiring a liver transplant, the cost can jump by $577,000. Suddenly, $84,000 looks like a tremendous bargain. The economic impact of treating or curing other diseases can be even greater. A 1% reduction in cancer-related deaths yields $500 billion in economic and quality of life gains, according to a paper published in the Journal of Political Economy. Further, in the aggregate, drug costs are simply not the issue the insurance industry is trying to make them. Spending on prescription drugs has increased at a far slower rate than overall spending on healthcare in five of the past six years. Prescription drugs accounted for 9.4% of the nation's total health bill in 2012. That's down from 10.4% in 2006, and less than the share way back in 1960, data from the Centers for Medicare and Medicaid Services show. New drug therapies also generated savings elsewhere in the healthcare system. The Congressional Budget Office has concluded that increased access to drugs for seniors through the Medicare Part D drug benefit has reduced other costs in the program. But the real harm from the insurance industry's war on drugs is the risk it poses to pharmaceutical innovation, which is in the midst of a virtual renaissance. Right now, some 5,000 new drugs are within the approval pipeline, many of them first-in-class drugs aimed at once untreatable diseases, "orphan" drugs for rare conditions, or diseases that haven't had a new treatment option in decades. The cost of this innovation is staggering, including more than a decade's worth of research and development, a high risk of failure and expenses that can reach $5.9 billion for each new drug that actually makes it to market. But the result is breakthrough drugs that have turned the likes of HIV/AIDS into a manageable chronic disease, have increased the life expectancy of those with cancer and have provided more choices to patients looking for precisely the right therapies for their ailments. Pharmaceutical companies charge the prices they do to recoup their multibillion-dollar investments. Efforts to limit those prices can bring drug research and development to a halt. For evidence, just look at Europe, where governments have forcibly limited drug prices for years. Three decades ago, the continent produced more than half the intellectual property around new medical innovations. "Europe now represents less than 25%," notes Robert Hugin, CEO of U.S. drug maker Celgene. Insurance industry executives trying to deflect blame for rising premiums -- or worried about meeting their quarterly earnings targets -- may not care about declines in medical innovation. But their single-minded focus on price doesn't just hurt patients desperate for cures today -- it hurts the patients of tomorrow, too.