When Jonas Salk was asked who owned the patent on the polio vaccine he created, he answered, “Well, the people, I would say. There is no patent. Could you patent the sun?”
When Vertex Pharmaceuticals received US Federal Drug Administration (FDA) approval in July to market Orkambi, its cystic fibrosis drug combination, there was no doubt who owned the patent or the profits. The Boston Globe heralded the event with the headline “Vertex’s Therapy Wins a Big OK—cystic fibrosis drug may bring company billions.” The article noted that the announcement led to a 4 percent increase in Vertex’s stock price, which was already up 34 percent for the year and had increased 300 percent in the last five years. A dozen Vertex executives will receive $53 million in bonuses in 2017 if the company is profitable the preceding year.
Almost as an aside, the Globe said that Orkambi would alleviate symptoms of cystic fibrosis (CF), an often-fatal genetic disease that severely damages the lungs and digestive system. Because Orkambi reduces CF’s damage, but doesn’t cure it, it must be taken for life. Vertex has priced Orkambi at $259,000 annually. The FDA approval is for use in patients 12 and over, meaning 8,500 US patients are eligible to receive it. It will cost over $2.2 billion per year to provide Orkambi to these 8,500 patients. Orkambi is actually less expensive than Vertex’s other CF drug, Kalydeco, used to treat 2,000 CF patients whose disease is caused by a different genetic mutation. Kalydeco costs over $300,000 annually, for a yearly cost of $600 million. The annual drug cost alone for treating these 10,500 patients is $2.8 billion. As a point of reference, $2.8 billion is slightly more than the annual budget for the city of Boston, and three times more than the annual budget of the Massachusetts Department of Public Health.
Vertex is not alone in charging exorbitant prices for its drugs. In July, 118 oncologists decried the rising costs of cancer drugs in an article in the Mayo Clinic Proceedings. The article noted that in 2014, all new FDA-approved cancer drugs were priced above $120,000 per year while the average annual household income was $52,000. Even cancer patients with insurance coverage often had out-of-pocket expenses of $25,000 to $30,000. Also in July, Regeneron Pharmaceuticals received FDA approval for an anticholesterol drug priced at over $14,000 per year to be used in patients whose cholesterol level is not controlled by current drugs that cost a few dollars per month.
All of this makes Sovaldi, a drug used in conjunction with other antivirals to treat hepatitis C, look cheap in comparison, although it was viewed as outlandishly expensive when first approved in 2013. Unlike these other drugs that must be taken for years, Sovaldi cures hepatitis C and it’s taken for just 12 weeks. The treatment is priced at $84,000 or $1,000 a pill.
Finally, expenditures for all health care spending rose 5.5 percent last year, but spending on pharmaceutical products rose 12.6 percent. Pharmaceutical spending constitutes about 10 percent of the $3.2 trillion in annual health care costs in the United States.
The questions are, why are drugs so exorbitantly priced and can anything be done to make them more affordable? The answer to the price question has a simple answer: manufacturers charge astronomical prices because they can. This is merely a description, not a criticism of these companies. We have no reason to expect that drug companies would act differently than all other for-profit companies whose goal is to maximize profits. If General Motors could charge $300,000 for a Chevrolet and still be able to maintain sales, there is no doubt it would. The reason why GM cannot price its product at this level and drug companies can stems from how these commodities are paid for. People pay out of pocket to buy a car. Car insurance does not pay for cars. But health insurers pay for drugs. Indeed, in terms of economics, the patient is an afterthought, not a consumer like a car buyer. The true consumers are the insurers that pay for the drugs—patients are beneficiaries.
There is no requirement for drug companies to justify their prices. When asked why they charge so much for drugs, companies claim research is expensive, or in a case like CF drugs, that the patient population (and therefore the market) is small. While both statements are accurate, they do not explain how a particular drug is priced or what eventual profit is expected from a particular drug.
Republicans who spend an inordinate amount of time threatening to repeal the Affordable Care Act (ACA) believe that the free market, not regulation, will tame health care prices. This entirely disregards the fact that prices of drugs are the result of the unregulated pricing. The pharmaceutical industry does not operate in a free market. Patents create time-limited monopolies in drugs, and patients don’t choose their drugs—physicians prescribe drugs for patients, and insurers often pay most of the bill. The ACA prohibits the federal government from negotiating drug prices with drug companies, as does the Medicare law. (The Department of Veterans Affairs and Medicaid have some leeway to bargain.) The FDA drug approval process does not consider cost in any way.
One might think that giant health insurance companies would be able to press a hard bargain with drug companies. In reality, insurers have surprisingly little leverage to negotiate prices for drugs like Orkambi. Once the FDA approves a drug as safe and effective to treat a serious medical condition, insurance companies are essentially required to provide it to their subscribers. Where there are less expensive and equally effective alternatives to an expensive drug, insurers may choose to pay for the less expensive over the more expensive drug. But if there is only one effective drug, in practice insurers have little leverage. And the public relations fallout from a company’s decision not to cover a drug that treats a disease as severe as CF makes refusal to cover the drug unless the company drops it price unimaginable. In these circumstances, patients with a dread disease are the equivalent of hostages—pay up or they die.
Incidentally, Orkambi is not just a windfall for Vertex. The Cystic Fibrosis Foundation (CFF), a nonprofit group funded by donations, provided some of the funding to Vertex to develop these drugs in return for a share in the profits. The CFF sold its stake in the future profits to a private company for $3.7 billion, 20 times its recent annual budget. The CFF claims that this will enable it to fund further research. As a recipient of royalty payments, the CFF has a strong incentive to not oppose high prices, which is precisely the opposite of the goal such an organization should have. Research on treatments that are ultimately unsustainably costly should not be the goal of disease-specific advocacy groups.
The drug “market,” if there ever was one, is clearly failing to produce affordable drugs. Indeed, the unregulated market has produced just the opposite results. Making drugs affordable requires federal regulation of drug prices that would take into account the need for drug companies to make reasonable profits while prohibiting price gouging. This would bring America in line with the rest of the Western world. Unlike America, countries with national health plans do negotiate prices. In England, the National Institute for Health and Care Excellence (NICE) evaluates the value of drugs and procedures and makes recommendations to the National Health Service (NHS) about whether or not to pay for a particular drug or treatment. When a treatment is considered too costly and the NHS refuses to pay the asking price, the asking price tends to go down to the level of the NICE recommendation. Only government is powerful enough to counterbalance the weight of the drug industry.
Drug price regulation is extremely unlikely to happen in this political climate. But it is inevitable. The only question is how much damage our unsustainably expensive health care system does to the overall economy until there is no choice but to act.
Leonard Glantz (LAW’73) is a School of Public Health professor emeritus of health law, bioethics, and human rights. He can be reached at email@example.com.
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