technologyreview | Because of medical insurance, co-pay reductions, and expanded access
programs for the uninsured, relatively few Americans pay more than a few
thousand dollars per year for even the most expensive drugs. The
primary customers in the United States are not patients or even
individual physicians, although physicians can drive demand for a drug;
rather, the customers are the government (through Medicare and Medicaid)
and private insurance companies. And since the insurer or government is
picking up the check, companies can and do set prices that few
individuals could pay. In the jargon of economics, the demand for
therapeutic drugs is “price inelastic”: increasing the price doesn’t
reduce how much the drugs are used. Prices are set and raised according
to what the market will bear, and the parties who actually pay the drug
companies will meet whatever price is charged for an effective drug to
which there is no alternative. And so in determining the price for a
drug, companies ask themselves questions that have next to nothing to do
with the drugs’ costs. “It is not a science,” the veteran drug maker
and former Genzyme CEO Henri Termeer told me. “It is a feel.”
There
are inherent problems with a system where the government is one of the
biggest payers, and where doctors, hospitals, insurers, pharmacy benefit
managers, drug companies, and investors all expect to profit handsomely
from treating sick people, no matter how little real value they add to
patients’ lives or to society. Drug companies insist that they need to
make billions of dollars on their medicines because their failure rate
is so high and because they need to convince investors it is wise to
sink money into research. That’s true, but it’s also true that the
United States, with less than 5 percent of the world’s population, buys
more than 50 percent of its prescription drugs. And it buys them at
prices designed to subsidize the rest of the industrial world, where the
same drugs cost much less, although most poor governments can’t afford
them at even those lower prices.
Still, we have to ask: When is the high price of a drug acceptable?
Perhaps it is one thing when Vertex charges $841 for two pills a
day—every day of a patient’s life—for medicine that will save that life,
and quite another when Sanofi offers a cancer drug that is twice as
expensive as its alternative but offers no obvious advantages.
