CNBC reports that one of the hemophilia genetic treatments is going through the pricing process. Analysts think it could be a $1.5 million dollar drug. If this is a reliable cure like the Hep-C drugs, that is one hell of a bargain compared to current treatment.
New gene therapies that aim to cure hemophilia, a disease affecting the blood’s ability to clot, may carry prices of $1.5 million or more, analysts at Leerink wrote in a research note Monday….
For some patients, costs can approach $1 million a year, or even more. About 20,000 Americans have hemophilia.
This is a lot of money but I think it is still good value.
This will be the first major example of when cost effective/cost saving fails us in pricing. Kidney transplants are life saving but the surgeon doesn’t charge $1.5million. https://t.co/2leKnMyfrd
— Walid Gellad (@walidgellad) May 7, 2018
Assuming $1.5 million is the average price, then the US market has a $30 billion dollar warehouse of demand and under $1 billion in newly diagnosed individuals. That is a lot of money in any context but I want to go back to something I said in March regarding Hep-C cures:
1) They are really freaking expensive on both a per-patient basis and total spending basis
2) They are really effective and thus high value
We’ll dig into ACA risk adjustment to get some rough cost estimators. From there we can get a rough, back of the envelope break even point for a $1.5 million dollar cure versus current treatments.
P.71 of the NBPP 2019 is the risk adjustment co-efficients for hemophilia:
Platinum Gold Silver Bronze Catastrophic
Hemophilia 61.183 60.705 60.325 60.299 60.296
What that means is an individual who codes as having hemophilia and a few other coagulation disorders is expected to cost an insurer, on average sixty times as much in monthly premium as the typical “healthy” member.
Using the 2018 State Public Use Files , I’ve calculated the average full year premium and the average hemophilia risk adjustment value for Silver buyers for each state. The full federal marketplaces have an average value of $449,835 per year.
Let’s assume that this is a complete cure with no future infusions needed after the course of treatment is needed. (This is a significant assumption but it baselines the question) There is variation among states. Break-even points, assuming uniform pricing for the genetic treatment, are shorter for higher cost states assuming the same severity of patient.
At a 3% discount rate, the net present value of treatment as usual after 4 years is $1.72 million dollars. At a 5% discount rate, the net present value $1.66 million dollars after 4 years. A 10% discount rate has a NPV of $1.54 million dollars after four years. I think a 10% discount rate is too high. The four year break even discount rate threshold is about 12.1%
All off these back of the envelope estimates support the contention that within a childhood, a hemophilia cure with no complications that costs $1.5 million dollars is a net money saver even if we completely disregard the improvements in the quality of life for the child and their family. I am betting there are quality of life improvements. I am also betting insurance companies will see a noticable reduction in catastrophic (multi-million dollar) claims and the variance in the extreme right hand side of the tail will be reduced. It makes pricing insurance easier.
Yes, I am putting my thumb on the scale with the assumption that there is a perfect cure with no complications. There may be systemic differences between the Exchange populations and other covered groups that could lead to different cost profiles and levels. But as a first pass, a $1.5 million dollar hemophilia cure with all of those caveats is not a crazy price from a societal level.
Once we get beyond the societal level, there are serious problems with a $1.5 million dollar cure. The biggest one is churn. Insurers who cover an individual with hemophilia will be facing the challenge of paying for a hyper expensive treatment in the coverage year with only some chance of collecting the cost savings in future years from averted “standard” treatments. For individuals with costly treatment regimes or who are prone to bleed, their annual costs are high enough that a $1.5 million claim quarter under standard treatment is a “good” quarter so they’ll be placed in the front of the line for the genetic cures because it saves the insurer money in the quarter after treatment.
Insurers will attempt to find ways to delay paying for cures for individuals who have reasonably well controlled hemophilia and who are at low risk of a major bleed. They will be motivated to make this cohort someone else’s problem. We should expect network games, we should expect pre-authorization hell, we should expect hoops upon hoops to jump through. And those games will continue for as long as there is only one high efficacy genetic treatment. As soon as there are multiple treatments, I expect these prices to come down like the effective Hep-C cure price has declined.
But overall, if there is an effective cure for some forms of severe hemophilia and if it costs $1.5 million dollars, it is still a great deal even if the first reaction is “Good lord, that is a whole lot of money….”
DISCLAIMER Some of my Margolis Center colleagues have had work funded by Spark
Nicole
Mmmm… I don’t know if I agree with that tweet’s comparison. I have a friend who had a double lung transplant and the cost of it was well over one million dollars. And she’s expected to get 15-20 years from it, not a whole lifespan.
I agree with (and thank you for the explanation) of everything in your post, David. I just don’t understand what M. Gellad was trying to say. An organ transplant and gene therapy are two different things.
guachi
$1.5 million to cure hemophilia, something which you can detect early, seems like a bargain. At least, a relative bargain.
If it’s $1.5 million now then it should be much cheaper not too far in the future.
Victor Matheson
Ok, overly wonkish here, but currently in legal matters dealing with future health care costs, it is not unusual to actually see 0% discount rates being used because medical price inflation is currently at or above the rate of return on low risk assets. In fact, if I were asked in court to propose an appropriate discount rate for over a short period of time like 4 years for a medial service or prescription drugs (like hemophilia clotting factor plus the associated physician and hospital services), I would use a discount rate of -0.62%. Yeah, negative, so that the net present value of the 4 years of treatment is actually more than just 4 years @ $449,865. If I were asked in court to provide a best guess for the net present value of 4 years of hemophilia treatment I would actually say $1,827,620. So yes, $1,500,000 is a great deal for everyone but the current insurer.
Barbara
$1.5 million to cure hemophilia would be an incredible bargain, assuming that it does not require recurring treatment. It is not unusual for the cost of hemophilia drugs to approach several hundred thousand dollars per month — and there is an incredible amount of arbitrage that goes on around the dispensing of hemophilia drugs that makes it harder for insurers to lower prices.
Regarding Hep C: I agree that Hep C drugs that actually cure Hep C could be cost-effective, except for the kind of patients whose habits make reinfection likely. The opioid epidemic makes a drug that should be cost effective a lot more questionable. IV drug abusers who get treated but go back to abusing IV drugs are at high risk of being reinfected and needing to be retreated. The medical treatment of opioid abusers raises a lot of ethical issues, and a lot of people who are otherwise “dead enders” when it comes to end of life issues can find themselves debating how much effort to spend on someone who seems to intent on self-destruction. The recent article about cardiac surgeons deciding not operate on some addicts presenting with a cardiac infection was hard to read. Source.
Barbara
@Victor Matheson: This is true. I remember being an observer for a third party in a dispute between a family and a hospital over severe birth injuries, and the hospital expressing outrage at the idea that the cost of the child’s care would exceed $10 million over the course of her (likely short) lifespan. My client, an insurer hoping to get some of its expenses paid out of the settlement told me that it would feel lucky if the cost was only $10 million.
Bob Hertz
I feel the same bafflement that I felt when reading
David Cutler on this subject. Where are we getting the money, collectively, to spend over $1 million on any one life? A thousand lives, a billion dollars, I can live with that. But where do we stop?
As for the insurance side of things, all risks like this should be placed into Medicare, just like dialysis. That way the cost burden is spread over all taxpayers.
David Anderson
@Victor Matheson: So you’re saving the break even point is probably closer to 3 years rather than 4 years.
@Barbara: All sorts of intuition goes out the window for multi-million dollar claims…
I am still thinking hard to figure out what I think on the cardiac surgery article. I’m not sure where I am with that.
Barbara
@Bob Hertz: I don’t know how familiar you are with medical costs but to put it in some perspective: A Medicare beneficiary, on average, costs the Medicare program somewhere just above $350,000 over the course of their life. That, of course, is the end of their life — maybe an average of 20 years of expenses, but it is the unhealthiest part of their life. Again, that is an average. For every person like my mother, who likely cost the system way below that average because her death was sudden and did not occur anywhere close to a hospital, there is likely at least one person whose care approaches $1 million, often on the road to nowhere.
Barbara
@David Anderson: You and a lot of other people. As the cost of Narcan goes up, local communities are debating how much of their budget they should devote to it, and whether they need to ration it (no more than 5 times per person). There have already been fairly heated debates about covering Hep C treatment for active IV drug abusers, just as their used to be debate about what to do with people waiting for a liver transplant who were still active alcoholics. The difference is that livers are in very short supply, and Hep C drugs are not.
Mnemosyne
@Bob Hertz:
My brother was in a car accident when he was 17 that left him a partial paraplegic. Between surgeries, recovery, and rehab, he probably exceeded $1 million in costs in the first year, and that was in the mid-1980s. You may have an unrealistic view of how common catastrophic care is and how much a car accident or hemophilia or type 1 diabetes ends up costing overall.
As David points out, we’re already spending $1.5 million every four years or so to treat hemophiliacs. Why not change that to a one-time cost instead?
Victor Matheson
In government regulation policy, the US government currently uses a roughly $10 million per life saved criteria in their cost-benefit analyses. This figure is based on scientific studies of how people actually behave around risk. So, government agencies (back when they actually believed in science and weren’t led by crooks) would typically develop and advocate for regulations as long as the regulation saved lives at a cost of less than $10 million in compliance costs per life saved.
Thus, spending $40 million to keep a severe hemophiliac alive for 40 years violates the usual government regulatory process. That being said, denying care to that individual would actually be a real, honest-to-goodness death panel instead of the imaginary ones Sarah Palin can see from her house.
Villago Delenda Est
How much of the $1.5 million is actual costs, and not pharma companies looking to cash in, CEO bonuses, marketing campaigns, etc? I don’t trust them at all.
Barbara
@Victor Matheson: There is no centralized process for valuing health care treatment in the U.S. The British do it, other countries also effectively engage in top down pricing, but we don’t. So it’s not as if anyone in the U.S. made a conscious decision to spend $40 million for hemophilia treatment. It’s due to accumulated pricing decisions of many different parties, some of which come very close to being a matter of ongoing fraud. That’s one among many reasons that health care costs in the U.S. are out of control.
Yarrow
The issue of churn, or individuals getting coverage from different insurers in different years, is one that doesn’t get enough attention in non-wonky health care discussions. It’s a big issue because it significantly affects the decisions of insurers to pay for treatments.
Insurer A may pay for something really expensive like this treatment but then the individual for whatever reason is no longer covered by Insurer A and instead is covered by Insurer B. That means Insurer B gets all the benefits of the healthier subscriber that Insurer A paid for. Insurer A doesn’t know if the subscriber will stay with them so they don’t want to pay a lot of money to get someone healthy only to have those premium dollars go elsewhere. It’s pretty easy to understand why insurers don’t want to pay for expensive treatments when seen through that lens.
This problem plays out similarly with less expensive treatments as well. It’s yet another argument for either single payer (the same insurer pays for everything) or a much more heavily regulated insurance industry, like the Swiss model.
Barbara
@Yarrow: The problem you articulate can be addressed by single payer but it can also be addressed, largely, by having standardized benefits.
David
@Villago Delenda Est: While I don’t know about this product. I work for a company trying to manufacture a gene therapy. It is devilishly hard. A crew of about 40 people did nothing else for almost 3 months and made a single dose of medicine.
As a chemist, the difference between manufacturing (ignore R&D) a modern antibiotic and a monoclonal antibody therapy like my mother is getting for leukemia is night and day. We are pretty good at making MAbs now, but it will be years before we are there for gene therapies. What do we as a society do for patients now?
Yarrow
@Barbara: Yes, that would be part of the more heavily regulated health insurance industry.
Nicole
@Barbara: That was a really good read; thank you for posting the link.
Tom
I worked back then on a hemophilia drug for one of the large pharma outfits. It was bio-engineered and took years and millions to figure out and begin testing. It also required building what then was the most expensive pharmaceutical production facility ever built. I also saw what the drug did in the early tests — on a 8-yr-old boy. He literally got a life, could play outside for the first time, ride a bike. Worth every penny.
Barbara
@Tom: Not quite. What has happened, in short form, is that specialty pharmacies have popped up to sell hemophilia drugs and their MO is to deliberately remain outside of insurance networks and charge well above the price the insurer can otherwise get from pharmacies under contract. They engage in a variety of techniques to get patients and they waive co-insurance so that patients don’t bear the brunt of the difference. This results in manifestly much more expensive drug spending for insurers. That delta is related solely to patient and provider arbitrage and it adds not an additional penny of value from a clinical or therapeutic standpoint.
Bob Hertz
Good for you!
The drugs in question may have cost $250 to produce, not $1 million.
To me research is a sunk cost. Microsoft did tons of research on Windows and still sold it for $179.
Anyways, I agree that in these expensive cases, our first question should always be if it had to be so expensive!!
KithKanan
@Bob Hertz: Sunk costs have to be paid for somehow. Microsoft could sell Windows for $179 despite the tons of research because they know they’re selling millions of copies. If they knew only 10,000 people in the world would ever have a computer that needed Windows, they would either have decided not to make Windows in the first place or had to charge a lot more for it.
jl
@Bob Hertz: @KithKanan:
Both are true. Once the drug is developed, economic efficiency says charge the production cost. So, even if $1.5 million could be charged for the pill, but it costs a buck to stamp out on a pill machine, you charge a buck for the pill. But, then, there is no way to finance R&D. So the trick of patents is to balance the efficiency of charging a price closer to the cost of production while still giving companies the incentive to do R&D. But for economic efficiency, the incentive should be about the same rate of profit as for other companies. The company doesn’t deserve, in any economic sense, huge excess profits just because they are the ones who developed the drug.
So, the question is balance.
R&D and the pill itself are two different economic goods. IF we had single payer, the price of the million dollar pill would be shared between everyone residing in the country, and most of the $1 million dollar payment for each pill would be split among people who never need it. But, they might need it in the future, so the share of the premium that everyone pays that goes to million dollar pill can be seen as a forced payment for an option to have the pill available in case you need it in the future.
Note, under the current US patent system, the patients who are lucky/unlucky enough to be alive shortly after the drug is developed have to pay a lot for the drug. And also the people who are unlucky enough to in the same insurance pool. There are economic efficiency and I think also ethical problems there.
Patent policy is always a balance between efficiency in production and distribution on one hand, and incentives for future R&D on the other. So, debate is misguided that ignores fact that society needs to find the proper balance. Current US patent, copyright, and IP is historically very extreme in giving very extraordinary rights to the corporate inventor or current rights holder, and very lax in checking whether or not the owner is getting far far more than they need to in order to provide an appropriate incentive for future R&D. There are, and have been, completely different systems that strike a different balance, and less extreme patent policies that strike a better balance than currently in the US.
jl
@KithKanan: Your explanation is a little misleading. Nothing in patent policy says anything about being able to charge a lot for your pill to recover R&D costs. You get property rights for the pill, and whatever you get, you have to recover R&D costs out of that. For gadgets consumables that have an uncertain demand, a patent doesn’t guarantee you get R&D costs back at all. And if you have a very sure market that will pay a lot for the drug, you can make many billions in excess of R&D costs, And Bob Hertz is correct, R&D costs that THAT pill are sunk. The fact that you completely own the pill and can have a monopoly on it, just helps you calculate the chances of you making a decent return on the next R&D project. If you don’t have a monopoly, and there is no property rights guarantee at all, and once the product is distributed it is easy to reverse engineer, you are sure to go broke on any future R&D.
Note that with modern medical technology, and insurance markets, there is little uncertainty in the demand for a new wonder pill. And big corporations have huge marketing departments, that they call R&D, but aren’t. They are marketers that spend most of their time calculating how to price the drug to different costumers to suck as much consumer surplus out their monopoly rights, and thereby increase their excess profits as much, as possible.
Historically, and in theory, patents have worked best when the inventor has to accept the risk of uncertain demand for the product. Much of that uncertainty is gone in modern medicine in countries with functioning health insurance markets (and which the US has a chance of having now if we can keep enough of the PPACA). So, a case can be made that pharmaceutical companies can get way too much for their wonder pills in the US today.
Bob Hertz
Life saving drugs are clearly not a normal product. They are what Michael Walzer calls a ‘desperate exchange’, or a ‘trade of last resort.’
The buyer is way too easy to exploit.
I think there is a duty to control the price.
And as for R and D, drug companies with a successful drug make back their R and D in about a year, and then have 17 years of enormous profits. We could give each scientist who invents a drug a price of $1 million, and then make all drugs generic from day one.
David
@Bob Hertz: Across a 15 year career I have been involved in more 200 candidate drugs with 2 going to market. I am in late stage development, so I couldn’t even guess how many died on the vine before I saw them. My company pays execs too much and spends an unconscionable amount on marketing. But even if you zeroed those and similar budget lines, this stuff is still seriously expensive and the price is going up. I am open to solutions where I get a reasonable salary (I am probably also over paid) and the drugs get developed and manufactured, but that solution needs to be clear eyed about how much that actually costs.