The introduction of new oral medicines that can cure chronic hepatitis C infections (including Sovaldi®) have led to some intense discussions permeated with misleading information about the pricing of new medicines, how such medicines are “game changers,” and the implications for budget-crunched payers.  Below I summarize some key points about those issues.

1.  Myth #1: How Medicines are Priced

One of the perpetuating myths about biopharmaceuticals is that medicines are priced to recoup research and development costs.¹ It’s a myth. As I’ve written about elsewhere prescription medicine prices are set like everything else in a regulated free market: Companies set prices to maximize revenues and profits based upon the market opportunities and the value the new medicine provide compared to the consequences of the disease and other treatment options – including no treatment at all.  (See more about this in #4 below.)

2.  Myth #2: There is A Price

While the price of Sovaldi® has been widely written about in the press, in reality, there is no single price in the U.S. for almost all medicines. Rather, every medicine has a range of prices that include the discounts required by law to Medicaid, VA, DoD and other government programs, and the discounts negotiated by private insurance companies. The widely reported price of Sovaldi®, which is the starting point for those discounted prices, has been widely criticized, but a high-level examination of the situation illuminates a relatively logical picture as discussed below. Furthermore, an understanding of the overall situation with chronic hepatitis C infection and those new medicines leads to a reasonable strategic framework for payers facing significant costs for treating people with chronic hepatitis C infection.

3.  Situation with Chronic Hepatitis C Infection

A.  Most of the roughly 4 million people with chronic hepatitis C in the U.S. were infected before 1992 when a test to screen donated blood started to be used.

B.  Today, the rate of new infections is about 45,000 people per year, and those infections are acquired primarily through intravenous drug use.

C.  The older treatments for chronic hepatitis C infection largely depended on activating the patient’s immune system to clear the virus from the body, which is why the medicines in those treatment regimens, (e.g., interferon) make people feel like they have a bad flu for several/many months.

D.  Assuming patients can tolerate the side-effects and complete their course of therapy, the older treatments for hepatitis C had cure rates² as low as 20% depending on the strain (genotype) of the virus and certain patient characteristics.

E.  The new medicines for chronic hepatitis C infection are “game changers” since they have reported cure rates of 90-95+%. Ray Chung, MD, a hepatitis C expert, has described these new medicines as a clinical paradigm shift from treating a liver disease to curing hepatitis C infection.

F.  These medicines are also “game changers” because this is the first time biomedical science on earth has developed a cure for a chronic viral infection. (I can’t speak for other planets, galaxies, or other spatial dimensions.)

G.  The low rate of new infections in the U.S. means that if people currently infected with hepatitis C are treated and cured (and the new medicines seem capable of curing people by eliminating the virus from their bodies), then – in theory – hepatitis C infections could be eliminated, or at least driven down to very low numbers.

H.  Physicians (particularly gastroenterologists and hepatologists) were aware that new – and much better – medicines to treat (and hopefully cure) hepatitis C infections were expected to be approved in late 2013/early 2014. Therefore, many patients weren’t started on the older therapeutic regimens that had significant toxicities and low cure rates.

I.  The people who deferred treatment in 2013 were lined up to be treated in early 2014, and this produced a large wave of new patients (and sales) for the new medicines in early 2014.

4.  Rationale for Pricing of Hepatitis C Cures

I stated above that companies price new medicines to maximize revenues and profits.  That’s only sort of true. New medicines are really priced to maximize the value the company will get from selling the medicine over the entire effective life of the product.  Economists refer to this as the “Net Present Value” (or NPV), which takes into account expected revenue in future years, discounted by how much less a dollar in the future will be worth than it is today because of inflation, and other factors such as competition from other treatment options. For Sovaldi® the most significant factors are competition and substitution due to other medicines expected to be approved in 2015 and beyond, AND the limited number of people with chronic hepatitis C infection.

The relatively finite pool of patients means that NPV calculations for Sovaldi® do not look like other medicines to treat chronic diseases or to keep cancers in remission, because those types of medicines have large (and probably growing) patient populations that will be taking those medicines on an ongoing basis. Therefore, the “value” of Sovaldi® in the latter years of its 14-year effective patent life³ will be much, much, much less compared to those other medicines. This front-loaded fiscal/value situation means that setting a ceiling price at the higher-end of the comparable range for treatments for a serious illness that will be taken as a single course for a shrinking population is a logical outcome.

5.  Path Forward for Budget-Crunched Payers

Because Medicaid programs, the VA, and state/local prison systems have significant numbers of people with chronic hepatitis C infection – and they have fixed or semi-fixed budgets – treating everyone infected with hepatitis C all at once would be a significant budget buster. Below I describe a framework for logically approaching this situation.

But first, it is also important to recognize some other factors about chronic hepatitis C infections and Sovaldi® and other medicines that are expected to be approved to treat/cure hepatitis C in the coming months/years:

A.  Of the estimated 4 million people in the U.S. with chronic hepatitis C infection, most do not have significant liver disease characterized by changes in the structure and function of the liver that ranges from various degrees of fibrosis and cirrhosis to full liver failure or liver cancer.

B.  People with more advanced disease are already costing the health system significant amounts and have the most health and quality of life problems.

C.  While the exact percentage of people with chronic hepatitis C who have advanced disease is unknown, a reasonable guess might be about 20-30%.

D.  People who do not have advanced disease will most likely progress to advanced disease, and there are known risk factors that increase the likelihood of more rapid progression.

Given those factors, a reasonable approach for payers with limited resources would be to put those people with advanced disease in the front of the queue for the cure. Other people who should be included in this “first to treat” group would be individuals who have certain criteria that increase their risk for rapid progression of liver problems, or are having health problems from the infection outside the liver (i.e., extra-hepatic manifestations) such as renal, hematologic or rheumatologic problems, or are symptomatic.

Other groups that could be considered for priority treatment could include people in prisons (or being released from prisons) who might be at increased risk of transmitting the virus to others.  (People who are cured of their chronic hepatitis C infection can be reinfected.)

After this first group’s treatment is addressed, the next group of individuals with risk factors for more rapid progression to advanced disease (such as longer time since their estimated date of infection) could be eligible for treatment.

This “triaging” of priorities would spread costs out over a longer period of time in a rational way. In addition, because of real-world barriers to identifying and engaging all potential patients, not all the people in those first to treat categories would get treated in the first few months or year. Therefore, the actual first year costs would be below the results from a simple calculation of the number of people multiplied by the treatment costs per person.

Such triaging would give budget-crunched payers time to plan for future budget years with the realization that the number of people with chronic hepatitis C infection will be decreasing over time.  After a few years of treating people with chronic hepatitis C infection (depending on how the triaging/staging is done, along with the effectiveness of public health outreach and screening) the annual costs for medicines for people with chronic hepatitis C infections should become relatively low even before generic versions of the new medicines are available.

6.  Cures for Chronic Hepatitis C Infection Are Not Game Changer

Some people have angsted about how the new treatments for chronic hepatitis C are harbingers of more expensive, budget-busting medicines. However, looking at the pharmaceutical industry pipeline, there are not medicines in clinical development to cure other chronic viral diseases.  Nor are there medicines to cure other serious chronic diseases.  I certainly wish there was a $100,000 cure for MS, Parkinson’s, Alzheimer’s, ALS, HIV/AIDS, or many other debilitating or degenerative conditions – but there aren’t, and there don’t seem to be any on the near horizon. Thankfully, there are compounds in clinical trials to better treat those conditions by preventing or slowing progression, as has already happened for rheumatoid arthritis and some other autoimmune diseases. Therefore, while the new cures for chronic hepatitis C are game changers for people with that specific condition, unfortunately, cures for other serious chronic illnesses do not appear like they will be available very soon.

7.  Caveats & Other Notes

I apologize for this rather lengthy post – particularly after the long time since my last post.  But there are a few other points to note:

• These thoughts are my own, nobody has paid me to write this, and only one person reviewed it for gross factual correctness.
• My projections and estimates of infection and cure rates etc. are derived from conversations with knowledgeable people and reading the literature, but there is clearly a significant level of uncertainty about many of those estimates, including the numbers of people infected and their stages of disease.
• Even the best projections are off by some significant percentages.
• The price of other medicines for chronic hepatitis C infection that are expected to be approved in the next 6-36 months are unknown, but the price range for Sovaldi® should set an upper limit based on a course of treatment to achieve a cure. Therefore, for example, if another compound is approved that achieves a similar cure rate with similar side-effects, etc., but only needs to be taken once a week for 8 weeks (i.e. 8 pills), it would likely have a higher per pill price than Sovaldi®, but a lower total cost for a course of treatment.

 Footnotes:

1. While, the risk of biopharmaceutical R&D is borne by companies, they cannot bake the R&D costs of individual medicines (and dead ends) into the prices of those medicines.  Rather, a company’s profits are the source of funds for future R&D. Specifically, companies makes decisions about how to use their financial resources (primarily derived from profits) for R&D and other activities. R&D opportunities are evaluated based upon the projected market potential combined with the company’s expertise and capabilities that would enable the company to successfully develop a new medicine in a specific disease area of need, i.e., where there is a market opportunity.
2. Cure is defined as no detectable virus six months after the conclusion of treatment.
3. http://www.accessdata.fda.gov/scripts/cder/ob/docs/patexclnew.cfm?Appl_No=204671&Product_No=001&table1=OB_Rx