$1000 Hepatitis Pill Shows Why Fixing Health Costs Is So Hard

A new drug for the liver disease hepatitis C is scaring people. Not because the drug is dangerous - it's generally heralded as a genuine medical breakthrough - but because it costs $1,000 a pill and about $84,000 for a typical person's total treatment.

A Washington advocacy effort has sprung up overnight, largely devoted to objecting to the cost of this one medication, Sovaldi. Members of Congress have started a joint investigation into how its maker, Gilead Sciences, settled on its price.

'Clearly, $1,000 a pill strikes people as completely unreasonable,' said John Rother, president of the National Coalition on Health Care, an advocacy group that has been raising an outcry about the drug's price as 'unsustainable.' Gilead 'stepped in it when they decided to go for that cost per pill, because people can't imagine why that could be justified.'

But maybe we are looking at the costs of Sovaldi in the wrong way. One reason it is causing such angst among insurers and state Medicaid officials is that treatment costs are coming all at once.

First of all, there is pent-up demand. There are a lot of people with hepatitis C - an estimated 3.2 million in the United States - many of whom have been waiting for a good treatment. Second, unlike drugs for most chronic diseases, like diabetes or H.I.V./AIDS, for which treatment continues over many years, Sovaldi can cure most patients' hepatitis in just a few weeks, with the bill soon to follow. The lifetime cost of treating someone with an H.I.V. infection is around $380,000, according to estimates from the federal Centers for Disease Control and Prevention, but the annual bill is much smaller.

Think about AIDS treatment as paying a mortgage. Sovaldi is like buying a house with cash.

The United States health insurance system works better for costs that are spread out and predictable. People change insurance frequently, discouraging insurers from making a big investment now that might pay off later. That does not mean that our health care system is not expensive - it is - but we are more used to costs that pile up slowly over time. Expensive one-time treatments like Sovaldi can be a shock to the system.

Hepatitis C slowly destroys the liver. Over decades, many infected people will end up with liver damage and complications, including joint pain and kidney disease, while a smaller number will get cirrhosis or liver cancer, and a tiny fraction will end up needing liver transplants. People used to get the virus from blood transfusions; now, it is contracted mostly by intravenous drug users who share needles.

Until now, doctors would mostly treat hepatitis C patients' symptoms. Some drugs attacked the virus itself, but they did not work very well. And most had side effects, including fever, depression and anemia, that about half the patients were not healthy enough to tolerate.

Those drugs were also expensive - the most effective drug cocktail before Sovaldi cost about $70,000 - but because few patients chose them, the price tag did not cause a big reaction. Sovaldi is different. Patients want this drug, with its high success rate and smaller list of side effects. That means a big financial shock to the health care system all at once.

'With a product like Sovaldi, it's a new price to the system,' said Gregg H. Alton, Gilead's executive vice president for corporate and medical affairs. He said the company priced the drug to be competitive with existing therapies, adding, 'It's a new cost they weren't paying for before.'

The accounting firm PricewaterhouseCoopers estimated that this single drug could bump up employer insurance premiums by half a percentage point next year. Researchers at the Kaiser Family Foundation, a health care research group, estimate that it could increase premiums for Medicare 's drug benefit program by 3 to 8 percent next year, even if only a fraction of eligible seniors were to seek the treatment.

Insurer-sponsored studies are estimating even higher costs. Express Scripts, a company that manages drug benefits for insurers, prepared a worst-case situation: It said that states alone could be on the hook for up to $55 billion if every Medicaid patient or state prisoner with the disease was treated.

'We think a perfect storm is arising out there,' said Dr. Steve Miller, a senior vice president and the chief medical officer at Express Scripts, who helped prepare its estimates.

The drug, which came on the market last year, has been a bona fide blockbuster for Gilead, which earned $3.48 billion in sales of Sovaldi in the last quarter alone. That puts it ahead of nearly every new drug introduction in history and in striking distance of the record for annual drug sales: the $12.9 billion for Pfizer's Lipitor in 2006.

America's Health Insurance Plans, the health insurance industry group, has been intensely focused on the drug's price. A new advocacy group, the Campaign for Sustainable Rx Pricing, begun by the National Coalition on Health Care with significant funding from the insurance industry, is sponsoring events and meeting with members of Congress to complain about Sovaldi's pricing.

In a rare bipartisan collaboration, Senators Ron Wyden, Democrat of Oregon, who is chairman of the Finance Committee, and Charles E. Grassley, Republican of Iowa, a committee member, have started a joint investigation, asking the drug company to answer questions about how it determined Sovaldi's price. They unearthed documents showing that the pharmaceutical company Pharmasset, which originally developed the drug and was acquired by Gilead in 2011, had planned to sell it for $36,000 per course of treatment.

By law, state Medicaid programs, which insure poor and disabled residents, are legally required to cover any drugs that are approved by the Food and Drug Administration. Medicaid gets a mandatory discount of at least 23 percent on drugs. But many states, terrified about the budgetary impact of Sovaldi, are testing strategies to limit access. Oregon, which has a special legal waiver from the usual rules, has said it would give it only to Medicaid beneficiaries with advanced liver disease. Illinois announced similar restrictions last week.

Research on the cost-effectiveness of Sovaldi is still in the early stages, but it appears that use of the drug has the potential to actually save money over the long run. Data from the C.D.C. suggest that more than 60 percent of people with hepatitis C will end up with chronic liver disease - and as many as 20 percent will end up with cirrhosis. Treating those diseases is costly. A liver transplant, the most expensive option for the small group of patients with end-stage disease, costs nearly $600,000.

Because the drug cures around 90 percent of patients who take it, public health researchers believe it has the potential to reduce the spread of the disease to others, eliminating the future costs of treating their disease and any complications.

But in America's health care financing system, people tend to change commercial insurance whenever they change jobs, lose Medicaid coverage when financial circumstances change, or leave the commercial market altogether when they become eligible for Medicare at age 65. That means one company will be stuck footing the big bill, and another will probably reap the benefits of a healthy liver 20 years later.

'If it is cost-effective from a societal standpoint, it is not necessarily going to be cost-effective from a health plan standpoint,' said Dan Mendelson, chief executive of Avalere Health, a health care consulting company. 'I think some of the friction here results because the societal value is not reflected in the health plan operations.'

State Medicaid programs are particularly sensitive to annual cost increases. Medicaid coverage is paid for, in part, out of state budgets, which have to be balanced every year. A disproportionate number of infected people rely on it for insurance, because the population most at risk - intravenous drug users - tends to be poor.

Matt Salo, executive director of the National Association of Medicaid Directors, which represents state Medicaid officials, said his members have been floored by estimates that the drug could drive up costs by 10 or 15 percent. They worry about the short-term budgetary strain, and about the longer-term political consequences.

'From a realistic perspective, when a Medicaid budget skyrockets like that, you aren't going to hear from the U.S. taxpayer, 'Thank goodness, Medicaid was here to solve this public health crisis,' ' Mr. Salo said. 'They're going to say, 'It's another runaway government program.' '

But for all the panic, the crisis may soon wane. New, effective drugs are about to enter the market to compete with Sovaldi, offering other options with high cure rates and low side effects. And a more competitive market is likely to drive down the drug's price, once payers can choose to cover only the drug that is the best deal.

The pent-up demand of patients who have been waiting for a cure will work itself out over the next few years. The PricewaterhouseCoopers estimates show big costs for treating hepatitis C over the next two years, then a sharp decline as the untreated population dwindles.