Avastin and Lucentis: When paying more is better

Genentech's Lucentis for age-related macular degeneration is basically just a different name for Avastin, a cancer drug. From the New York Times (A Rule on Eye Treatment is Likely to Cost Millions)

...Lucentis costs about $2,000 per injection — with an injection needed as often as every month. Although Avastin can cost thousands of dollars a month as a cancer treatment, when used in the tiny portions required for eye-disease injections, it costs only about $30 to $50 per shot...But Medicare has now introduced a special reimbursement code just for the smaller doses of Avastin. And starting Thursday, the reimbursement of Avastin dropped to about $7.20 for the dose typically used in the eye.That would mean eye doctors — who purchase Avastin and then are reimbursed when using it on patients — would lose money administering the drug.The new policy would give eye doctors a financial incentive to switch to Lucentis, for which they would be fully reimbursed even though that drug is significantly more expensive.

I know the Times wants to frame this as a case of bureaucratic rules unnecessarily causing the waste of hundreds of millions of taxpayer dollars. In the near term they may even be right, because both drugs are available and will remain available.However, it's clear that the value of Avastin is not based on the amount of the drug given but rather the effect it has. The $2000 price is consistent with other specialty products and Genentech has earned the right to that level of revenue from customers.If Genentech is forced to sell the drug for $30-50 (or less) who in their right mind is going to try to develop the next generation of products for macular degeneration. Already I've seen early-stage products killed because the upside is just not there.Medicare should implement a software licensing model for prescription drugs. Rather than charging by the physical amount of drug dispensed, drug companies should charge per patient per year. The physical cost of the product is negligible, just like in software. Most of the cost is in R&D and marketing.