Tag: Gilead

Sovaldi: a near-perfect example of price discrimination

March 19th, 2015 by

The controversy over the pricing of Gilead’s Sovaldi for Hepatitis C is a textbook example of price discrimination in action. I hope that my quick review of some of the principles involved will help explain what’s going on.

Gilead sells Sovaldi for high prices in the US: up to $85,000 or so for a course of treatment. The price is a little lower in Europe, substantially lower still in middle income countries and less than  $1000, or 1 percent of the US price in poor countries such as India. Such stark differentials set up major financial incentives for people in richer countries to obtain the product in poorer countries. With more than $80,000 per patient at stake, grey marketers could easily make millions of dollars and even an individual patient from a rich or middle income country would find it financially worthwhile to go to a low income country to procure the medicine.

This isn’t just theoretical. I was approached by a consultant representing large US employers who were exploring pharmacy tourism that would send patients abroad for their drugs.

Gilead has responded by taking steps to limit diversion of product. Patients must present IDs showing they are residents of the country to be eligible for the low-income country price. Patients can only get one bottle of medication at a time. Naturally some folks, including Doctors Without Borders, are complaining about the burden on patients and caregivers, and accusing Gilead of being greedy and maximizing profits.

Although the anti-Gilead people have a valid perspective, my sympathy is mainly with Gilead. The concept of price discrimination: charging different prices to different customers based on willingness or ability to pay, maximizes a monopolist’s profits but it also maximizes societal benefit. As the simplified chart below illustrates, Gilead makes the most money if it can sell the medication at different prices in different countries. That also leads it to sell the highest quantity of product, meaning more people can be treated.

 

Price discrim

If Gilead were required to charge the same price everywhere in the world –as shown below– it would result in a windfall for consumers in high income countries (“consumer surplus”) and lack of affordability in poorer countries (“deadweight loss”), because patients in poorer countries could not afford to be treated. Even assuming Gilead wanted to maximize its profits in that scenario fewer people would get the treatment.

No discrim

 

Because of the opportunity for price discrimination, Gilead was willing to introduce Sovaldi in rich and poor countries at the same time –something that doesn’t usually happen.

For price discrimination to work, the following conditions must hold:

  1. The firm (Gilead) must have some monopoly power. In this case the monopoly is based on patent rights. Gilead critics can try to undermine this power by encouraging governments to ignore patents.
  2. Markets must be able to be segmented and kept separate. Here that means segmentation by country, but theoretically it could be done down to the individual level so that rich people in poor countries pay the same or more than poor people in rich countries. (In rich countries there are other mechanisms to do this, such as patient assistance programs, but let’s not make this even more complex.)
  3. There can not be leakage between markets, otherwise the price is eroded in the expensive market. That’s why Gilead needs to confirm residency and why pharmacy tourism undermines societal benefit.

Price discrimination maximizes profits and maximizes societal benefits by increasing the number of people who can afford treatment, while rewarding the monopolist for bringing a valuable innovation to market. It’s not necessarily true that patients are harmed when Gilead maximizes its profit.

Allowing and even encouraging price discrimination is good global health policy. It encourages innovation and lessens global disparities.

By healthcare business consultant David E. Williams, president of Health Business Group.

Hooray for high-priced hepatitis treatment Sovaldi

April 1st, 2014 by

Congratulations to Gilead Sciences for producing Sovaldi (sofosbuvir), which cures hepatitis C about 90 percent of the time. The drug has a list price tag of $84,000 for 12 weeks of treatment. That $1000 per pill price tag is causing concern among health insurers, policymakers and the general public. The Wall Street Journal (Sales Soar for Pricey Hepatitis Drug Sovaldi) emphasizes the negative impact the drug’s release is likely to have on health insurers’ profits this year.

Doctors and patients are rushing to embrace the drug, and prescribing has taken off during the first several months of availability. Despite the concerns about cost containment, health insurers and pharmacy benefit managers have done little to restrict access. Gilead is making money hand over fist.

This is the American healthcare system at its best: providing rich rewards to those who bring truly innovative solutions to market first and not letting cost concerns lead to rationing. I hope Gilead’s example spurs investors to fund other treatment breakthroughs and get them to market ahead of competitors. 

Hepatitis C is a scourge and the treatments have been difficult to take and not nearly as effective until now. One of the reasons the total costs of Sovaldi is so high is that there are millions of people who were infected years ago and are starting treatment now. The CDC recommends testing for baby boomers, many of who were unknowingly infected from intravenous drug use in the 60s and 70s or from a tainted transfusion received up till the early 1990s. Once the big group of long-term infected patients is tested and treated, and when more products like Sovaldi come to market, costs will decline.

The cost problem in American healthcare is not from products like Sovaldi that are expensive but work. The problem is expensive care that is less effective or even harmful.

I asked all nine candidates for Governor of Massachusetts the following question:

Hepatitis C is 3 or 4 times more common than HIV. New drugs that can cure the infection are coming on the market this year but they are very expensive. What role should the state play in ensuring that residents are tested, linked to care, and have access to these new medications?

Don Berwick, former head of CMS and the Institute for Healthcare Improvement, had a good answer:

“We have to recover money from ineffective care, wasteful care, and harmful care.  We need to work very hard to make sure that we have the resources liberated from health care waste, so we can rededicate them to things like proper hepatitis C care.”

None of the candidates had a great suggestion for how to make sure everyone gets tested. But the beauty of the profit motive is that Gilead is hard at work raising awareness about hepatitis C testing and treatment, which will benefit the company and patients.

By healthcare consultant David E. Williams of the Health Business Group