Health Policy$ense

That Overpriced Cholesterol Drug? Let the Market Respond

[cross-posted from the Field Clinic]

Praluent, a new cholesterol-lowering drug for people who need more than a statin, has been priced at about $40 a day by its suppliers, Regeneron and Sanofi. This compares to about $8 a day for Crestor, the most recent statin on the market, and pennies a day for generics. The introduction of a blockbuster drug at a budget-buster price has thrown Express Scripts, CVS/Caremark, and other drug insurers into the throes of serious anxiety. They warn that widespread use of the new medication at this price could bump up drug spending by as much as a third, which translates to $100 billion annually nationwide.

Is Praluent worth it? A new study has estimated the value of the benefits it provides relative to alternative treatments. It concludes that, if patients value the health benefits (as measured by improvements in both survival and quality of life) at $100,000 for a healthy year of life, the value would be only about 25% of the price. Most drug spending is covered by insurance, and beneficiaries usually have to cover higher costs with higher premiums. Based on this analysis, the maximum price consumers would want their insurer to pay is only a little higher than the price of Crestor. Even if the value of improved health were assumed to be greater (say, $150,000 or $200,000 per life year), the gap between the value-based price and $40 a day would narrow by only a little and would remain enormous.

Some commentators have called for political pressure to lower prices and possibly even regulation, based on the results of this study. But that is the wrong conclusion. From an economics perspective, what consumers should really want is for their insurers to deny coverage for the drug. The reason is simple: the benefits are not worth the cost—and so the harm they would sustain from having to pay higher premiums would be greater than the gains they would realize from improved health. Better to have less costly insurance than more expensive coverage of an overpriced commodity.

Though this point may seem both bloodless and pedantic, it does fit with most people’s usual commonsense behavior when faced with an excessively high price for a product. If the price is high enough and the improved quality modest enough, don’t buy it. That is why I do not own a Tesla, eat at four star restaurants, or buy scalped tickets for sporting events.

The obvious implication for insurers is that they should not authorize wide-scale use of this drug, something they are trying to figure out how to do. Right now, they make decisions like this based on each patient’s clinical needs. Use of the drug is covered only for those whose condition is bad enough to really need it. But these clinical excuses provide only a fig leaf: the real reason that insurers should walk away is not because the drug does not work better than alternatives, but because it does not work better enough to justify its higher costs.

Now for that first ray of sunshine. If most potential buyers do, in fact, value a year of added life at no more than $100,000, and so do not buy the drug, the increase in insurer spending will be much less than the $100 billion projection. That is a gain not only for insurers but also for consumers who will pay less in premiums (assuming that lower insurer costs translate into lower premiums, something that is likely but not guaranteed as insurers consolidate).

But wait, the story might turn out even better!  The sellers of Praluent may have underestimated the market share they might attract with a somewhat lower price. Because both patents and FDA rules give them a temporary monopoly, they can charge whatever they wish, but the price can still be too high to maximize their profits if they lose buyers. As Professor Y. Berra might have observed, “they are making so much money off of this product that nobody can afford to buy it anymore.”

You do not maximize profits by setting a price so high that it leads to a very low volume of sales. Since the R&D costs for the drug have already been incurred, one would expect the sellers to respond to weak demand by cutting the price—perhaps not all the way down to Crestor levels, but at least somewhat lower.

The logical flaw in the excessive handwringing and gnashing of teeth over the price of Praluent was to assume that it was somehow immutable and externally determined. According to economics, the explanation should be quite the contrary: monopoly drug sellers chose the price not based on their cost or even on measures of average value published in economics or medical journals, but rather based on how many customers they thought they could attract. If, indeed, they suffered from excessive optimism about the market for their new product, a tepid market reaction should drive them to price it more appropriately.

Unfortunately, there are few completely happy endings in economics. Humans naturally want the best possible product at the lowest price, and that is usually not in the cards. And if, in fact, consumers tell insurers that they do not want them to walk away at the high price—in effect, saying they think their health is worth more than $100,000 per year—then they will be better off letting their insurers pay the current price.

Economists believe that markets can sort this out—although not perfectly and with temporary glitches.  But, as experience with Obamacare has shown, both imperfection and glitches are also not unknown when the government gets involved. So perhaps, before invoking regulatory options or plunging into an Armageddon mindset, we might want to give realistic if unexciting market processes the benefit of the doubt.