Sovaldi is a wonder drug that effectively cures a strain of the Hepatitis C virus. The headline price of Sovaldi is $1,000 per pill, or $84,000 for a course of treatment. Too expensive? That’s what the head of the health insurers’ trade association says, and many agree with her.
This charge is inaccurate. The problem with Sovaldi is that all the costs are upfront. Spending $84,000 in a few months will potentially save hundreds of thousands of dollars down the road. As Margot Sanger-Katz wrote in the New York Times:
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.
This development can take twenty or thirty years, and not every Hepatitis C patient will end up needing a transplant. Nevertheless, according to the PriceWaterhouseCoopers Health Research Institute, Sovaldi will reduce long-term medical claims for employer-based plans.
Pent-up demand for Sovaldi and other Hep C drugs on the horizon will drive up medical costs in 2015 and 2016 by 0.7 percent per annum year, because about 80,000 patients each year will be treated with these drugs. However, as early as 2017, this will lead to a very slight reduction in overall spending growth, as patients cured in 2015 and 2016 stop incurring long-term costs.
And yet, the health insurance industry is extremely upset about Sovaldi’s price. Sanger-Katz continues:
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.
Perhaps Medicare, which owns its patients for life, has a better incentive to pay up early for long-term benefits. A report by actuaries at Milliman concluded that Medicare beneficiaries with Hepatitis C have three times the medical costs of the average Medicare patient. Unfortunately, Medicare also has poor incentives.
Medicare has about 350,000 beneficiaries with Hep C. Scholars affiliated with the Kaiser Family Foundation have modeled a scenario in which 75,000 of them get Sovaldi, increasing Medicare Part D costs by $6.5 billion, or 8 percent. Medicare Part D insurers do not benefit from reducing costs to the rest of Medicare, or costs beyond the current year.
Plus, because voters seem largely immune to Medicare’s looming insolvency, politicians have no incentive to reform the government program so that it pays for treatments that save money over the long run.
As for other government health plans: 750,000 people with Hep C are dependent on Medicaid or in prison, according to Express Scripts. Treating them all with Sovaldi would cost states $55.2 billion. Interviewing Matt Salo, who represents state Medicaid plans, Sanger-Katz continues:
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.
“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.'”
And it gets worse. There is a lot of uncertainty over how many people in the U.S. have the disease. Milliman estimates 3.2 million, of which over half a million are in prison. However, there is no requirement to screen prisoners for Hep C. Of the remaining approximately 2.6 million, about 1.8 million are undiagnosed.
Obviously, these people are highly likely to transmit the virus to others. So, better diagnosis and treatment would have a knock-on effect. Unfortunately, incentives to diagnose and treat the disease are awful, and Sovaldi has actually made the incentives worse. Insurers and governments are less likely to seek out likely patients to screen, because diagnosis will just bring a gigantic drug bill.
A solution is one that NCPA has endorsed for a long time: Individually owned insurance that includes insurance against the costs of chronic illness (called health status insurance). Instead of forcing people to get health insurance that lasts only one year, this health insurance would take into account a person’s lifetime cost of illness.
As a result, unproductive conflicts like the current one over Sovaldi would recede from prominence. Insurers would have an incentive to screen patients early and often, in order to nip expensive conditions in the bud. Diagnostic and pharmaceutical innovation would accelerate, as insurers become more willing to pay up for tests that diagnose early-state illness and drugs that bring long-term benefits.