Patent for hepatitis C drug costs US billions of dollars

The media have been full of hand-wringing stories in recent weeks over Sovaldi. The new hepatitis C drug is apparently an effective treatment for the debilitating and potentially deadly liver disease. However, Gilead Sciences, Sovaldi’s patent holder, charges $84,000 for a three-month course of treatment.

There are an estimated 3 million people with hep C in the United States. This puts the tab to treat them at more than $250 billion. That would be a major cost to private insurers and public-sector programs such as Medicaid. This is the basis for the hand wringing: Should we require private insurers to pick up the tab for Sovaldi for hep C sufferers? Does everyone get treated or just the very sick? And should already stretched state Medicaid programs have to bear this additional burden?

The answers to these questions, however, are much easier for anyone who doesn’t mind bucking the drug companies. Sovaldi is expensive in the U.S. because the government gives Gilead Sciences a patent monopoly on the drug. It uses this monopoly to charge a price that is far above the free-market rate: A generic version is already available in Egypt for $900 per treatment. Indian generic manufacturers believe that they can produce the drug for less than $200.

This presents a simple and obvious way around the $84,000 problem: Send people to Egypt or India for a treatment that costs 1 percent as much or less. The U.S. could pay for family members to go as well, stay a full three months and still come out tens of thousands of dollars ahead. Certainly this can be presented as an option to people, perhaps throwing in a $5,000 or $10,000 incentive to make the trip worth their while.

The savings states could net from opting for this solution are enormous. They will all have large numbers of hep C sufferers, many of whom are covered by state Medicaid programs. For example, with a bit less than 12 percent of the country’s population, California, if it has a proportional number of people with hepatitis C, has about 350,000 sufferers. If one-third are on Medicaid and the total cost for treating someone in another country is $20,000, the state could save more than $7 billion by offering the option to be treated abroad. For Texas the potential savings by this calculation would be about $4.8 billion and for New Jersey some $1.7 billion.

These huge potential savings present a great opportunity for California’s Jerry Brown, Texas’ Rick Perry, New Jersey’s Chris Christie and other governors to show themselves as tough guys who are willing to do what it takes to save taxpayers’ money. That is, unless they are scared to stand up to the drug industry.

Big Pharma representatives will of course argue that they won’t be able to finance their research if people evade their patent monopolies by going to countries where generics are available. This is true, but it just points to the absurdity of using a patent system that dates back to the 16th century to finance 21st century research. If we didn’t rely on patent monopolies to finance drug research, the U.S. wouldn’t face difficult questions about paying billions of dollars for drugs that are essential for people’s health.

If the government just paid for the research up front, with few exceptions, drugs would be cheap. We wouldn’t have to worry about whether the government or private insurers could pay the vast sums demanded by companies with legal monopolies on the sale of a drug.

We have experience with the government financing research. The bulk of U.S. military research is financed by the government. While there are many tales of inefficiency and corruption, the defense industry produces highly sophisticated weaponry. There is also a huge advantage of public financing for drug research rather than weapons research: There is no reason for secrecy. Full and prompt disclosure of research findings would be a condition of funding. Science advances most quickly in a context of open research.

There also happens to be a precedent. The U.S. spends $30 billion a year on research conducted by the National Institutes of Health, funding that has strong support across the political spectrum. However this is mostly for basic research. It would be necessary to double or triple the level of funding, with the explicit expectation that the money would be used for the development and testing of new drugs.

We care about these drugs because peoples’ lives and health are involved, yes, but there is also a huge amount of money at stake. Americans spent more than $380 billion last year on pharmaceuticals, or roughly 2.2 percent of GDP. Given the current system’s enormous waste and corruption, economists should be heavily involved in trying to design a better system.

But almost no economists today give the issue of drug research any thought. By contrast, they obsess over the possibility that the U.S. Export-Import Bank may not be reauthorized. The Export-Import Bank may mean a great deal to Boeing’s profits, since the bank finances foreign purchases of its products, but its impact on the economy as a whole is less than one-tenth as large as the amount of money at stake with patent monopolies on prescription drugs. 

It would be great if a governor or other prominent figure in public life were willing to put the public’s health and the economy ahead of the drug companies. It might not be as much fun as suing President Barack Obama for not fully enforcing the Affordable Care Act, but it would make a much bigger difference in people’s lives.   

Editor’s note: Because of a math error, an earlier version of this column printed incorrect estimates of the savings California, Texas and New Jersey could net from sending Medicaid patients abroad for hepatitis C treatment rather than paying for Sovaldi. We regret the error.