The Ethics of Drug Pricing
Photo by Christina Victoria Craft on Unsplash
Let’s start with a bit of a refresher of high school economics. In an ideal free market economy, prices of goods are determined by the straightforward interaction of supply and demand. Increase supply while demand stays the same, and prices will go down; increase demand while supply stays the same, and prices will go up.
In a world of scarce resources (that is, where supply is limited), this process allocates goods to those who are willing to pay the most for them. In theory, this should ensure that the limited resources are put to their most efficient use – where the value created by the use is the highest. If I can take a unit of raw materials – a tree, or a ton of iron, say – and make something that I can sell for a price higher than what you can make and sell from the same stuff, then I should be willing to pay more for it than you are. Allocating those resources to me, so I can make something that has more value, is better than you using the same resources to make something of lesser value. Multiply this process across millions and billions of purchases and sales across the whole economy every day, and the total value of goods created from the available resources should be maximized.
This is Adam Smith’s invisible hand at work. Through the uncoordinated actions of millions of people, the amount of every product to be produced is determined and its price is set, and the largest possible aggregate value is created across the whole economy.
The classic alternative to a free market system is socialism, where a government or other authority unilaterally decides how much of any good to produce and how much to charge for it.
As ubiquitous as the market economy may now be, it has always faced a number of criticisms. For one, value is not always just measured by simple price, and relying on what someone will pay prioritizes financial metrics over all others. For another, the willingness to pay more for a good may not correspond to its utility to the purchaser, but instead may simply be the result of the ability to pay more for it. If I have more money than you, I will be able to pay more for a good, even if you would make “better” use of it.
Despite such critiques, in the United States as well as in most of Europe and in many other parts of the world today, the price of the vast majority of goods is determined by the market.
Where goods are luxuries or where acceptable alternatives are readily and cheaply available, the market poses relatively few ethical dilemmas. I may not be able to afford a Lamborghini, but I can afford a Honda. The Whole Foods down the street may be a bit pricey, but the food at the Aldi around the corner is equally wholesome and much less expensive.
(Few ethical dilemmas, perhaps, but not none. For there are those for whom even the essentials of life – shelter, food, clothing – are beyond their ability to pay. That’s a topic for another blog post, however.)
Relying on the market to determine price is much more fraught, however, where the good in question is a necessity without low-priced alternatives. Health care and medicines are perhaps the primary examples where the morality of market pricing can be most troubling.
This issue has become front and center as a result of the COVID-19 pandemic.
Remdesivir is the only antiviral drug that has, so far, been clinically shown to provide demonstrable patient improvement in those suffering from COVID-19. It was originally developed by a pharmaceutical company called Gilead Sciences as a possible treatment for hepatitis-C and certain other viruses, such as Ebola. Gilead holds the patent on remdesivir, and so only Gilead can manufacture the drug.
As a result, the demand for remdesivir is very high, while the supply is limited to the amount that Gilead can, or will, manufacture. How can such a drug be priced? On June 29, the company announced that it would charge governments of developed countries $2,340 per patient for a five-day treatment course. Due to standard negotiated discounts, private insurers would be charged more, $3,120 per course. How did Gilead determine this price? In part, the company based it on the “value” that it expects the treatment to provide. Current evidence indicates that remdesivir reduces the average hospital stay by four days, which in the United States would imply a savings of approximately $12,000. Nevertheless, the company chose a lower price, “[t]o ensure broad and equitable access at a time of urgent global need . . ..”
Despite pricing the drug at a level below its purported “value,” the announcement was greeted by a flurry of criticism.
Many critics noted that Gilead received some $70 million in government assistance to further the development of remdesivir. In addition, the production cost of manufacturing each course of treatment has been estimated at only around $60. By one projection, at the price it set, Gilead will in the first year alone make a net profit on remdesivir of between $247 million and $1.37 billion. And although there is clinical evidence that remdesivir shortens hospital stays, it has not in fact been shown to reduce fatalities from COVID-19 at all. From this perspective, charging $2,340 or $3,120 per course may seem outrageous.
On the other hand, Gilead’s unreimbursed research costs on remdesivir are estimated to be around $1 billion. If the company was required to provide the drug at the cost of production, it would never be able to recover its investment. That being said, the Institute for Clinical and Economic Review calculated that a price of $1,600 per course would likely permit Gilead to recoup its costs in just one year, substantially less than what the company decided to charge.
So how should the price of remdesivir be determined? In a “pure” free market, of course, Gilead just gets to decide on its own. It has a legal monopoly on the drug, so it can set any price it wants. Anything over $12,000 a course, however, would price it over the drug’s apparent value, likely meaning no one would buy it. The floor would be a price that would just recover the company’s development and production costs. That might be less than $1,600 per course, since there is no requirement that Gilead recover its entire investment back in just one year; but with a COVID-19 vaccine likely to be developed early in 2021, it wouldn’t be unreasonable for Gilead to look to a relatively short term for its cost recovery.
Between those limits, Gilead would normally price remdesivir at a level that it believes would maximize its income: any higher, and it would reduce demand (or the ability or willingness to pay) enough that Gilead would make less money; any lower, and demand would not be increased enough to make up for the lower price. Gilead’s investors would normally expect exactly this behavior, as it makes the maximum profit for them for their ownership of the company.
But there is another factor in play. COVID-19 is not just a public health crisis, it is the public health crisis of 2020. As of the writing of this post, there have been over 5,500,000 confirmed cases in the United States alone, and over 172,000 deaths. Profiting off of such suffering is, to put it bluntly, bad public relations. And charging as much as the market could bear brings not just bad press but also the attention of government authorities.
Gilead presumably took these factors into consideration when it set the price it did for remdesivir: obtaining as much profit as it could for its investors while limiting public outrage and the likelihood of governmental intervention. Whether it succeeded remains to be seen.
Whatever the price, however, there is certainly something uncomfortable about a private company taking a profit on a potentially life-saving drug that is measured in the hundreds of millions or billions of dollars in a single year. And given the price, there is no question that not everyone who would benefit from remdesivir will be able to afford it. In countries with universal health care, the cost will be borne by the government, and presumably the drug will be available to all citizens (subject to that government being able to procure sufficient amounts from Gilead). In the United States, those who have private insurance which covers remdesivir will see the cost paid by their insurer. For those covered by Medicare, Medicaid or the Veterans Administration, the US government will pick up the tab. The uninsured may have to pay their own costs, or simply be denied the treatment due to inability to pay.
In the end, in the United States, wealth (whether direct or by virtue of having the benefits of coverage by a private insurer or government provider) will determine the allocation and availability of what may be a life-saving drug. A system that provides essential treatment to the wealthy while denying it to the poor is obviously ethically troubling.
There is no answer to this dilemma in the free market. In fact, the dilemma arises specifically from a deviation from a free market: the grant of a legal monopoly through a patent. With such a monopoly given, the supply of a drug will be limited by the number of people able to pay enough to the manufacturer to provide it with the return on investment it demands. And the drug will be allocated only to those who have the funds, or coverage by a private insurer or governmental agency, to pay for it.
We are willing to limit Lamborghinis to those who can afford them. It is a very different thing to decide to limit life-saving medical care to those with the means to pay.
Since the dilemma arises from governmental action – the grant of a patent – it should be the responsibility of government to fix the problem it has created.
There are a number of ways government can try to address the inability of the free market to get remdesivir to every person who might benefit from it. For one, the government could force Gilead to reduce the price of remdesivir, perhaps as low as its production cost. Alternatively, patent protection could be stripped from remdesivir (though this would likely constitute a governmental taking entitling Gilead to compensation). But doing either would have undoubted consequences. Pharmaceutical companies are in the business of making drugs for a profit. If they cannot make a profit, they won’t seek to develop a drug. As long as we rely on private companies to develop and manufacture drugs and other medical treatments, they need to have an incentive to do so. Should governments force sales at too low a price or deny patent protection, the lesson will be learned, and no responsible pharmaceutical company will ever work on a drug that might be in such societal demand again.
Another option available to governments would be to simply buy the drug at whatever price Gilead demands and provide it to those who need it. This is the option taken by developed countries that have some form of universal healthcare.
The United States will take a mixed approach, covering those who have Medicare or Medicaid (or those covered by the Veterans Administration), while private insurers pay for those with insurance. The remaining populace will be left to their own devices, to the use of their own or their friends’ resources, or perhaps the generosity of the hospital they find themselves in. Some people, without a doubt, will not be able to afford the treatment.
There is a broader point to be made here. This dilemma is not just an issue regarding COVID-19 and remdesivir. This same issue will arise soon, in the context of possible vaccines for the coronavirus. And, of course, this same scenario plays out every day with respect to any number of life-saving drugs and treatments affecting only small numbers of people, and so not attracting the same attention to that given a world-wide crisis.
The COVID-19 pandemic has brought these concerns into focus and require us to reconsider the ethical consequences of using a market economy to provide healthcare. The market, in combination with the availability of patent protection, provides an incentive for private companies to develop drugs and treatments, but only where they are likely to obtain a sufficient return on their investment to satisfy shareholders. As a result, where such returns are anticipated, the power of the market will drive innovation and creativity and lead to the development of treatments that benefit many people. On the other hand, potential drugs or treatments that would fail to provide such a return will likely be ignored. And unless government takes on the burden of the cost, allocation by wealth means that those with insufficient means will be denied access to lifesaving care.
Going forward, there are other alternatives available to governments. Governments could themselves get into the business of developing medical treatments and drugs for which granting patent protection would impose undesirable societal consequences, or where the possible return to pharmaceutical companies would not be sufficient to justify the costs (for example, treatments for rare diseases where the number of potential patients who would benefit is small). This would, of course, require substantial investments by government to create the infrastructure to engage in the necessary research, development, and production. And it may incur the opposition of the pharmaceutical industry, which may fear governmental competition.
Alternatively, government could effectively outsource the development of such non-economic treatments to private companies through the use of governmental subsidies, grants, and prizes.
Whatever the alternatives, the current crisis has thrown a bright light on a critical breakdown in the functioning of the free market in the production of drugs and other medical treatments. For the sake of those who are and will be denied care that would save their lives, we need to find a better way.