Living Economics

Capping the Sky
Death-postponing cancer drugs command high prices because of the third-party payment health insurance system.

A unique product that must be repeatedly purchased for daily life maintenance is an ideal product for generating a high and constant stream of profit. A necessity with no substitute is a recipe for high price. And repeat purchase generates a reliable source of revenue. Patented drugs for chronic cancer fit the bill. They are good enough to postpone death, but not good enough to cure the deadly disease. At $4,000 to $10,000 a month, they add up to a sizable stream of revenues.

But how many cancer patients can afford drugs that cost more than $40,000 per treatment course? If cancer drugs must be paid for out of patients' own pocket, these drugs would never have been invented. If they were invented at all, they certainly could not command such high prices. In fact, these high prices are supported by third-party payment health insurance systems, such as employer-supported private health insurance plans or tax-payer-supported systems such as Medicare or Medicaid.

The real question therefore should be: Why aren't the prices any higher for such death-postponing drugs? First, there is the constraint of co-payments. These co-payments must be paid out of the patients' pockets, typically at 10 - 50% of the drug treatment prices. That is already a bank-breaking $4,000 - $20,000 per treatment course for most income earners. Second, even employers and tax payers do not have bottomless pockets.

Drug companies are not free to practice price discrimination by charging less well-off patients lower prices while keeping prices high for deep-pocket patients. Medicare drug reimbursement rates are set at a drug's average wholesale price plus 6%. Free drugs are counted at zero prices towards the computation of the average wholesale price. Thus charging lower prices to marginal users would reduce the total revenue. Giving free drugs to charities would not affect the average wholesale price. But Medicare would not reimburse doctors for administering charity drugs that are not billable items (WSJ 5/10/2006).

Far from the sky being the limit, prices for death-postponing drugs must in fact take into account possible government regulations and funding reality to avoid killing their golden geese. One estimate projected cancer drugs would account for 1/4 of U.S.'s drug spending by 2007 if their prices are not capped (WSJ 3/15/2007).

In view of such reality, some cancer drug companies have volunteered to cap some drug prices. For example, Genentech planned to impose a cap of $55,000 per patient annually, regardless of insurance or income for Avastin, a colorectal and lung cancer drug. Similarly, Amgen would provide Vectibix (for colorectal cancer at $8,000 a month) for free after co-payments exceed 5% of the patients' adjusted gross income.

References:
  • WSJ. 3/15/2007. "From Wall Street, a warning about cancer-drug prices."
  • WSJ. 5/10/2006. "Wary of backlash, cancer-drug makers weigh price limits."
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