How Gilead and Price Controls Played a Supporting Role in the Midterms

The defeat of more than a half dozen sitting Democratic senators last Tuesday marks the first time since 1980 that the GOP has been able to unseat more than two incumbents in a single night.

As political consultants and opinion leaders look for what caused the shellacking Democrats took at the polls, a number of answers stand out: The lack of quality job creation, stagnant wages, a mixed at best foreign policy and other would be initiatives. But let’s not forget that consumers tend vote with their wallets and from there we have to consider the impact of ObamaCare. According to a Wall Street Journal review of proposed 2015 insurance rates in the 10 states that have completed their filings, in all but one of them, the largest health insurer in the state is proposing to increase premiums between 8.5% and 22.8% for next year.

Taking a look back, since 2010, when the president's health care proposal was passed by a strict party line vote, 28 U.S. Senators have either lost their election, retired or died. One more seems destined to join the list, Sen. Mary Landrieu, (D-LA), when her runoff election is completed in December. Those numbers are truly historic and give credence to the damage the law has done to the Democratic Party. Detractors warned the law would lead to price increases in health care premiums, shortages of doctors, price controls and ultimately, rationing of care.  The warnings on price controls have begun to take root.

Commenting on its September quarter earnings, health care company Humana said investments in ObamaCare health care exchanges and state-based contracts as well as increased costs related to a new hepatitis C treatment weighed on the company’s earnings. According to the Centers for Disease Control hepatitis C can cause cancer or cirrhosis of the liver, affects 3.2 million Americans and kills 15,000 a year. One of the vendors of that new hepatitis C treatment is biopharmaceutical company Gilead Sciences (NASDAQ:GILD) with its new drug Sovaldi. To date, 117,000 patients have been treated with Sovaldi, which shows that the drug has received amazing reception despite some concerns about the pricing.

Controversy surrounding high-cost drugs is nothing new and it has been around for years. After the Food and Drug Administration approved Sovaldi, which can cure hepatitis C, but costs about $1,000 a pill, the controversy was reignited. Basic economics dictates that if investors cannot recoup their investments, they will shift their dollars into other fields and areas.  Bringing a drug to market, thanks in part of the red tape imposed by the government itself is costly -- according to the Tufts Center for the Study of Drug Development the total cost of bringing a new drug to market is now $1.2 billion due in part to regulatory compliance and litigation expenses.

Health insurance companies were already bristling over the cost of Gilead's $84,000 hepatitis C cure Sovaldi and are going apoplectic over the company's next-generation version, Harvoni, which is priced at $94,500.  Because the new version replaces multiple companion drugs that are no longer required Gilead’s pitch is the new drug is actually less expensive. Sovaldi is often combined with other treatments bringing the total cost closer to $150,000 per patient.

Rather than the industry players settling the issue through negotiation, health plans are turning to Congress to step in and arbitrarily limit prices, which could undermine the investment that is critical to developing new cures. It should come as no surprise that three members of the House Energy and Commerce Committee dispatched a letter to the chairman demanding that Gilead’s executives be hauled before the committee to justify their pricing.

This past May, The National Coalition on Health Care (NCHC) launched the ‘Campaign for Sustainable Rx Pricing’ and has inserted itself in the national debate about drug pricing. Looking at the coalition’s membership -- 85 organizations includes major businesses, labor unions, insurers, providers, state based benefit programs, and consumers -- as well as the President and CEO John Rother’s background -- long time EVP for Policy, Strategy, and International Affairs at AARP -- it comes as little surprise it is calling for government intervention to control the price of the drug.

The argument for price controls fails every reliable economic theory in the book. Ten years ago, the late-Milton Friedman joined over 150 of his peers in arguing against them. In their words, “Drug price controls are more difficult to remove than other price controls. Controls on oil and other products often tend to be limited or short-lived, as voters eventually object to the resulting shortages and distortions. The effects of drug price controls, however, are far more difficult to observe because they mainly affect medicines that haven’t been invented yet."

When innovators are on the cusp of major advances in cancer, diabetes, HIV/AIDS and hepatitis C, among others, arbitrarily limiting the economic rewards and incentives for a major breakthrough make it more difficult to raise capital, stunt innovation, and hurt patients who rely on new advances. While Sovaldi costs upwards of $150,000 when bundled with other drugs, that pales in comparison to the costs associated with not treating hepatitis C. In other words, a cure, even an expensive one, for hepatitis C is far less costly than ongoing treatment. If a company can not recoup on its investment efforts across its entire product portfolio and generate a profit while doing so in order to benefit its shareholders then few companies would be willing or able to develop potentially break through products, particularly in the health care industry.

Remember too, the principal advocate for price controls -- the NCHC -- represents labor unions, insurers and other benefit program providers and is funded in part by the health insurance industry’s trade association, America’s Health Insurance Plans (AHIP), the Pharmaceutical Care Management Association, and the American Hospital Association. To say they might have a vested interest in price controls is more likely than not.

From a policy standpoint, the most important thing for health policy to accomplish is to get the incentives right for new cures to be developed and made available to improve and extend people’s lives.  That should mean stream lining regulation as well as fostering competition and choice.  Price controls would do the exact opposite, and Congress should reject the rent-seekers calling for them to get involved in a pricing dispute between industry players who are perfectly capable of negotiating for themselves.