The Dollar Value of an Extra Year of Life

Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.

A recent article on Kaiser Health News reported on a new drug for the treatment of hepatitis C for which the manufacturer charges $1,000 a pill, or $84,000 for a 12-week course of treatment. Chronic hepatitis C is a leading cause of serious liver disease, including cancer.

It has been estimated that providing the drug to all patients known to have hepatitis C would substantially drive up budgets for public insurance programs and premiums for private insurance, though over the longer run there would be offsets to these upfront costs by obviating the need for alternative treatments, including liver transplants (see Pages 69-71 of the meeting summary from the California Technology Assessment Forum, linked to above).

The high price charged for the drug has led to street protests in San Francisco and calls for congressional hearings. It also provoked from The New York Times a stern editorial, “How Much Should Hepatitis C Treatment Cost?”

These reports brought to mind my post in November 2012. In that, I presented the following heuristic visual.

The horizontal line in this graph represents additional quality-adjusted life years (widely known in the research community as QALYs) wrestled from nature by a nation’s health system, arrayed in the increasing incremental costs per QALY gained. The vertical axis represents the incremental cost per additional QALY the health care system bestows on some patient.

I had called the solid line in the graph the QALY supply curve that the nation’s health system presents to society - the health system’s “offer curve,” in commercial parlance. A point on the line (e.g., Z) represents the most cost-effective (lowest cost) treatment capable of yielding the associated QALY. The treatment represented by point X would not be an efficient way to gain that QALY, because treatment Z is more cost-effective.

With this offer curve, a health system confronts the rest of the nation with two morally challenging questions:

1. Is there a maximum price above which society no longer wishes to purchase added QALYs from its health system, even with the most cost-effective treatments (e.g., Point C)?

2. Should that maximum price be the same for everyone, or could there be differentials - for example, a lower maximum price for patients covered by taxpayer-financed health programs (e.g., Medicaid, Tricare, the Veterans Administration health system and perhaps Medicare), a wide range of higher prices for premium-financed commercial insurance, depending on the generosity of the benefit package that the premium covers, and yet higher prices for wealthy people able to pay out of their own resources very high prices to purchases added QALYs for the family?

I tell my students that their parents and grandparents in the United States have always avoided confronting these morally taxing questions. They simply paid whatever was charged for whatever new medical technology came down the pike, letting per-capita health care spending grow annually at a long-term growth rate 2 to 2.5 percentage points above the growth in per-capita gross domestic product. The result has been spending far above the level of spending one observes in any other industrialized society (although we may implicitly have imposed a maximum price on QALYs for some Americans without health insurance).

But I also tell my students that they most likely will not be able to kick that particular can down the road much farther. Slower overall economic growth, rising income inequality and the stream of ever more expensive new medical technology that their classmates in biochemistry, molecular biology and bioengineering are likely to develop and offer to society at stiff prices will make that harder to do. As seasoned adults, my students will have to debate the two questions I raise explicitly

That debate seems to be closer at hand in this country than I had thought. An article titled “California medical experts question value of Gilead’s $1,000-per-pill hepatitis C drug” in US News Health notes:

An innovative hepatitis C drug that was only recently hailed as a breakthrough treatment is facing skepticism from some health care providers, as they consider whether it is worth the $1,000-a-pill price set by manufacturer Gilead Sciences Inc. A panel of California medical experts voted Monday that Gilead’s Sovaldi represents a “low value” treatment, considering its cost compared with older drugs for the blood-borne virus.

In effect, the panel seems to have concluded that while the drug was clinically effective and offered added clinical benefits beyond current treatments, its cost exceeded the price society should be willing to pay for those added clinical benefits. The panel in this case did not use QALYs as a measure of clinical outcome, but a metric called “sustained virologic response rate” (Page ES1).

Although other nations routinely undertake such studies and reject some therapies as too expensive - notably Britain’s National Institute for Clinical Excellence - for the United States it is quite a remarkable statement.

The panel of experts cited in the story was constituted by the California Technology Assessment Forum. The forum is part of the Boston-based Institute for Clinical and Economic Review, dedicated to evaluating the evidence and value of new medical technology. The institute also includes the New England Comparative Effectiveness Public Advisory Council.

A laudable policy of the California Technology Assessment Forum - and presumably of the institute â€" is to make its proceedings fully transparent through public meetings. All the documents surrounding the evaluation of this particular drug, including videos of the panel’s review of the evidence on clinical effectiveness and costs, are available on the web. So are a summary of the voting questions and responses thereto and a draft of the full assessment.

Evidently, the panel’s work meshes with what I framed two years ago with the chart above.

In a critical comment on that earlier blog post, Dean Baker of the Center for Economic and Policy Research called my framing of the issue “unfortunate.”

Mr. Baker would prefer to do away with patent protection of new drugs altogether, by expanding government funding of research and development, then licensing discoveries to manufacturers that would sell drugs competitively at prices near their low production costs, more like generics.

Alternatively, following a proposal by the Nobel laureate Joseph Stiglitz, Mr. Baker would use a public prize fund that would buy patents gained through privately funded research and development. Those patents would then be licensed to manufacturers that would similarly sell drugs at prices near production costs. These and other proposals are explored further in Mr. Baker’s earlier paper.

There is nothing wrong with and, indeed, much to be said for exploring alternatives to our current system based on patents and the idea of financing all private R.&D. for new drugs through prices paid by afflicted patients or their insurers.

Every economist would agree that it is inefficient, at any point in time, to sell a product at a price far above incremental manufacturing costs â€" what the economist Joseph Newhouse has called “static inefficiency” in drug pricing. The tricky task under any approach is to find the socially optimal time path of R.&D. for new medical technology - what Professor Newhouse has called attaining “dynamic efficiency.”

The alternatives to pricing new medical technology proposed by Mr. Baker and others whom he cites face huge political hurdles not likely to be overcome soon, if ever. I believe that for the system we have and will have for some time to come, I have framed properly the moral choices we face as a society.