Advocates have warned against what they fear will be high prices for covid-19 treatments. Sen. Bernie Sanders (I-Vt.), for example, has said a potential vaccine should be free and that we shouldn’t allow companies to “profiteer” from a cure. But while this backlash against potentially high prices is understandable, there are dangers to under-pricing drugs, too — particularly when we are still searching for an effective treatment or vaccine.
Said plainly, to develop the science we need to get us out of the pandemic, we must convince biotechnology firms that we will pay for the value they create. We can’t just hope that they will follow the better angels of their nature and risk tens of millions of dollars with little hope of a return.
When debating drug prices, the public too often focuses on the costs to manufacture the product. In remdesivir’s case, some estimate that this is only $1 per daily dose. Others, such as the drug-pricing watchdog group Institute for Clinical Effectiveness Research, produce more sophisticated estimates of the clinical value of a drug to patients. Earlier this month, ICER declared remdesivir’s effectiveness justified a price up to only $4,500 for a 10-day treatment course, including a discount ICER believe should be applied to drugs during a pandemic.
But these approaches are precisely the wrong way to think about pricing drugs, especially during a pandemic. Prices should reflect not only the cost to manufacture a drug or its clinical effect on patients, but also its value for society. If a truly effective treatment emerged, all of us could rest easier knowing that the downside risk of an infection had been reduced. An effective antiviral or vaccine would allow us to return to work. Restaurants could earn money. Employees could be paid. Kids could go to school.
In other words, everyone benefits from the product’s existence — even if they never catch covid-19. This happens in two ways: First, it reduces the spread of the disease. Every person who doesn’t get sick or who gets better faster is someone who is less able to transmit the virus to others. We all value that.
Second, it creates value by transforming the existing uninsurable health risk into an insurable financial risk. Just as homeowners willingly pay premiums for insurance even if their houses don’t burn down, we all value the existence of innovative treatments that can cure us even if we don’t get sick.
It’s fair to ask whether these broader benefits should affect the drug’s price. After all, if patients paid directly for drugs, they would enjoy only a minuscule fraction of their societal value. But that isn’t the world in which we live; instead, drugs are largely paid for by everyone in each insurance pool. Before anyone gets sick, everyone in the insurance pool wants to know they could potentially access these products. If we want nice things, we have to be willing to pay for them.
Why should we care whether remdesivir’s price is too low? Aren’t lower drug prices our goal? To be clear, I have no particular desire to ensure that Gilead’s shareholders are rewarded for their past investments leading to remdesivir. And if this were the treatment that solved all of our problems, we could have a frank conversation about whether it was time to use the power of government to transfer value from shareholders to society. This would decrease the incentive for other firms to innovate, and we’d lose out on new treatments, but we must acknowledge there are prices and values where this loss of future innovation could be worth it.
But remdesivir isn’t the home run we so desperately need, and therefore it matters greatly how we talk about its value. Come in too low, and the long-term cost may be high, both in dollars and lives. That’s because the prices we pay today send a signal to other potential market participants. We need other firms to know that if they successfully make a risky bet to create a product that generates large amounts of value, their efforts will be appropriately rewarded.
Estimates of the current cost of the lockdowns in the United States range upward of $20 billion per day. And that doesn’t even include the psychic costs to individuals living in fear of an infection. Given these exceptional costs, we should be sending consistent signals to every firm that could develop a treatment that the bank vault is open for value-creating products.
It is to be hoped that this method will convince firms their most profitable path is to spend every waking hour attacking the pandemic rather than other diseases. Any effort that disincentivizes that work moves us further from this goal.