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Expensive Drugs and Medicaid

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The media have been full of hand-wringing pieces in recent weeks over Sovaldi, the new Hepatitis C drug. The issue is that Sovaldi is apparently an effective treatment for this debilitating and possibly deadly disease. However Gilead Sciences, the patent holder on Sovaldi, is charging $84,000 for a 3-month course of treatment.

There are 3 million people with Hepatitis C in the United States. This puts the tab at over $250 billion if everyone with the disease got treatment. That would be a major cost to private insurers and public sector programs like Medicaid. This is the basis for hand wringing. Should we require private insurers to pick up the tab for Sovaldi for people with Hepatitis C? Does it have to be everyone or maybe just the very sick? And should already stretched state Medicaid programs have to bear this additional burden?

The answers are much easier for anyone who doesn’t mind bucking the drug companies. Sovaldi is expensive in the United States because we give Gilead Sciences a patent monopoly on the drug. It uses this monopoly to charge a price that is far above the free market price. We know the free market price because a generic version is already available in Egypt for $900 per treatment. Indian generic manufacturers believe that they can produce the drug for less than $200.

This presents a simple and obvious way around the $84,000 question: send people to Egypt or India for a treatment that costs less than one percent as much. We could pay for family members to go as well, and stay a full 3-months, and still come out tens of thousands of dollars ahead. Certainly this can be presented as an option to people, perhaps throwing in a $5,000 or $10,000 incentive to make the trip worth their while.

This should be a simple way for states to save vast amounts of money. They will all have large numbers of people suffering from Hepatitis C, many of whom are covered by the state’s Medicaid program. For example, with a bit less than 12 percent of the country’s population, California would have around 350,000 people with Hepatitis. If one-third are on Medicaid, and the total cost for treating someone in another country is $20,000, the state could save more than $7 billion by offering the option to be treated outside of the United States. For Texas the potential savings by this calculation would be around $4.8 billion, and for New Jersey the savings would be around $1.7 billion.

These huge potential savings should present a great opportunity for governors like Jerry Brown, Rick Perry, or Chris Christie to show themselves as tough guys who are willing to do what it takes to save taxpayers’ money. That is, unless they are scared to stand up to the drug industry.

The industry types will of course yell and scream that they won’t be able to finance their research if people could just evade their patent monopolies by going to countries where generics are available. This is true, but it just points to absurdity of using a 16th century mechanism to finance 21st century research. If we didn’t rely on patent monopolies to finance drug research we wouldn’t face difficult questions about paying tens of thousands of dollars or hundreds of thousands of dollars for drugs that are essential for people’s health or life.

If we just paid for the research upfront, with few exceptions, drugs would be cheap. We wouldn’t have to worry about whether the government or private insurers could pay the vast sums demanded by drug companies with legal monopolies on the sale of a drug.

We do have experience with the government financing research. The bulk of U.S. military research is financed by the government. While there are many tales of inefficiency and corruption, the defense industry does produce highly sophisticated weaponry. There also is a huge advantage of public financing of drug research rather than weapons research; there is no reason for secrecy. Full and prompt disclosure of research findings would be a condition of funding.

There is also a precedent. We spend $30 billion a year on research conducted by the National Institutes of Health, funding that has strong support across the political spectrum. However this is mostly for basic research. It would be necessary to double to triple the level of funding with the explicit expectation that the money would be used for the development and testing of new drugs.

We care about these drugs because peoples’ lives and health are involved, but there is also a huge amount of money at stake. We spent more than $380 billion last year on pharmaceuticals, or roughly 2.2 percent of GDP. Given the enormous waste and corruption in the current system, it would be reasonable to expect that economists would be heavily involved in trying to design a better system.

But, you will find almost no economists even giving the issue of drug research any thought. By contrast, they get hysterical about the possibility that the Export-Import bank may not be reauthorized. The Ex-Im Bank may mean a great deal to Boeings profits, but its impact on the economy as a whole is less than one tenth as large as the amount of money at stake with patent monopolies on prescription drugs.

It would be great if a governor or other prominent figure in public life would be willing to put the public’s health and the economy ahead of the drug companies. It might not be as much fun as suing President Obama, but it would make a much bigger difference in people’s lives.

Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.

This article originally appeared on Al Jazeera.

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Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.

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