“New Gene Therapy Treatments Will Carry Whopping Price Tags” New York Times, September 11, 2017

Kymriah On August 30, the FDA approved Kymriah, the first gene therapy treatment in the US Kymriah treats precursor B-cell acute lymphoblastic leukemia (ALL) and is approved only for those below age 25 whose ALL is resistant to treatment or in relapse. Less than 6,000 new cases were diagnosed last year; of those, only a few will be eligible to use Kymriah, as ALL has roughly a 2/3 survival rate Each dose of Kymriah will cost $475,000; why?

How much value do treatments provide? Kymriah has had great success in clinical trials among patients with ALL Among other forthcoming gene therapies, one may restore sight to those with blindness due to a rare genetic disease and another may replace 10 years of blood transfusions costing $5 million with a single injection Should treatments’ prices reflect willingness to pay?

How do drug companies recoup investment? Drug companies argue that treatments relevant only to a small number of patients must be particularly high-priced There is some disagreement. A recent study suggested that cancer drug development costs are lower than previously believed. The federal government provides often-generous subsidies to developers of orphan drugs. Some gene treatments like Kymriah may eventually be used for other diseases, too, reducing development costs.

How will insurers pay? Insurers are unused to paying for one-time very expensive treatments. Novartis, the maker of Kymriah, says it is working with the Centers for Medicare and Medicaid Services to find a way to modify payments depending on the treatment’s efficacy in individual patients Steve Miller, Chief Medical Officer at Express Scripts, has proposed that insurers pay a large portion up front, then make smaller payments after the treatment until the full amount is paid or the disease returns

Potential problems Glybera was a gene therapy approved for use in Europe for a rare disease that was not life threatening. The treatment was approved in a very small trial with no control group. The treatment was priced at $1 million; only one patient ever used it. It was then abandoned.

High Fixed Costs, Market Power Research, clinical trials, and the FDA approval process represent high fixed costs for new treatments, whereas the marginal cost of producing them is relatively low. Patents for new treatments give companies market power and therefore lead to prices above the marginal cost of production. There’s a tradeoff involved; limiting prices allows more people to be treated now, but may discourage future research into medical advances as investors expect smaller profits.

Markup The firm facing these demand and cost curves will produce 400 and charge $600, a significant markup over the constant $200 marginal cost. The socially efficient amount is 800 of the treatment sold at a price of $200, equal to the marginal cost. Monopoly power from a patent leads to higher prices and lower output of treatments. This may be desirable, however, as firms face high costs up front from research, trials, and the FDA approval process; monopoly power gives them a period in which to earn high enough profits to earn a return sufficient to justify investment in this research.

Discount Rate Many gene therapies promise to save lives or improve quality of life for patients with rare diseases. How much will limiting prices of new treatments limit the resources directed toward research into future treatments? How do we compare the benefits of treating serious illnesses now to the benefits of forgone or delayed future treatments due to reduced investment in medical innovation? What is the appropriate value to place on saving or improving the lives of future persons?