How Much Is More Life Worth?

Avastin, Genentech's monoclonal antibody that it proposes to offer at twice the dose (and twice the price tag) to treat breast and lung cancer, has already made billions of dollars for the company through its original use—treating colon cancer. Now, with a potential pool of hundreds of thousands more patients, financial analysts predict its United States sales alone could grow nearly sevenfold to $7 billion by 2009.¹

Extremely expensive drugs are hardly new. The pharmaceutical companies have long argued that these prices are justified by the extraordinarily high costs of getting new drugs to market. They typically estimate those costs at $800 million, which is said to reflect both the high costs of the large clinical trials required by the FDA to establish safety and efficacy, as well as the fact that only a small minority of potential new drugs ultimately makes it to market. The patent system for pharmaceuticals is designed to encourage research and development of new drugs by protecting the returns from successful drugs. Since the marginal costs of producing new drugs like Avastin are typically tiny in comparison to their patent-protected prices, pharmaceutical companies could not justify the very large costs of research and development unless the patents prevented other companies from producing and selling them at those marginal costs.

Drug prices raise many controversial issues. Is the $800 million figure typically cited by the industry accurate, or are the real costs substantially less? Does the patent system primarily encourage the development of biologically new compounds, or does it instead promote so-called "me-too" drugs? Why do—and should—Americans pay substantially higher prices for drugs than citizens of other developed countries? Such economic, legal, and political issues are of great importance, but they apply across the industry broadly.

What is apparently new with Avastin is the justification that Genentech has offered for its extremely high price. Instead of relying on the traditional cost recovery argument, which would be hard to sustain if the estimates of a $7 billion market by 2009 are anything near accurate, the company is appealing to a new rationale—namely, the inherent value of life-sustaining therapies. It has priced Avastin based on "the value of innovation, and the value of new therapies," according to Susan Desmond-Hellman, the president of product development at Genentech.²

What should we make of this argument? How should the economic value of a life-extending intervention be determined? Is that value a justified basis for setting the price of the intervention? We have less experience addressing that first question in this country because most insurance plans do not explicitly and openly give weight to costs in making coverage decisions. The Centers for Medicare and Medicaid Services (CMS) is explicitly foreclosed by law from taking account of cost-effectiveness in decisions about coverage of new interventions. ³ While this rule has been criticized (correctly in my view), so long as it remains in place CMS's decisions look only at whether a drug "is reasonable and necessary in the diagnosis or treatment of illness or injury," ⁴ without regard to costs. Since many private insurance plans tend to follow CMS in their coverage decisions, they too fail to explicitly consider cost-effectiveness or the economic values assigned to life extension.

Only the combination of patent protection together with purchasers' failure to consider cost-effectiveness and to bargain with Genentech will enable it to sell Avastin at the proposed price.

We can get some help if we look abroad. In the United Kingdom, the National Center for Clinical Excellence (NICE) is charged with evaluating new technologies (broadly construed to include new drugs) for coverage by the National Health Service. Cost-effectiveness is a principal criterion in their evaluations using quality-adjusted life years (QALYs) as the benefit measure. Although NICE denies using any strict cost per QALY threshold, an analysis of their decisions suggests a threshold of approximately $50,000 per QALY.⁵ No simple inference that this is an appropriate threshold in the United States is possible, among other reasons because the United Kingdom spends less than...