Pharmaceutical Externalities

By Alex Tabarrok.

"In my view, pharmaceuticals are undervalued and underinvested in because, despite high prices, pharmaceutical innovations earn only a fraction of the value that they create (Nordhaus finds that in general that innovations reap only a small share of the gains that they create). In 2014, for example, we got Harvoni a new treatment that offered a complete cure for hepatitis C (HCV) infection. In 2014, Harvoni cost over $1000 a pill and between $60,000 and $100,000 for a full treatment. In 2015 Medicaid spent more on Harvoni than on any other drug and there were calls for regulation and price controls. Studies showed, however, that even at that high price, Harvoni was value/cost-effective. Today, with more competition, there are equivalent versions of Harvoni available from Amazon for $12,869 (and 64 cents) which is still expensive but cheap for a cure for an often debilitating and sometimes life-threatening disease (and the price is less for a private insurance buyer or Medicare/Medicaid). In 2030, Harvoni will go generic and prices will fall much more.

Writing at their new substack, Random Acts of Medicine (based on their book of the same name which I reviewed at the WSJ), Chris Worsham and Bapu Jena point us to another side-benefit of Harvoni and similar hep-C drugs. By curing hep-C these drugs results in fewer liver transplants but that means more livers are available for transplant to other people on the waiting list.

One simple statistic suggests that indeed, treatment of HCV is freeing up donor livers for patients with other diseases: in 2022, patients with chronic HCV infection represented only 11% of liver transplants (1,029 of 9,528)—down from the 38% in 2013 when the new HCV drugs were approved.

Beyond this simple figure, a new working paper by economists Kevin Callison, Michael Darden, and Keith Teltser has taken a new, rigorous look at data from 2014 to 2019 to understand how these new drugs for HCV have impacted liver transplants after their first 5 years of broad use. There were a number of encouraging findings:

• Waiting lists for liver transplants were being occupied by fewer HCV-positive patients and more HCV-negative patients; this shift can be explained by an estimated 45% reduction in the addition of new HCV-positive patients to waiting lists
• Patients on the waiting list were healthier, likely because waiting times for livers have decreased with less demand from HCV-positive patients
• Compared to what would have been expected without the introduction of new HCV treatments, the researchers estimated a 39% decrease in transplants to HCV-positive patients coupled with a 36% increase in transplants to HCV-negative patients.
• Over the five year period, researchers estimated 5,682 livers were transplanted to HCV-negative patients as a result of the new HCV drugs, corresponding to an economic value of $7.5 billion.

These kinds of external benefits from pharmaceuticals are often undercounted and they are one reason why I think the pharmaceutical price controls in the Inflation Reduction Act are a very bad idea."