What is the Right Amount of Profit in Healthcare?

Can You Put a Price on Treatments That Saves a Life?

William Hersh, MD, Professor and Chair, OHSU
Blog: Informatics Professor

I have written in the past that while free markets and capitalism work well in most industries, their value in healthcare is less clear. Other industries set prices that balance cost of production and how much consumers are willing and able to pay. I can, for example, decide when my budget allows me to buy a new car or a new computer. However, I do not believe I could ever put a price on a treatment that would save my life.

A new situation has come to the fore that reinforces this view, which is the release of the drug Sovaldi (sofosbuvir). This drug is curative of Hepatitis C in 90% of patients with the infection and has modest side effects [1]. Hepatitis C is a widespread, devastating disease that is mostly symptomatic yet can insidiously cause cirrhosis and liver failure. This drug is truly miraculous for those with this infection.

The problem with this situation is that the cost of the drug has been set by its manufacturer at $1000 per pill, meaning that the standard 12-week course costs $84,000. The drug manufacturer, Gilead Pharmaceuticals, counters that the drug saves the cost of complications and treatment of the disease, up through the use of liver transplantation that costs 3-4 fold ($300,000) the cost of the drug course along with a lifetime of expensive anti-rejection medicine ($40,000 per year) [2].

This really gets to the crux of the dilemma: What is the right amount of profit due to the innovation developed by a pharmaceutical company like Gilead? And when companies carry out less innovative activities, such as development of “me too” drugs [3], should we penalize them?

Sovaldi is not the first drug for which this dilemma has arisen. The cost of cancer chemotherapy, even when there are some competing alternatives, is extraordinarily expensive. Can the market really put a price on drugs that save or extend lives, for which there are few or no alternatives? A number of leading cancer researchers, including OHSU’s Dr. Brian Druker, have raised alarms about the prices of cancer drugs [4, 5]. A Forbes Magazine contributor has discussed these issues in the context of both Sovaldi and cancer drugs [6].

This scenario has also played out with drugs for AIDS in Africa, which was documented in the movie, Fire in the Blood. Fortunately in this situation, funding from the US government came to the rescue, with the President’s Emergency Plan for AIDS Relief (PEPFAR) initiative by former President George W. Bush credited with success [7]. But there are still many other challenges for high-cost drugs in developing countries.

Asking whether drug companies are greedy or innovative is probably the wrong question. If one accepts that innovation in medicine is risky and should be rewarded when it is successful, and that the cost of drug development is extraordinarily high, with a serious cost for failures (that must be spread across successes for a company’s bottom line), then companies such as Gilead should indeed be rewarded. The right question is, how much should they be rewarded?

The answer gets back to the crux of medicine not adhering to the principles of a free market. When someone has a disease, especially a life-threatening but highly treatable one, he or she does not really have “choice” to choose whether or not to treat their disease? If there is just a single drug treatment, then that person is at the total mercy of the company selling the drug. The same holds for any other aspect of treatment, including the cost of physicians [8].

One possible solution to this problem is to adapt a program that has been proposed for drug development in the developing world and reward those who take the risks to develop new treatments by a measure of their health impact. One organization has proposed a plan that creates a fund to reward innovations based on their health impact globally [9, 10]. This is an intriguing idea, even if there are many challenges in the details of implementing such a model.

There are probably other solutions, but clearly society must develop a mechanism to reward true innovation and health benefits while not allowing those who have made the discovery to engage in predatory pricing. Unless solutions are developed, the current situation is only likely to exacerbate, as new discoveries in personalized [11] and precision [12] medicine emerge, which are unlikely to be developed without substantial cost.


  1. Sulkowski, MS, Gardiner, DF, et al. (2014). Ledipasvir and sofosbuvir for 8 or 12 weeks for chronic HCV without cirrhosis. New England Journal of Medicine. 370: 1879-1888.
  2. LaMattina, J (2014). What Price Innovation? The Sovaldi Saga. Forbes, May 29, 2014. http://www.forbes.com/sites/johnlamattina/2014/05/29/what-price-innovation-the-sovaldi-saga/
  3. Gagne, JJ and Choudhry, NK (2011). How many “me-too” drugs is too many? Journal of the American Medical Association. 305: 711-712.
  4. Pollack, A (2013). Doctors Denounce Cancer Drug Prices of $100,000 a Year. New York Times. April 25, 2013. http://www.nytimes.com/2013/04/26/business/cancer-physicians-attack-high-drug-costs.html
  5. Experts in Chronic Myeloid Leukemia (2013). The price of drugs for chronic myeloid leukemia (CML) is a reflection of the unsustainable prices of cancer drugs: from the perspective of a large group of CML experts. Blood. 121: 4439-4442.
  6. Munos, B (2014). Sovaldi Vs. Cancer Drugs: Price And Value In The Pharmaceutical Industry. Forbes, June 2, 2014. http://www.forbes.com/sites/bernardmunos/2014/06/02/sovaldi-vs-cancer-drugs-price-and-value-in-the-pharmaceutical-industry/
  7. Anonymous (2009). How a Bush Administration Initiative to Combat HIV/AIDS Is Saving Lives. Washington Post. April 9, 2009. http://www.washingtonpost.com/wp-dyn/content/article/2009/04/08/AR2009040803706.html
  8. Rosenthal, E (2014). Patients’ Costs Skyrocket; Specialists’ Incomes Soar. New York Times. January 18, 2014. http://www.nytimes.com/2014/01/19/health/patients-costs-skyrocket-specialists-incomes-soar.html
  9. Banerjee A, Hollis A, Pogge T. The Health Impact Fund: incentives for improving access to medicines. Lancet. 2010; 375: 166-9.
  10. Hollis, A and Pogge, T (2008). The Health Impact Fund: Making New Medicines Accessible for All. New Haven, CT, Incentives for Global Health. http://healthimpactfund.org/wp-content/uploads/2012/11/hif_book.pdf
  11. Hamburg, MA and Collins, FS (2010). The path to personalized medicine. New England Journal of Medicine. 363: 301-304.
  12. Anonymous (2011). Toward Precision Medicine: Building a Knowledge Network for Biomedical Research and a New Taxonomy of Disease. Washington, DC, National Academies Press.

This article post first appeared on The Informatics Professor. Dr. Hersh is a frequent contributing expert to HITECH Answers.