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How much should we pay for new drugs?

That is arguably the most important, complex, and controversial question in health care today. New drugs intended for widespread use — like antiviral medications for hepatitis C, cholesterol-lowering PCSK9 inhibitors, and biologic drugs for various cancers — can cost tens of thousands of dollars per year. Some experts fear that rising drug costs will bankrupt health care. The cost of drugs is the number one health issue in the 2016 election, and both Democrat and Republican voters favor government intervention to help reduce prices.

The three leading presidential candidates, Republican Donald Trump and Democrats Hillary Clinton and Bernie Sanders, have all come out in favor of letting Medicare negotiate drug prices to better reflect the value that drugs do — or do not — provide. But in order to do that we must better understand how to measure the value of drugs.


There is no doubt that new drugs are pricey. But the current way they are valued misses the boat — it ignores vital aspects of why drugs are developed, prescribed, and taken. Most attempts to quantify a drug’s value are based on what individuals are (in theory) willing to pay for the benefits a drug can bring, be it longer or higher-quality life. This fails to factor in beneficial effects that extend beyond the treated individual and that accrue to loved ones and communities.

As physicians caring for patients and health policy researchers studying drug pricing and health care markets, we believe these “spillover effects” have real benefits. Research suggests that improvements in a patient’s quality of life can lead to simultaneous improvements in caregiver and family quality of life. For diseases that diminish a patient’s ability to engage with loved ones or that are associated with high caregiver burden, such as Alzheimer’s disease, multiple sclerosis, cystic fibrosis, and childhood cancers, effective treatments may generate particularly large social value.


Spillover effects can extend to communities and even countries. Many diseases, from Zika to Ebola, primarily affect individuals in low-income countries. The conventional economic value of treating these diseases is low simply because individuals usually afflicted by the disease are poor.

A fuller interpretation of the value of treating diseases like Ebola should recognize that the total value of treatment includes both the direct value to the affected individuals plus the indirect value to others around the world who value better health for affected individuals and the continued stability of the region. Our inability to adopt this more comprehensive view of social value is a key reason we routinely underinvest in diseases that mainly affect the developing world.

Current methods for estimating the value of new drugs fail to capture the added value of better and extended life for loved ones who care for, depend on, and interact with the individual using the drug. On a personal level, the current conversation fails to recognize that our lives are valuable — not just to us as individuals but to our loved ones as well. On a global level, it fails to recognize that treating disease goes beyond helping individuals to healing communities and ultimately stabilizing societies.

Economic estimates suggest that individuals are willing to pay on average $100,000 to $150,000 for an additional year of life. These estimates, while imperfect, serve as a starting point for nearly all assessments of drug value. Drugs deemed low-value when the value of a year of healthy life is assumed to be $150,000 may be socially beneficial (or “cost-effective”) if the value of a year of life is instead $300,000. A drug that extends life by two weeks and costs $10,000 would be low-value in the first scenario, but cost-effective in the second.

For example, caregivers of people with Alzheimer’s disease spend more than $50,000 per year on expenses related to the care they provide. None of that is currently taken into consideration when evaluating a breakthrough Alzheimer’s drug. Studies suggest that drugs used to treat illnesses with high caregiver burden are among the most expensive in development.

This is certainly not to say all drugs should be priced higher. Instead, drugs should be priced for the value they provide not only for patients, but also families, communities, and societies. Only a system that more clearly recognizes what constitutes value can stop overpaying for low-value drugs, and start rewarding the use and development of high-value ones.

Quantifying spillover effects in health care is still a nascent endeavor. Yet early results suggest that we should include bonds of love and family to gauge the value of a better, longer life. John Donne’s eternal words, “No man is an island,” are as relevant today in the genomic revolution as they were in the 17th century Scientific Revolution. Men and women are not islands, and as such, are not the exclusive beneficiaries of new treatments. Our intuition seems to recognize this. It’s time our policies do, too.

Dhruv Khullar, MD, is a resident physician at Massachusetts General Hospital and Harvard Medical School. Anupam B. Jena, MD, is an economist, physician, and associate professor of health care policy and medicine at Harvard Medical School. Dr. Jena has received consulting fees from Pfizer, Inc., Hill Rom Services, Inc., Bristol Myers Squibb, Novartis Pharmaceuticals, Vertex Pharmaceuticals, and Precision Health Economics, a company providing consulting services to the life sciences industry.

  • The Khullar-Jena analysis does not provide a rational structure for pricing. The value in drugs is created by the government granting of temporary monopoly status (i.e. granting a patent) and by government approvals for use which give the drugs access to market. Thus, we see a situation where the company’s wealth-generating potential derives from having been given sole right of access to a public commons. This fits into the long-established structure of limiting utilities to a fair return on capital invested because their value derives from having been given sole (or duopolistic) write to the public way. The body of law and precedent for this dates to the 19th century in the U.S. and provided fair and stable financing for growing and innovative industries until the epidemic of infatuation with “market forces” where no free market exists to balance interests began in the 1980s. Drug companies enjoying monopolies merit a fair return on capital resulted, but must be limited from an unfair return

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