Why don’t streaming services like Hulu or Netflix go bankrupt? After all, most businesses couldn’t survive if customers paid a flat subscription fee each month for all they could eat or all the gasoline they could use. Yet you can pay Netflix $8.99 and watch one movie or all 342 episodes (so far) of “Grey’s Anatomy.” Netflix doesn’t care.
Netflix and Hulu can do this because they sell products with a very low marginal cost. Movies and TV shows are expensive to make. But once that’s done, each new stream costs Netflix little or nothing.
Another product works in a similar way: medicine.
Last week the Senate grilled pharmaceutical officials about the absurd costs of medicines. Public outrage had been building, but it exploded in 2013 with the debut of new cures for hepatitis C. They were very good drugs with very high prices — the first two listed for $84,000 and $94,500 per 12-week treatment. Now, popular revolt is brewing over the costs of insulin, naloxone, penicillin, EpiPens and many other drugs.
The executives commiserated with the American people — and blamed everyone else in the supply chain. Although President Trump has promised tough action, the administration has taken the issue only semi-seriously, talking about measures that have brought down prices in other countries — a little.
But Australia is doing something that could help a lot: treating medicines like Netflix treats shows.
In 2015, Australia signed agreements with Gilead, AbbVie, Bristol Myers Squibb and Merck, producers of the new hep C cures. For 1 billion Australian dollars — $766 million U.S. — Australia gets, for five years, all the hep C medicine it can use.
The size and certainty of the payment guarantees that the drug companies will get large profits. And they can look like good guys.
A study just published in The New England Journal of Medicine found that on average, Australia pays $7,352 (U.S.) per course of treatment. It has been able to treat seven times as many patients as it would without the agreements.
In the United States, Louisiana and Washington State are following Australia. In bidding that closed on Thursday, Louisiana received responses from AbbVie, Merck and a Gilead subsidiary, Asegua Therapeutics.
Louisiana’s secretary of health, Dr. Rebekah Gee, said that the state hopes to have contracts with one or more companies and begin getting medicines on July 1.
This is a big deal. The model can be used in other places and for other drugs. Most important, it’s something drugmakers are willing to do. “It’s feasible to implement other ways of paying for innovation,” said Dr. Suerie Moon, the lead author of the study, who is director of research at the Global Health Center of the Graduate Institute of Geneva. “That’s what’s been missing so far in some of the state-level debates. It’s been done, at a large scale. It’s not a crazy experiment.”
Hep C kills more people in the United States than all other infectious diseases combined. Cases are soaring, largely caused by injection of heroin and opiates; it’s a blood-borne virus spread by sharing needles.
Yet six years after the debut of the first new cure, only 450,000 people have been treated — 15 percent of those with hep C in America.
The reason is cost. For a clue about what hep C drugs actually cost to make, consider Greg Jefferys, an Australian who runs a hep C buyers’ club (Sophie Cousins profiled him in Fixes last year). Mr. Jefferys arranges shipping of Harvon (the drug listed at $94,500), which is made in India by generic drugmakers licensed by Gilead, such as Cipla and Mylan. The cost is $850 for a full course of treatment, and that includes shipping anywhere. Mr. Jefferys offers other hep C drugs as well. He recently started selling to low-income patients, for $350 per course of treatment, a drug combination that has been effective against all strains of hep C. (American authorities have permitted Mr. Jefferys’s patients to import these medicines.)
It’s true that nobody actually pays $94,500. The system of rebates and discounts is so complex that it’s impossible to track what governments and insurers actually pay, but it’s probably closer to $50,000 per treatment.
Nevertheless, between 2013 and 2015, Medicaid spending on outpatient drugs rose by 41.5 percent — almost entirely attributable to new hep C medicines. Kentucky spent 7 percent of its Medicaid budget in 2014 to treat only 861 hep C patients. The cost has forced most states to reserve the drug for the sickest patients. And most states require patients to be off drugs in order to get treatment.
That is a dumb public health move. Hep C is a contagious disease. Just as with H.I.V., limiting treatment only spreads the virus. And the people most likely to pass it on are injecting drug users — who are barred from getting treatment.
Nor does it make financial sense. Failure to treat hep C not only spread the epidemic, it also leads to chronic liver disease, cirrhosis and liver cancer.
The real cost-effective (and humane) strategy would be to aim to eradicate hep C. A study by the Kirby Institute at the University of New South Wales, which studies infectious diseases, found that Australia is now on track to do that there by 2026.
Louisiana is the sickest state in the nation, according to Dr. Gee, and one of the poorest. In January, the state asked drug makers to bid on a plan to supply unlimited amounts of hep C drugs for a payment of $35 million — the amount it had spent in 2018 to treat only about 1,000 of the estimated 90,000 people infected.
The money would treat patients on Medicaid and those incarcerated. “We have a $2 billion budget deficit and have to balance the budget every year,” she said. “It’s a zero-sum game. For us to spend more on health means spending on K-through-12 education has to go down.”
Even with good profits assured, pharmaceutical companies are hesitant about schemes like the Netflix model; they’re wary of doing anything that could put a crack in a system that has served them well, and hope to ride out public anger at high prices. (Spokesmen for Gilead and AbbVie, the two largest makers of hep C drugs, declined to be interviewed.)
But Dr. Gee carefully laid the groundwork. She held years of meetings, working with the National Governors Association and the National Academy of Medicine to build support. And in 2017 she asked the federal government to help in overriding patents, “invoking a law that allows lower-cost generic production, paying the patent holder fair compensation.
Drugmakers hate this law. The federal government has used it frequently, including for products like tractor wheels and corn seeds. In the 1960s, the government invoked it often to obtain needed medicines. But the pharmaceutical industry has ensure, by using its formidable political powers, that it has not been used for drugs in recent years.
Still, the simple threat of seeking to override patents was a signal that Louisiana was serious. “It got the attention of the industry,” Dr. Gee said.
High prices are a major barrier to treatment. Another is a lack of liver specialists. Dr. Gee said that Louisiana now allows nonspecialists to prescribe hep C drugs, a switch that has been successful in Australia.
And Australia has long invested in harm-reduction measures, like needle exchange, which has averted hundreds of thousands of infections and provided a path with which to work with injecting drug users. Dr. Gregory Dore, a professor and the head of the Viral Hepatitis Clinical Research Program at the Kirby Institute, said that Australia has so effectively reached this group that their treatment rates are higher than those of infected people who don’t inject. “That’s the way public health is supposed to work,” he said.
Hep C drugs could be just the beginning for the Netflix model. Several experts I talked to suggested naloxone, the drug that reverses opioid overdose, as a candidate. Others mentioned insulin and H.I.V. treatments.
The Netflix business model makes particular sense for hep C drugs, said Rachel Sachs, an associate professor of law at Washington University School of Law. Hep C is a communicable disease, so governments have a strong public health interest in treating as many patients as possible. With widespread treatment, hep C could be eradicated. “That rarely comes along and is important to pursue as a public health matter,” she said, referring to the possibility of eradication.
Another advantage is that several companies make hep C cures, she said. Companies will not want to let a competitor take the market and so they may bid just to avoid being shut out. She said that without the public health rationale and competition, it might be more difficult for a government to get drug companies to participate in Netflix-style schemes.
The Netflix model is an example of delinkage: pricing schemes that decouple rewards for pharmaceutical innovation from a drug’s price. Another example is to offer a drugmaker a big prize for new drugs that matter to society. Prize funds could provide lower prices, broaden access to medicines and incentivize the creation of important drugs rather than big-selling drugs. Senator Bernie Sanders regularly introduces the Medical Innovation Prize Fund Act and another bill proposing a fund for H.I.V. drugs. The legislation goes nowhere.
There’s one category of drugs where delinkage is no longer controversial, and that’s antibiotics. The world desperately needs more antibiotics, as even some second-line ones are failing because of overuse.
But any new antibiotic must be used extremely sparingly — only when all current antibiotics fail — in order to stave off its own failure. The current pricing model rewards selling as much as possible, which is the opposite of what you want. That’s why we haven’t seen a new class of antibiotics in 30 years.
A prize fund could persuade companies to work on antibiotics. Democratic legislators regularly introduce a bill to lower medicine costs that includes a $2 billion prize for new antibiotics. A different, bipartisan bill would reward a company that makes a new class of antibiotics with a year’s patent extension on another of its drugs — potentially worth billions.
Less dramatically, there’s an organization named CARB-X, for Combating Antibiotic-Resistant Bacteria, founded in 2016 at Boston University School of Law. CARB-X members include the United States, British and German governments, foundations like Gates and the British Wellcome Trust, and a network of scientific and business experts. It offers funding and scientific and business help to small companies. Kevin Outterson, a law professor who directs CARB-X, said six companies are already in human trials with new drugs.
The new ingredient in all this is public outrage, which can help apply a counterweight to the might of the pharmaceutical industry. Political will matters. “Australia said we’re not going to settle for 10 percent coverage,” said Dr. Moon, the lead author of the study of Australia’s program. “We’re going to find a way to 100 percent. If other governments were to follow that course of action, they’d get results, too.”
Tina Rosenberg won a Pulitzer Prize for her book “The Haunted Land: Facing Europe’s Ghosts After Communism.” She is a former editorial writer for The Times and the author, most recently, of “Join the Club: How Peer Pressure Can Transform the World’” and the World War II spy story e-book ”D for Deception."
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