By Julian Ubriaco

US Prescription Drug Spending is on the Rise

Growing prescription drug spending is a core driver of rising healthcare costs in the US. Given that prescription drugs now make up nearly 15% of total healthcare spending, calls for price controls have become increasingly intense from the US Congress. However, as a student of economics, I feared the long-term effects of price controls (decreased R&D spending) would counteract any short-term cost savings. Thus, I decided to dedicate my thesis to uncovering just how great the value of a high-priced pharmaceutical may be.

In my quest for high-value therapies, I came across a glut of gene therapies in clinical development. By correcting the genetic cause of disease, gene therapy can eliminate recurring prescription drug spending through a single, potentially curative, intervention. Next, I searched for a disease with high per-patient expenditures and an advanced gene therapy candidate and settled on Hemophilia A. Hemophilia A, an inherited blood clotting disorder affecting roughly 15,000 Americans, is one of the most expensive diseases for payers and providers to treat; severe patients average roughly $700,000 in annual treatment expenditures with some patients incurring upwards of $1M annually.[1] Further, several gene therapies are being developed to treat hemophilia A, including Biomarin’s Valrox which is projected to enter the market in Q4 of 2020.[2]

I decided on the research question of quantifying the effect of the market entry of gene therapy on patient welfare. Most inquiries into the value of medical innovations are performed through a public health lens and quantify welfare gain as the number of quality-adjusted life years (QALY) saved times some fixed value of a QALY (typically around $100K); I depart from this approach by instead choosing to fit a micro-founded model of demand borrowed from the demand estimation techniques pioneered by the industrial organization subfield of economics and my mentor Ariel Pakes. Basically, by fitting a drug’s market share to its characteristics (price, efficacy, dosing frequency), I was able to estimate how many patients would choose the new gene therapy and how their welfare would increase from the new product.

Equipped with a research question, my next challenge was data. Fortunately, the CDC has amassed a national dataset on hemophiliacs that includes patient-level demographic and treatment information. Unfortunately, this dataset took me just 5 months to access!

After fitting my model, I found that patient demand is sensitive to a drug’s price, dosing frequency, and efficacy in reducing bleeds. I then simulated market entry of a gene therapy for hemophilia and found that demand was highly price-sensitive in the range of $2M to $3M per dose. When priced at $2.5M per dose, gene therapy reached an equilibrium market share of 34%, becoming the most popular treatment for severe cases of hemophilia A. At this price, the mean consumer surplus gain to the patients who chose gene therapy is $236K/year, leading to a total consumer surplus of $436M/year. As current prescription drug spending for severe hemophilia A patients is approximately $1.7B/year, consumer welfare will increase by 25% of current spending following gene therapy market entry, although total spending also increases. Overall, I concluded that gene therapy priced in the $2 – 2.5M range will provide substantial welfare gains to hemophilia patients, profits to firms, and reductions in long-term spending on hemophilia treatments. Thus, I argued for an expanded role of “transformative therapies” such as gene therapy in providing sustainable healthcare solutions over the longer term.

[1] Stacy E. Croteau et al., “Regional Variation and Cost Implications of Prescribed Extended Half‐life Factor Concentrates among US Haemophilia Treatment Centres for Patients with Moderate and Severe Haemophilia,” Haemophilia 25, no. 4 (2019): 668–75.

[2] “Therapeutic Categories Outlook,” Equity Research (Cowen, September 2019).