This morning, I listened to an NPR news report that surveyed the non-approved use of the cancer drug Avastin to treat a common cause of blindness, wet macular degeneration. A researcher realized that Avastin was chemically similar to another drug being specifically approved by the FDA for this disorder (whose name I forget, but it is made by Genentech), and tried it on his patients with great success.
The FDA-approved drug retails for $2000 a dose. Avastin, when used as an eye treatment, costs about $50 a dose. (A course of treatment is typically two doses several months apart.)
It gets more interesting. Avastin is comparably cheap because in its normal use, as a cancer drug, it requires much more volume than as an eye drug. But as a cancer drug, Avastin is also about $2000 a dose.
Why are the drugs priced this way? A spokesman from Genentech said that they determined that their typical patient would have insurance, and would only have a $50-a-month copay out-of-pocket for the blindness drug. The rest of the cost would be eaten by the insurance companies.
In short, the calculation is made based on what cost the individual user will see. But because the true cost is shielded by the insurance comapny, Genentech and other companies like it are free to put the hurt on the insurance providers for everything they can get.
It isn't that simple in practice, unfortunately. Many people lack insurance, of course. Moreover, many people with insurance must pay for the entire cost upfront, and only later will they be reimbursed by their provider. This presents a massive cash-flow problem, as one can imagine.
Most of all, this contributes to an inflationary spiral in which insurance companies must continually raise their premiums to recoup the exploding costs on innumerable individual treatments, whose pricing is being determined by the calculation noted above.
Given that the drug prices are set based on the felt cost to the patient, which translates to a massive premium to the manufacturer, it seems obvious that insurance companies can rapidly drive down prices by covering a smaller fraction of the drugs' cost. This would force the manufacturers to adjust accordingly, reducing the burden on insurance companies, policyholders who must pay crushing premiums, and those without insurance altogether.
Some might protest that lessening drug coverage will hurt patients. But this ignores the truth that everyone is already paying indirectly for the full cost of the drugs, through high premiums; and anything that can bring down the absolute price will help everyone, especially the uninsured.
Drug companies will charge what the market will bear. That being the case, it is foolish to distort the market in the way we have done. Consumers should feel more of the cost for their specific treatments, or else overall costs will continue to grow.