When people complain about the U.S. medical system, high drug prices usually top the list. The advent of gene therapy, which can cost as much as $1 million for a treatment, has emboldened the objections to high drug prices, but the objections are misplaced.

Various politicians, journalists, and activists have accused pharmaceutical companies of price gouging. The New York Times editorial page recently equated their actions to that of tobacco company CEOs, and a recent Senate Finance Committee hearing featuring the testimony of the CEOs of the largest drug companies at times came close to treating them as criminals.

Gene Therapy Costs

The outrage over high drug prices, especially in the context of gene therapy, is wholly unreasonable.

One reason this is true is that gene therapy is fundamentally different than the drug regimens of either traditional small molecule or newer large molecule, or biologic, drugs. While biologics present a way to treat a whole range of illnesses that appeared impervious to traditional drug treatments, gene therapy offers potential treatments for heretofore incurable diseases such as sickle cell disease and hemophilia.

Someone dealing with a chronic disease imposes continuing costs on the health-care system. Maintaining a regular drug regimen, regular doctor’s visits, occasional hospitalizations, and a variety of other medical costs can result in significant ongoing costs for both the provider and the patient. What’s more, chronic illnesses impose substantial opportunity costs to the patient as well—it often makes it difficult or impossible to hold a job, let alone advance a career.

Gene therapy does more than allow people to survive with a potentially deadly disease; in many cases it provides a literal cure to the disease with a short course of treatment.

Comparison to Traditional Drugs

Another reason the current hand-wringing over drug prices is overwrought is that assessing the value of gene therapy by comparing it to other, more traditional drug treatments probably isn’t the proper way to assign a value to it; a better way to proceed would be to consider it as akin to an organ transplant.

These days organ transplants are quite safe and people can live—and thrive—with a new kidney, liver or heart for years, if not decades. An organ transplant recipient does not entirely return his previous health state—the antirejection drugs that must be taken can compromise immune systems and also cost tens of thousands of dollars a year—again, usually paid by insurance. However, a transplant recipient can usually achieve something approximating a normal lifestyle.

The cost of a liver transplant is typically between $500,000 to $700,000 just for the procedure: including the cost of anti-rejection drugs brings the typical cost of a transplant over the lifespan of the patient to well over $1 million.

Few Question Transplant Costs

It is a cost that, these days, few would think to question, but it is worth considering what makes the procedure so expensive. By law no money can change hands for the organ; while the procedure does require several hours to perform and a team of surgeons operating in concert, along with several days of post-operative care, there is nothing intrinsic about a transplant that imposes a cost on the hospital that does such transplants.

These procedures involve a very high fixed cost—the operating rooms and the immense human capital of the doctors—and a small operating expense. The hundreds of thousands of dollars of charges for these surgeries—virtually all of which is paid by Medicare or private insurance—cover these fixed costs incurred as well as provide a return to that capital.

However, the advent of Sovaldi—a drug that provided an actual cure to hepatitis C and obviated the need for liver transplants for most disease sufferers—created a firestorm when its manufacturer initially priced it at nearly $100,000—a fraction of the cost of a liver transplant.

Collective outrage and market competition quickly led to its price falling rapidly, and most people who received the drug had it paid for by the government or an insurer, but the indignation remained.

That we have come to accept the current price structure for liver transplants but inveigh against the cost of cutting edge drugs—especially for gene therapy—strikes us as incongruous. The discussion about drug prices in the public sphere should put them in the proper context.

Author Information

Ike Brannon is a senior fellow at the Jack Kemp Foundation. He was previously chief economist at the House Energy and Commerce Committee and a senior economist at the Office of Management and Budget.

Tony LoSasso is a professor of health policy and administration and director of the Center for health policy studies at the University of Illinois at Chicago. He was previously a technical adviser for the Centers for Medicare and Medicaid Services.

An abstract of the authors’ full study on the issue is available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3373135.