The Massively Different Pricing Of Two Identical Drugs Shows Something Deeply Wrong With The US Healthcare System

The Washington Post has a great piece today on how two drugs manufactured by the pharmaceutical company Genentech both treat a chronic disease that causes blindness in many seniors.

They have identical risks, but one costs 40 times as much as the other. Yet, doctors often prescribe the more expensive drug.

This costs Medicare more than a billion dollars a year, but the agency can do little to stop it. Unlike other health agencies, Medicare does not have the right to negotiate prices and cannot tell physicians which drug to prescribe.

To make matters worse, doctors have a financial incentive to prescribe the more expensive drug, Lucentis, because Medicare reimburses them for the average price of the drug ($2,000), plus six percent. Doctors prescribe it more than half a million times per year.

In contrast, Avastin, the cheaper drug, costs just $50.

Lucentis was developed in the mid-2000s and won FDA approval in 2006, after Genentech spent $1.4 billion developing it. But just two years earlier, the FDA approved Avastin to treat colorectal cancer.

The drugs are created using different processes, but come from the same antibody, meaning they are functionally the same. One researcher noticed this and in 2005, before Lucentis had received FDA approval, decided to test his theory on a patient who gave her approval. The scientist injected a small dose of Avastin into the patient's eye and the results were amazing. The drug worked perfectly.

The problem is that the FDA has not approved Avastin for eye injections and the company continues to adamantly state that they are different drugs with different side effects and purposes.

The evidence says otherwise. Scientists have now conducted six clinical studies comparing Avastin and Lucentis and have concluded that the drugs are the same. In fact, the major impediment for doctors to use Avast in place of the more-expensive Lucentis is created by Genentech itself. The pharmaceutical company only sells the drug in large doses since it is not officially intended for eye injections. This requires it to be repackaged in smaller doses and puts it at risk of contamination.

While there have been a couple of isolated incidents of contamination, the overall risk is very small with hundreds of thousands successful injections taking place every year.

Despite this evidence, according to the report, Genentech refuses to ask the FDA for approval of Avastin for eye injections and will not distribute the drug in smaller doses. They say that the price difference between the two is because Lucentis costs significantly more to produce, but scientists disagree with the company on that as well.

This looks like rent-seeking in its purest form. Lucentis has the same effects as Avastin, but for forty times the price. In order to ensure that physicians still prescribe Lucentis, Genentech has created artificial barriers and benefits from a health system of misaligned incentives. For those reasons, the firm has made more than two billion dollars in the U.S. alone off Lucentis last year. The firm is quick to point out that that is revenue, not profits, but the numbers are still astounding.

Lucentis is a great example of why health care is so expensive. Pharmaceutical companies spend vast amounts of money to keep this system, which allows them to profit from an overpriced drug has no additional benefits than one much cheaper. Doctors favor it so that they can take an additional fee for prescribing more expensive drugs.

Medicare and ultimately taxpayers are the ones who lose. They are forced to pay exorbitant amounts while receiving nothing in return. Making our bloated health care system more efficient will have to involve reducing this rent-seeking, in the process fighting two of the most powerful lobbies in the country.