Ethics of drug costs and pricing

Drugs & Ethics

The Kalydeco case (Stein, 2012) raises a few different ethical issues. From a pragmatic perspective, Kalydeco's costs should have been mitigated by the FDA with an Orphan Drug designation during the development phase. This designation "qualifies the sponsor of the product for tax credit and marketing incentives" that would largely offset the cost of developing a drug for an ailment that affects less than 200,000 Americans (FDA.gov, 2012). Kalydeco would clearly have qualified for orphan drug status. It is reasonable that if development costs have largely been offset by tax credits, it is unethical for Vertex to charge $300,000 per year for the drug. That appears to be abuse of the company's monopoly position, something that the Orphan Drug legislation is intended to put an end to.

Remember that the reason for the FDA-backed monopoly on new drugs is so that drug developers can leverage monopoly power in the product in order to recoup the (very) high costs of developing a drug and bringing it to market. For drugs with a very small market, like Kalydeco, the high cost reflects not only the costs of development but the fact that there are very few customers who need the drug. The development costs must be spread over fewer customers, necessitating the high price. The company has a right, under current drug laws, to recoup its investment and turn a profit, but at the same time, Vertex is probably overstating the case with a $300,000 per annum price tag on Kalydeco. The reason for making this assessment is that if the company developed this drug under Orphan Drug designation as it should have, much of the development cost of Kalydeco would already have been offset. Thus, charging prices that do not reflect the tax credits is an unethical abuse of the system, and defeats the entire point of the Orphan Drug Act.

The ethics of the pharmaceutical business are a mixed bag. The FDA wants to encourage drug manufacturers to develop as many new drugs as possible, which reflects utilitarian spirit, and this is why the FDA is willing to make the bargain with pharmaceutical companies that allows them to earn monopoly rents on new drugs for a period of many years. Normally, abusive monopolies are not permissible, as per the Sherman Act and other pieces of antitrust legislation but the exception is made for pharmaceuticals in order to spur development. The Orphan Drug Act is an extension of these ethics, but veers away from utilitarianism. The principle at work with orphan drugs is more deontological in its nature because it uses massive amounts of taxpayer money to provide drugs for relatively few individuals, under the idea that all Americans deserve their ailments to be treated, not just Americans with common ailments.

From this analysis, Vertex appears to be operating with poor ethics. From a utilitarian perspective, the American taxpayer has underwritten the development of this drug so that CF sufferers can also receive treatment, yet Vertex in charging such a price for Kalydeco is rejecting the bargain that it has with its backers. From a utilitarian perspective, this betrayal of the American taxpayer represents harm done to the masses for the benefit of a few (Vertex shareholders). That this behavior runs directly contrary to the spirit of the system places Vertex on shaky ethical ground from a deontological perspective as well. The company is not expected to behave altruistically, but both the law and societal norms reject the idea that a person's life should be held at ransom, especially in amount that it unreasonably high. Vertex is under no obligation to lower the cost for insurance companies, it is worth noting, as those companies have taken on the risk associated with that customer. That is a business decision the insurance companies made, and for them the fact that they are losing on their actuarial gamble is of no concern to Vertex. The American taxpayer financed Kalydeco in part, and no insurance patient is being denied covered on account of price, because insurance companies can afford to pay, even if they don't like it. With respect to governments that face legitimate budget situations, again, governments make choices based on priority and in nations where governments have a bargain with their citizens to safeguard health (i.e. Canada, UK, etc.) it is the responsibility of those government to uphold that bargain. Their taxpayers are being abused by Vertex, but we have established that Vertex is in the wrong already, and this only lends support to this conclusion.