Pharmaceutical costs, Expected Costs and Premium

In May, 2019 a drug, Zolgensma by Novartis will enter the US market with a price of over $2M. The drug is used to treat Spinal Muscular Atrophy which is fatal before age 2.

Novartis says their cost effectiveness analysis shows that it is worth $4M. How is this possible?

Note on Calculations:

Please show all work. Full credit will only be given if all work is shown. If handwriting calculations please write neatly in an organized format with the question section above and with each variable clearly labeled.

Pharmaceutical costs:

Famous “pharma bro” Martin Shkreli gained infamy by increasing the price of Daraprim, a drug necessary for the treatment of HIV and first approved by the FDA in 1953 from $13.50 per pill to $750 per pill.1 The drug Sovaldi was released in 2014 for the treatment of hepatitis C and cost approximately $1,000 per pill.

a) Do you believe this cost is too high? Should there be a price cap?

b) There are approximately 3.5M people currently with hepatitis C in the United States.2 Of those, 5.8% of patients are likely severe enough to be treated each year.3 The estimated annual cost of the pre-Sovaldi “Standard of Care” treatment is $15,000. What is the annual estimated medical cost of medical care for treatment of Hepatitis C in the United States before Sovaldi?

c) Hepatitis C has other costs associated with it besides actual medical costs. Name two costs and describe very generally how you would estimate their financial value.

d) Sovaldi was released in 2014 with an approximate cost of $90,000 per hepatitis C patient treated. What is the one year annual cost of switching 100% of treated patients from traditional “Standard of Care” treatment to Sovaldi? (Assume same number of patients are treated with both therapies)

e) Health plans (including the health plan Professor Block worked for) originally underestimated the cost of Sovaldi. What is one economic reason why a health plan may have underestimated the cost of Sovaldi? Please give a specific example.

2) Expected Costs and Premium

There is a population of 10,000 people. In that population, 10 people have a serious disease that costs $50,000 to treat. 175 people have a less serious disease that costs $800 to treat.

What is the expected total medical spending for the population?

What is the premium that an insurer with 0 administrative costs will charge to insurance each person in this population?

What is the premium that an insurer will charge if administrative costs are 10% of total expenses?

1 Pollack, A. (Sept 20, 2015), Drug Goes From $13.50 a Tablet to $750, Overnight. New York Times.

2 United States Center for Disease Control. Surveillance for Viral Hepatitis — United States, 2015. Atlanta, GA: CDC, 2017. (p. 4)

3 [Example of a White Paper] Aitkin, M, “Comparison of Hepatitis C Treatment and Costs,” IMS Institute for Healthcare Informatics, September, 2016


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