Regardless of the risks, many drug companies are making huge profits. Gilead, maker of Sovaldi, has profits of around 50 percent. Biogen, Amgen and other biotech firms have profits of around 30 percent. Merck and Pfizer are seeing profits of 18 percent or more. Even if profits were cut by a third or a half, there would be sufficient incentive to assume the risks of drug development.

What should be done? The United States government has created myriad special pricing arrangements that pervert incentives. For instance, Medicaid generally gets the lowest prices in the market. This discourages drug companies from experimenting with other payers on lower price arrangements, knowing that they will most likely have to give the same deal to Medicaid. Similarly, through the Orphan Drug Act of 1983 the United States created many incentives for developing drugs for orphan diseases — those with fewer than 200,000 patients nationwide. Through special tax credits and better deals on marketing exclusivity, the federal government is encouraging the companies to benefit thousands instead of millions. The result has been the development of more than 400 drugs and biologics. While it is important to find effective treatments for rare diseases, it is more important to target serious, common diseases such as stroke and antibiotic-resistant infections.

Also, as outrageous as they are, prices are not the real issue. Value is. What really frustrates people are expensive drugs that do not provide a cure. For instance, Opdivo adds an average of 3.2 months of life to lung cancer patients and costs $150,000 per year for treatment.

Conversely, other drugs are superexpensive but are worth it. There was an outcry over paying $1,000 per pill for Sovaldi. But it helps cure hepatitis C and has shown to be cost-effective.

While the Australian system of price controls is one approach, another possibility is the Swiss health system, which is frequently applauded by conservative commentators. The Swiss government includes only those drugs that are effective and cost-effective on its approved drug list. It then establishes a maximum allowable price for the drug, but up to that point, companies can decide what to charge. We could cap the price based on objective, quantitative measures of value. Private payers would continue to negotiate with drug companies over prices as they do now, but there would be a ceiling to prevent prices from becoming unsustainable

Everyone, including drug company executives, believes that high prices cannot continue. Indeed, that is one reason that companies are trying to maximize profits while they can. We must come up with a comprehensive solution now.