The first thing Philip Mason noticed was the hair loss. The 73-year-old retiree, a former computer programmer, began shedding hair from his arms, legs, everywhere on his body. "It just all came right off," he said.

After the hair loss came weight loss; Mason dropped from 150 to 125 pounds. He felt weak and sick. Mason, who is blind and already used a white cane to get around, began having falls. He switched to a walker for more stability.

Mason went to the doctor and discovered he had Hepatitis C. He had contracted the disease through sex with an ex-boyfriend. And when he received his diagnosis three years ago, the prognosis wasn't good. He already had renal insufficiency, a chronic condition in which the kidneys become increasingly weak and unable to process urine. After the diagnosis of Hepatitis C, which weakens liver function, Mason's doctor recommended a transplant.

Mason declined. "I told my doctor I was already old, and worried about what my quality of life would be like after the transplant," he said.

"I wish I could say I was optimistic that the future would be different, and prices would moderate"

So Mason lived with his Hepatitis C, the hair loss, the weight loss, the walker, and the falls, until this past February. That's when his doctor at the Whitman Walker Clinic in Washington, DC, asked if he wanted to try a new Hepatitis C drug called Sovaldi. It had just come on the market a few months earlier. In initial trials, Sovaldi used with another medication cured at least 94 percent of Hepatitis C cases during a 12-week treatment course.

Treatment would not be invasive like a liver transplant. He would just need to take Sovaldi and one other medication once a day for three months. Mason agreed.

Sovaldi worked better than Mason had hoped. His hair began to grow back. Within three weeks of finishing treatment, he gave up his walker — and his Hepatitis C was gone. "I keep thinking it's going to come back," Mason said. "But each time they test me, it's undetectable."

What Mason didn't know: the pills he took typically cost $1,000 each. His entire course of treatment has a an $84,000 sticker price that his health insurer, public assistance programs, and the drug manufacturer itself all chipped in to cover.

Mason didn't know that the yellow pill he took daily, and its price, were the subject of a massive fight in the healthcare system and one of the biggest policy debates of the year.

The way the pharmaceutical industry developed, priced, and sold Sovaldi is an instructive study in how the American healthcare system allows drugs to become expensive — an incredible, unprecedented, and $1,000-per-pill type of expensive that the country has never seen before.

The story of Sovaldi shows the American health care system is incapable of fighting back against these prices. The people who buy drugs — mostly private health plans and public insurance programs — are too fragmented to demand lower prices.

"I wish I could say I was optimistic that the future would be different, and prices would moderate," said Jeff Myers, chief executive of the Medicaid Health Plans Association, which represents the private insurance companies that states use to manage their Medicaid programs. "But I suspect that's not the case. What the companies have learned from the Sovaldi experience is that there are precious few ways for us to manage costs."

How Sovaldi came to be

The $1,000 Sovaldi pill — before it had a price tag, or a name, or had caused a national controversy — had a code name: PSI-7977.

PSI-7977 was a molecule developed in the mid-2000s and owned by Pharmasset, a small biotechnology company based in Atlanta. The firm had a library of hundreds and hundreds of molecules, all tiny investments they tested in laboratories. They wanted to figure out which one could unlock new secrets about how to treat infectious diseases like AIDS and Hepatitis C.

Hepatitis C looked like a particularly lucrative market. There are at least 130 million infections worldwide. Left untreated, chronic Hepatitis C ravages the liver, causing the organ to fail or cancer to develop. It kills an estimated 350,000 people worldwide each year and, in 2007, Hepatitis C deaths surpassed those from AIDS.

Hepatitis C treatments did exist before PS-7977, but they often had terrible side effects. Half of all patients used an injectable drug known as interferon. It works by mimicking the immune system's response to infection, pushing the body to produce more of the cells that fight off the disease. Patients on interferon regimens regularly experience fever, chills, and aches while taking the medication — which doesn't cure the disease, just continues to treat it. Pharmasset wanted to build a molecule that could do better.

Most molecules in Pharmasset's library — like any of its competitors' collections — fail. They exist solely in pharmaceutical companies' storehouses, never to see the light of a pharmacy shelf. "At a big pharma company, you can end up screening potentially several million molecules to see which one is viable," said Michael Sofia, who worked extensively on PS-7977 in the mid-2000s.

The firm recognized, in what its founder Raymond Schinazi describes as "a collision of science and serendipity," that PS-7977 might not be the typical failure. PSI-7977 turned out to be really great at stopping the Hepatitis C virus from reproducing in a way that other drugs never had.

It "turned out to be a very potent and very selective inhibitor of the Hepatitis C virus," Sofia said. "That's why it continued into development."

"In terms of the American patient, you're just paying double or more the price for no more health gain"

Initial trials showed never-before-seen cure rates for Hepatitis C, upwards of 90 percent of patients treated. That quickly made PS-7977 the envy of the pharmaceutical world. Pharmasset found itself in the middle of a bidding war, with large drug makers looking to buy the small biotech company and its valuable molecule. Gilead, one of the country's largest pharmaceutical companies, won. In 2011, it paid $11.4 billion for Pharmasset — and, most importantly, for that single, special molecule.

"There was a big competition to buy Pharmasset," said Stefan Zezeum, a prominent Hepatitis C researcher at J.W. Goethe University Hospital in Frankfurt, Germany. "Everybody wanted to buy them, but only Gilead was willing to give them $11.4 billion. Everyone said that Gilead was crazy then, that they were going to go bankrupt."

Gilead was about do something almost as crazy as buying Pharmasset: last December, it announced it would be charging about $1,000 for each single yellow pill. That adds up to $84,000 for a 12-week course of treatment — more when combined with other medications. That's how Gilead would earn that $11.4 billion back, and more — and, in the process, become the center of the $2.7 trillion health care industry's most vicious fight in years.

How drug pricing works differently in other countries

Nexium is a bright, purple pill that treats heartburn. In 2013, it was the second best-selling drug in the United States, after Abilify, an anti-depressant manufactured by Otsuka. Americans spent $6.2 billion buying Nexium prescriptions in 2013 alone.

But we probably didn't have to: while Americans pay an average of $215 for a Nexium prescription, the Dutch get the exact same purple pill for $23. In England, Nexium costs $42 and in Spain the price is $58.

There's nothing different about the Nexium that we buy in the United States and the pills that the Dutch, British and Spanish take — except that, in the United States, we didn't ask the manufacturers for a discount.

"It's exactly the same product," said Tom Sackville, chief executive of the International Federation of Health Plans. We spoke earlier this spring, when his group published an annual report comparing international health care prices. "In terms of the American patient, you're just paying double or more the price for no more health gain."

In Spain, the United Kingdom and the Netherlands, the government sits down with drug makers and haggles over how much they will pay. Each country uses different negotiating tactics. The United Kingdom, for example, runs its bargaining through the National Institute for Clinical Evaluation, typically known by its acronym, NICE.

NICE exists solely to decide at what point a new treatment is cost-effective: when it will save the health care system money, in the long run, by preventing further disease. NICE runs dozens of these analyses each year, on drugs and surgeries and scanning devices. And it uses its findings to tell medical manufacturers: this is the price our country will pay for your service. This is the point at which your new drug is worth buying.

NICE often finds itself at the center of controversy. If it declares a drug to not be worth its cost — tells breast cancer patients, for example, that the British system won't cover a $39,000 new treatment — the recommendation can be met with fury. These are prescriptions that are typically too expensive for a patient to afford on their own; they need the government's coverage approval. That's the trade off inherent in asking a central agency to evaluate whether or not certain drugs are worth buying — some prescriptions won't make the cut.

"How do we maintain insurance financing if everyone takes this approach? We end up sinking the ship"

The United States works differently. Federal law bars Medicare, the country's largest insurance plan, from negotiating with drug makers. Once a pharmaceutical company sets its price, the government-run plan that insures 49 million seniors is required to accept it.

"For Medicare, the sky is really the limit," said Jamie Love, who has studied drug pricing and directs the DC non-profit Knowledge Ecology International.

Other federal programs get certain discounts from drug makers. Federal law requires that Medicaid, the program that covers low-income Americans, gets a 23 percent discount off of all brand-name drugs' sticker prices. Each state's Medicaid program also has the authority to negotiate even lower prices. The Department of Veterans Affairs also negotiates drug prices, as do private health insurance plans.

There are thousands of private insurers, though, and they often have little clout to demand lower prices. Other countries are essentially buying in bulk — like shopping at Costco. The United States does the equivalent of going to the local grocery store — and paying more.

"We don't have a NICE in the United States," said Steven Pearson, founder and president of the Institute for Clinical and Economic Reviews, a non-profit that evaluates evidence on medical tests. "We have a system that says, ‘If it's better, we have to provide this pill and you, the drug maker, get to name the price.' It's not a market. It's a drug maker saying what they want."

Gilead's Sovaldi gamble

Gilead knew it had a potentially breakthrough drug on its hands when it acquired PharmAsset in late 2011. It spent two years finishing the research process, collecting the data that regulatory agencies would need to let its new product onto the market.

Gilead also had to settle on a price. When the sky is the limit in American drug pricing, it had to figure out how high it would go.

Pharmasset, in a December 2011 filing with the Securities and Exchange Commission, estimated that it would sell the drug for somewhere between $36,000 and $72,000. Those figures were, according to the filing, meant to be "ranges of possible deviations for each of the relevant commercializations."

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Gilead had lots of options in setting its price. It could have stuck where Pharmasset was. Or it could have tried to recoup the $11.4 billion it spent acquiring Pharmasset. The drug company could have looked at what it spent on the drug — the purchase, the additional development costs, the marketing budget — and priced to earn more than that.

Gilead has repeatedly said it didn't do any of this. "We didn't take those things into account," Gilead's president John Milligan said during an October appearance at the Brookings Institute, one of many think-tank gatherings where he's been called on to defend Sovaldi's price.

Gilead said that it looked around the market and got a sense of what its competitors were charging. They looked at what other Hepatitis C drug makers got away with, and chose something in that range.

"Our pricing analysis was looking at what was the cost of current other therapies," Martin said.

That is how the $1,000 pill came to be. And that's when Gilead had to wait and see: would the American health care system agree to buy it?

The debate over high drug prices

There's an active debate among economists about the benefits and consequences of expensive drugs: whether $1,000 pills are the necessary rewards that keep the pharmaceutical world innovating — or just pure waste.

The argument against high drug prices is more intuitive: how does it make sense for the United States to pay $1,000 for a pill when billions of people elsewhere can buy it for less? It is unethical and unfair that some Hepatitis C patients in the United States would be unable to afford a drug that costs tens of thousands of dollars less in European countries. (NICE recommended that the United Kingdom buy the drug for British Hepatitis C patients at £34,000 — approximately $55,000. In provisional guidelines issued in August, NICE described the drug as "a clinically and cost-effective treatment.")

Patient advocates say drug companies could significantly reduce their prices while running similar margins to other parts of the healthcare sector. Pharmaceutical companies have the largest profit margins in the healthcare industry, hovering just above 20 percent. That's more than five times the margins that hospitals and health insurance plans typically run.

"How do we maintain insurance financing if everyone takes this pricing approach?," said Rother, who leads the coalition protesting Sovaldi's price. "We end up sinking the ship. We want innovation, but to continue loading these high drug benefits onto premiums, isn't going to work."

"This is an actual innovation, and that is something that they should get a reward for"

One particular challenge for the American health care system is fragmentation: insurers that pay for Sovaldi rarely recoup their spending on the drug, which, in the long run, does increase health.

But there's another take on the higher drug prices, one that argues that large payouts in the form of big profits are the best way to encourage drug makers to innovate. Without the large profit margins, companies wouldn't bother to chase the breakthrough cures — medications like Sovaldi.

Most new drugs that come out annually aren't these type of breakthroughs, though. They are often tiny, incremental tweaks to existing treatments, like when AstraZeneca replaced Prilosec, its original blockbuster heartburn drug, with Nexium. Nexium didn't offer much in the way of better outcomes, but it did give AstraZeneca an exclusive, brand-name product it could sell just as Prilosec's patent expired.

"Pharmaceutical companies get criticized for lots of things like that," Craig Garthwaite, a health economist at Northwestern University's Kellogg School of Management, said. "This is an actual innovation, and that is something that they should get a reward for."

The United States does pay more for drugs, but, Garthwaite and others argue, the end result is better drugs for the entire world.

The future of really expensive drugs

Gilead gained approval to sell Sovaldi in the United States on December 6, 2013. It was met with fierce protest from health insurers and state agencies, who quickly sized up the pill as a budget-buster.

Oregon and Illinois put strict limitations on which patients would receive the drug. Oregon, for example, limits access to those in late-stage liver disease. Illinois requires patients to meet a 25-item checklist before receiving a Sovaldi prescription. Most of the costs are borne by insurers, rather than patients, whose insurance typically shields them from the high price. Mason, for example, said he paid a mere $59 out-of-pocket during treatment.

Coalitions sprung up to denounce the high price. Congress launched an investigation into the issue in July. Sovaldi, Sens. Ron Wyden (D-Ore.) and Chuck Grassley (R-Iowa) said in a rare bipartisan press release, raises "serious questions about the extent to which the market for this drug is operating efficiently and rationally."

All of these actions were meant to send a signal: it's unacceptable for drug makers to price their products so high. Pharmaceutical companies will be made to answer for these actions.

It didn't work: while Sovaldi became a poster child for pharmaceutical greed, it has brought Gilead and its shareholders a hefty profit. The drug "catapulted Gilead Sciences into the ranks of the top-selling pharmaceutical companies," the Wall Street Journal reported this summer. Gilead has sold more than 280,000 Sovaldi prescriptions this year, according to a CitiGroup analysis. The company earned $3.5 billion in Sovaldi sales in 2014's second quarter (sales fell to $2.8 billion the quarter after).

The lesson of the Sovaldi launch seems to be this: if drug companies are willing to take a little bit of heat, they can get away with high prices for drugs, especially those that deliver great results. That terrifies American health insurers, who fear a future where every large scientific breakthrough is accompanied with Sovaldi-esque prices.

Express Scripts, a pharmacy benefits management company, estimates that spending on specialty drugs like Sovaldi will grow another 18 percent in 2015 after similar growth rates this year and last.

Forecasters expect that Medicare spending on drugs will more than double over the next decade, from $79 billion in 2014 to $171.2 billion in 2023. At least some of that growth, this year's Medicare Trustees Report said, will be due to "an increase in the use and price of speciality drugs."

And much of that growth is rewarding big advancements in medicine, said Express Scripts chief medical officer Steve Miller. He's anticipating the launch of new injectable drugs next year that could revolutionize the treatment of cholesterol — an equally impressive advancement to what Sovaldid did for Hepatitis C, with an equally steep price.

"There's this new class of drugs out there for high cholesterol, injections that you give yourself every two to four weeks, that's just extraordinary," Miller said. "But here's the scary part: there are 71 million people with high cholesterol. I love these drugs, they're great, but they could increase drug spending by a full third. That's just one drug."

Mason knows that, for him, Sovaldi was incredible. But he also has friends, at an HIV support group he attends in Washington, who can't access the drug because of the price. They don't have health insurance coverage and it's just too expensive.

"My experience is I feel much better and I'm much happier having taken the medication," Mason said. "But let's put it this way: I'm 73. I'm grateful to be alive now. But if there was some young child who could have used this money to keep them alive, I think it would have been better to spend the money on them."

Correction: The original version of this piece inaccurately described AIDS and Hepatitis C. They are infectious diseases, not autoimmune diseases.