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DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: Twitter: Dereklowe

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September 23, 2009

Pay Them Now, Or Pay For It Later

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Posted by Derek

Time for a brief comment on health care reform, now that Sen. Baucus has presented a bill to the Finance Committee (which, to be sure, I believe has already attracted over 500 proposed amendments). As is well known, the largest drug industry trade group, PhRMA, signed on to the whole idea of a large reform effort early, in exchange for a seat at the table (and a chance to make things go favorably). How's that working out so far?

As Steve Usdin at Biocentury writes, the answer is "fairly blatantly":

The parochial value of PhRMA’s controversial decision to cut a deal with the Senate Finance Committee and the White House became clear last week as details of the committee’s healthcare reform bill emerged that favor big pharma companies over their biotech siblings. The bill also pounds the medical device industry and slams laboratory service providers, sectors that didn’t agree on “voluntary” contributions to healthcare expansion. . .

. . .A 233-page summary of the America’s Healthy Future Act released by Finance Committee Chairman Max Baucus (D-Mont.) includes most of PhRMA’s healthcare reform wish list and has only one major provision pharma companies hope to kill: a commission with powers to constrain Medicare spending.

The tax put on medical devices by this bill has already been noted widely in the press, and I see that Sen. Kerry is already objecting to that provision - naturally enough, since Massachusetts has some big players in that area. The Senators from Guidant and Medtronics (also known as Indiana and Minnesota) are speaking up as well. The trade association for that industry (AdvaMed) apparently couldn't come to terms with Washington, so this tax is their reward - which, in a nutshell, is the sort of thing that keeps gradually turning me into a libertarian.

There are more examples. Biocentury goes on to detail an excise tax provision in the bill that's based on sales figures and market share. But this isn't calculated on total US sales, which is the method various biotech companies were pushing for. No, it's calculated by market share of sales to the US government, which (because of Medicare) tends to emphasize drugs for an older population. In general, if your drug is provided substantially through any government-supported program, (HIV medications come to mind), you're going to see a higher fee. Orphan drugs are exempt from the tax, which must gladden the hearts of several companies, though.

It's still way too early to get worked up over any specific provisions of any one bill, and there's plenty of room to wonder if anything substantial at all will get passed. But it is worth paying some attention to how the process works. When the same tactics are used in the private sector, the unfortunate phrase "protection racket" comes to mind. But government, well, that's different. Clearly.

Comments (28) + TrackBacks (0) | Category: Current Events | Regulatory Affairs


1. Hap on September 23, 2009 9:23 AM writes...

Ick. My only caveat, though, would be that we don't see exactly how insurers, for example, determine what they'll cover or not - at least part of their negotiations with hospitals and doctors probably operate similarly. The government has more leverage (and is less avoidable), but the ugliness of the behavior is probably not simply a product of government, but one of people and profit (both cash and power), instead.

The nonoptimalities of health care [(a) you have to have it to survive, (b) for severe health care, there is not time to sort between competing providers, (c) for other health care there isn't much good information to determine who provides the best care or to determine relative costs and benefits, and (d) the costs of unmet healthcare provided to those unable to afford it are born by everyone in common] seem to make the market unlikely to solve health care costs inflation and problems, IM(S?)O. If the market can't solve those problems, then a libertarian solution is not going to do well. (That also assumes the ability of an optimal market to solve those problems.) Government is ugly, but it may be less ugly than the alternatives.

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2. Hap on September 23, 2009 9:26 AM writes...

Oh, and (e) on the list of market nonoptimalities: restrictions/licensing on medical schools (the supply of doctors is rationed).

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3. CMCguy on September 23, 2009 11:03 AM writes...

Hap I should let this pass but I wonder if you are on/off your meds at times.

"Government is ugly, but it may be less ugly than the alternatives" seems to paraphrase Churchill's quote "It has been said that democracy is the worst form of government except all the others that have been tried." I can see the latter but do not see as equivalent to the former, particularly in this context. A big part of the current problems with health care have been longterm action/inaction by Government which I attribute more to Congress although Administrations and Courts share significantly. While I know Government has legitimate role(s)to play and a total free market approach seems overly subject to abuses as you indicate in the end I have little faith that present Government can really achieve anything of substance and not cause great collateral damage.

Derek's post illustrates the big problem in that US does not really operate as a democracy because of influence of money and power where PhRMA has seem to play the cards well to protect themselves at the expense of others. Although it is indeed too early to tell my own chief fear is that will undercut "innovation in drugs", be it in Pharma/Biotech because an overly controlled system will make go from bad to worse.

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4. DH on September 23, 2009 11:11 AM writes...

The reason "the market" has been unable to solve various real and alleged problems with health care in the U.S. is that we haven't had anything approaching a free market in medicine for 40+ years. Items (c), (d), and (e) in particular are not "market non-optimalities," but consequences of government interference in the market.

On the specific topic of this post, see "Knife in the Back" at the Freedom and Individual Rights in Medicine blog:

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5. John Thacker on September 23, 2009 1:22 PM writes...

"(e) on the list of market nonoptimalities: restrictions/licensing on medical schools (the supply of doctors is rationed)."

How is that the market? State and federal governments make it illegal to practice without a license. Rationing of doctors is entirely a government problem. Yes, self-interested private actors petition the government to make legislation in their favor, but that's how government works. "The market" solution to this particular problem is medical tourism.

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6. John Thacker on September 23, 2009 1:24 PM writes...

The only people arguing against rationing the supply of doctors has been people like Milton Friedman, shown in the video there doing so to doctors at the Mayo Clinic.

I can accept, but disagree with, people who support the licensing and rationing of the supply of doctors. But to blame it on "the market" instead of government is delusional.

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7. Palo on September 23, 2009 1:47 PM writes...

So Big Pharma is going to spend 80 billion for a seat at the table and a chance to make things go favorably?. Really? So the deal under which the White House agreed not to require rebates on sales of commonly prescribed drugs to patients enrolled jointly in Medicaid and Medicare is just a possible topic in that table? Together, presumably with some talk about the Vikings taking the Super Bowl this year with Bret Favre getting full price Vicodin?
Oh, Derek, Derek...

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8. Derek Lowe on September 23, 2009 2:21 PM writes...

Palo, I don't want to do anything so. . .vulgar as to suggest that this is a straight quid pro quo. Even though that's how things really work.

But there's also the comparative-efficacy requirement in this latest bill - which explicitly prohibits cost/benefit analysis, or the use of any such information for Medicare reimbursement decisions. 80 billion will apparently buy you quite a bit.

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9. Cellbio on September 23, 2009 3:24 PM writes...


How does this sort of thing push you to libertarian views? Would like to understand. Would abolition of government interference in these affairs make the system less susceptible to quid pro quo? I kinda think the opposite, but maybe I am missing something.

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10. metaphysician on September 23, 2009 3:58 PM writes...

I've said it before, I'll say it again: every one of the attempts to "solve" the health care system will end up floundering on a common problem- health care in general is not a suitable candidate for an 'insurance' solution. The insurance model breaks down when the probability of the risk ( in this case, needing health care ) approaches 100% on a yearly basis.

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11. Sili on September 23, 2009 5:52 PM writes...

But there's also the comparative-efficacy requirement in this latest bill - which explicitly prohibits cost/benefit analysis, or the use of any such information for Medicare reimbursement decisions.

Oh, how I hate 'politics'.

But metaphysician is right. Why the fulleroid not get rid of the insurers? What do they add? Aside from cream-skimming.

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12. Malcolm on September 23, 2009 6:13 PM writes...

As a smug outsider from a country with a reasonable national health service (Australia), my observations are

(a) the failings of the US legislative system (be they unique or universal) are unfortunate, but tangential to the merits of a functioning system of universal health care. Other governments around the world have created systems which provide excellent health care for their citizens, and their politicians are no less corrupt or cynical.

(b) many of these agonies seem to be a result of the baroque attempts to 'square the circle' and give every single special interest group their quid quo pro: doctors, insurers, pharma etc.

Provisions barring cost-effectiveness considerations boggle my mind: they are one of the pillars of our pharmaceutical subsidy scheme and despite some warts, they provide the drugs people need at a fair cost to individuals and society.

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13. Derek Lowe on September 23, 2009 7:06 PM writes...

Cellbio, the thing that gets me is that I don't think it's possible, ultimately, to have a tug-of-war of interests with the government and win. If it's politically popular, they can do pretty much anything they want to with you.

And it disgusts me to see so much time and effort put into figuring out just the exact way the make the Mighty Cow put out the milk in just the right place. The government, through its control of the regulatory apparatus and the tax code, can make you and your company rich, and it can squish anyone that you (or it) doesn't like. All you have to do is pull the right levers, grease the right people, cut the right deals.

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14. Derek Lowe on September 23, 2009 7:11 PM writes...

Malcolm, one point worth noting is that very few of the drugs you're talking about came from Australia, or have much to do with Australian research - with some very honorable exceptions, of course. The price that you pay in Australia (and the price paid in many other countries around the world) is made up for by the prices charged here.

That's while things are still under patent protection, of course. Generic drugs tend to be cheaper in the US, a fact that not many people seem to know.

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15. metaphysician on September 23, 2009 7:15 PM writes...

#11- Well, getting rid of the insurers *now* would probably be a total disaster. The whole system has long since adjusted to having bulk payers involved, rather than individuals paying their own costs. This is part of the reason the costs have of many services are high- the demand is unconnected with any cost benefit analysis, since the consumer isn't paying ( directly ).

I believe the best long term solution is a combination system, with out-of-pocket payment by the consumer for most medical costs ( preferably through some kind of medical savings account system ), supplemented by catastrophic need insurance ( possibly provided via a government system ). That way you can get the increased incentive for cost effectiveness that user-pays entails, while also still leveraging the insurance model against catastrophic costs.

I'm not sure the price system would be able to restabilize without some kind of tort reform first, though. I dream of a world where doctors, pharmaceutical companies, and everyone in between could do their job without worrying about massive lawsuits going to court, motivated by harm *rather* than wrongdoing. "Their drug made me sick" isn't a good reason for a lawsuit, neither is "Their drug made me sick, and they knew it." "Their drug made me sick, they knew it could, and they concealed this fact from everyone", *now* we are in billion dollar fine territory.

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16. Malcolm on September 23, 2009 7:32 PM writes...

In response to Derek's argument that US consumers effectively subsidise cheap drugs in the rest of the world, there have been a couple of analyses of Australian prices that counter this. See for example this paper by Libby Roughead et al.

From memory, the median price paid by the Australian government is not markedly lower than the US price. The bulk of savings come from not subsidising or paying a lower price for new drugs with unproven or poor cost-effectiveness.

A good example would be the very healthy revenue Lilly has garnered from US sales of duloxetine (Cymbalta). For the bulk of people taking it, this drug is not demonstrably better than generic SSRIs (and the adverse effect burden is arguably worse).

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17. Malcolm on September 23, 2009 7:36 PM writes...

Oh, and yes, Derek is right that we pay more for generics in Australia than one does in the US. That's an aspect of drug pricing where competition appears to be providing its advertised benefits.

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18. Anonymous BMS Researcher on September 23, 2009 8:51 PM writes...

I'm mildly surprised not to see anybody in this thread mentioning the old saw, "laws are like sausages, it is better not to see them being made," which is usually attributed to Bismarck though he may not actually have said it (another version is "the less the people know about how sausages and laws are made, the better they sleep at night," this also he may not actually have said.)

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19. alex on September 23, 2009 11:01 PM writes...

"I can accept, but disagree with, people who support the licensing and rationing of the supply of doctors."

I don't get why people seem so incapable of getting this. Doctors salaries are

Returning to a less tangential subject, the level of blatant extortion here is pretty painful. If the purpose of government payment is to promote innovation, I'd stick it to drug pharma long before the device industry considering recent advances in both camps. The real problem is the fundamental issue of the government being too large to truly negotiate with so you end up with either paying anything the manufacturer wants (unreasonable) or the lowest price the manufacturer can do without going bankrupt (also unreasonable).

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20. alex on September 23, 2009 11:03 PM writes...

Whoops, the less than sign ate my post. Repost of the first part:

"I can accept, but disagree with, people who support the licensing and rationing of the supply of doctors."

I don't get why people seem so incapable of getting this. Doctors salaries are less than 20% of costs. It is well established that more doctors equals more net cost even if you pay them less because each doctor has to order tests, write medications, do surgeries, etc. Vastly increasing the number of doctors (as every would-be libertarian loves to slaver over in between complaints about the AMA conspiracy) is just going to worsen the cost issue.

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21. alig on September 24, 2009 7:03 AM writes...

I dont get why people dont understand simple economics. If you reduce the supply of anything, the price goes up. The AMA has been very effective at restricting the number of doctors. In a normal market the price increase would be the only effect, but in healthcare because there is a disconnect between payers and users, this has led to a shortage.

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22. Biobug on September 24, 2009 12:22 PM writes...

@ malcolm
Your Australian price study is flawed. FSS prices only apply to DoD, VA, the coast guard, and the federal native american health service. Manufacturers get on the FSS through a bid process, most do not participate as the prices are very low, subsequently many drugs are not covered in this schedule.
AMP actually DOES include the bulk of rebates and discounts (excluding certain class of trade channels), and is actually not yet used for reimbursement. They are pushing to use AMP for Medicaid but haven't done it quite yet. Instead, AWP minus a percent or WAC plus a percent is used or in some cases ASP. AMP tends to be significantly below the AWP and WAC based reimbursement levels which are used by much of the US market now.
So that study which looks at FSS (inappropriate) to say prices are higher in Australia is wrong, and with AMP (which is much lower than real reimbursement prices) the study shows the US is 14.4% higher priced. We can safely assume the reality is that the price difference is much higher than 14.4%. Check the link below for an excellent report of how US reimbursement currently happens. The US absolutely funds much of the new drug development for the world right now.

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23. Sili on September 24, 2009 2:28 PM writes...

Well, since Obama isn't actually a fascist communist, just expropriating the ensurers isn't on the table. Pity.

But ideally, I'd say that'd be the way to go. At least transistion to a Canadian single-payer model. Of course, not being an economist, I have little clue as to how to bring such a solution about. (My totalitarian tendencies not withstanding.)

This sums up my appreciation for insurers pretty well. But what do I know, living on the dole over here in Northern Europe.

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24. metaphysician on September 24, 2009 5:15 PM writes...

23- Going single payer doesn't solve the underlying problem. In the long run, the government would be under the same pressure ( to reduce costs ) that private insurers are. Whatever they gain from a more diffuse pressure and no profit requirement, they'd lose from having no ability to choose their 'customer' base.

And really, thats the killer right there: insurance *requires* either excluding, or charging more from, high risk individuals. If you don't ( thus taking too much risk onto the insurer ), and are a private company, you eventually go bankrupt if you don't fix your system. If you are a government operation, you *still* eventually go bankrupt, you just can mooch funds off other parts of the government when you do. Of course, even governments only have so much money. . .

Long story short: if you want to provide universal coverage or similar, you'll need to reduce the costs of medical care. Not the amount that doctors and hospitals charge, note, but the actual amount it costs them to provide that service. The only really notable way to do that? Tort reform. The current tort system is a huge sucking lamprey on the medical industry.

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25. Hap on September 24, 2009 7:49 PM writes...

I didn't think malpractice suits were that much of the cost of medicine, though their insurance is a substantial cost (20-40% doctors incomes?). (In a previous post, someone noted that rates of increase of medical costs in rural CO had decreased with limits on malpractice suits, though not a whole lot. I assumed that there wasn't any notably positive data in a similar vein from other states with tort reform - is that true?)

If you do tort reform, though, you need to have another way to remove the crappy doctors (the 5% that supposedly generate 50% of the malpractice), because the licensing hasn't done it so well. That will probably run smack into the AMA. Controlling malpractice without providing an alternative way of removing harmful doctors is not good - at least for patients.

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26. Malcolm on September 24, 2009 8:33 PM writes...

@biobug I'm not an economist and it seems that selecting the 'correct' comparison price is a prickly issue. However, on the wider question of how subsidy schemes and price negotiation affects drug company revenue, there is an argument that even with lower prices, pharma revenues increase for subsidised drugs due to the growth in market volume. For a general discussion about the Australian PBS, see Drug Policy Down Under or for a technical approach to the pricing and revenue question (which I don't understand and cannot critique), The Drug Bargaining Game: Pharmaceutical Regulation in Australia.

An older analysis does report lower average drug prices in Australia than in the US, but the differences are smaller for innovative drugs, and bigger for 'me-toos', as outlined in the first paper I linked.

A further question I have is whether international differences in drug prices can be described as a 'subsidy' when the pharmaceutical industry generates profits well in excess of other sectors. Perhaps those paying for drugs in the US are simply getting a bad deal.

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27. doctorpat on September 28, 2009 2:00 AM writes...

@Malcom, Shhhhhh!

Us Aussies don't want the USA to abandon its current system. If they are overpaying for drugs that result in more drugs being developed than otherwise, that is what us non-americans want.

I can't understand why anyone from outside the USA wouldn't try to keep the americans doing what they are doing for as long as possible.

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28. spsp on September 28, 2009 4:50 AM writes...

I don't get your point, Derek. If the American people, via its elected government, rewards industrialists that cooperate with their interests and punishes those that don't, how is that like a criminal racket? Isn't that vigilant democracy, instead?

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