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“Value-Pricing” of Drugs and Pharmaceutical Innovation

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In a fascinating paper on drug pricing, Ana D. Vega and her five co-authors trace increases in the price of brand-name and generic drugs in the U.S. during the period 2012-15, using the national average drug acquisition costs (NADAC) data made public by the Centers for Medicare and Medicaid Services (CMS). These acquisition costs are the prices that retail community pharmacies pay to acquire medicines, usually from a wholesaler.

The tables in the paper show that the top 50 increases in the price of generic drugs over the three-year period ranged from a “low” of 448% to a high of 18,808%. For branded drugs the increases over the period ranged from a “low” of 63% to a high of 391%.

The paper also presents data on the wholesale acquisition costs (WAC) differences between first-in-class drugs and subsequent me-too-drugs, the latter usually costing much more than the first-in-class drugs, although they typically involve only small molecular changes. Here the price differentials varied from a low of -2.3% (the sole case me-too-drug actually being cheaper than the first-in-class drug) to a high of 61,259%.

It is rare to find such transparency on drug prices in this country, presumably because the data are in possession of a public agency, the CMS. By contrast, the private sector usually confronts both patients and researchers with contemptuous opacity. The pharmaceutical benefit management industry (PBMs) is particularly opaque on drug pricing, and private insurers and employers have gone along with it.

Price increases of the sort reported by Vera et al. usually are defended on two distinct grounds.

The first is what has come to be called “value pricing’ the idea that the price of a drug should be pegged on the value that drug has to patients or to society at large, in their eyes. For life-saving drugs or pain-killing drugs, that value can be very high.
Another defense of the ever rising prices of drugs is that they are needed to provide the incentives for new drug development.

Value Pricing

In my presentations on drug pricing, I often use the following metaphor to convey the central point of this concept.
Picture, then, a man somewhere in the Sahara desert close to dying of thirst.

Along comes a camel caravan for tourists, loaded with bottles of water. Assume the chap on the first camel is a private equity manager who knows a thing or two about “value creation” through “value pricing.” Assume the lady on the camel behind the first is a corporate lawyer.

Jumping off the camel, the private-equity chap approaches the dying man and, water bottle in hand, queries the dying man thus:

“How much would you pay me for this fresh bottle of water?”

When the Patient is a Racist

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Something has changed.

In my first 16 years in practice, I received exactly one insensitive comment from a young child who had never seen an Asian in person. But in the last year, I have received a hateful, bigoted comment approximately every other month. (That includes the remarks by a person who tried to reassure me that the comments were not directed to me personally, but to the “other illegals.”)

My colleagues are experiencing an increase in bigoted comments too. A fellow physician, a southeast Asian man, says he has been called “Dr. Bin Laden” on several occasions recently.

Last September, one of my students was on the receiving end. A patient’s father requested another doctor when he saw the medical student assigned to his son’s case was black. My student and I went to see the patient’s family together. I acknowledged the father’s anxiety and reassured him that we could treat his son. I asked the surgeon-on-call to see the patient.

Is Healthcare a Right? A Privilege? Something Entirely Different?

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Election Day 2016 should have been Christmas morning for Republicans. Long awaited control of the White House and both houses of Congress. A chance to deliver on an every two-year election cycle promise to repeal and replace Obamacare. In 2010 Republicans needed the House. They got it. In 2014, it was the Senate. Delivered. But we still need the White House they said. Asked and answered with President Donald Trump.

So, what happened a few weeks ago when the House bill fizzled like a North Korean missile launch? Disparate factions within the House couldn’t unify behind Speaker Paul Ryan’s plan, despite pressure from the White House. For some it wasn’t a repeal, only a rearranging of the deck chairs on the sinking Obamacare ship. Others in the GOP were happy with the status quo, preferring to rail against Obamacare in campaign speeches rather delivering on empty campaign promises. Still others, #NeverTrumpers, knowing that President Trump was behind the House bill, preferred to see the bill, and Trump, fail.

Kudos to the Democrats. When they ran the show in 2008, they herded their cats and passed Obamacare. No Statist Caucus on one side or a Tuesday (or Thursday or Friday) group on the other side, each wanting their own version of healthcare reform.

Hobson’s Wrong Answer

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Thomas Hobson was his name, a licensed carrier of passengers, letters, and parcels between Cambridge and London in the years surrounding 1600. He kept horses for such purpose, and rented them when he wasn’t using them. Naturally, the students all wanted the best horses, and as a result, Mr. Hobson’s better mounts became badly overworked. To remedy this situation, he began a strict rotation system, giving each customer the choice of taking the horse nearest the stable door or none at all. This rule became known as Hobson’s Choice, and soon people were using that term to mean “no choice at all” in all kinds of situations.

Not to be confused with Sophie’s Choice, the title of a 1979 novel by William Styron, about a Polish woman in a Nazi concentration camp who was forced to decide which of her two children would live and which would die. That phrase has become shorthand for a terrible choice between two difficult options.

Both Choices come to mind when reading this week’s Boston Globe article titled Hope for Devastating Child Disease Comes at a Cost: $750,000 a Year. The headline, as is too often the case, is inaccurate. It’s $750,000 for the first year, and $375,000 annually after that. But let us not quibble. That equals a lot of resource.

Key Mechanisms That Define Health City Cayman Islands’ Value Innovation

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Health City Cayman Islands (HCCI), less than three years old and located in the Caribbean just an hour’s flight south from Miami, is a 104-bed hospital outpost of Bangalore, India-headquartered Narayana Health (NH). HCCI has caught the attention of US health care professionals not just as a nearshore health care destination, but for having extremely high quality despite pricing that is a fraction of that in the US, as well as careful attention to the patient’s experience. HCCI is not only a competitor to traditional US health systems, it is potentially a radical disruptor. It’s model is so different that it could significantly change the standards by which health systems are judged.

HCCI’s performance is the culmination of a deep commitment to access, efficiency and excellence. NH’s Founder, Dr. Devi Shetty, began with a mission-driven awareness that health care is an essential need and must be affordable to be accessible. He then spearheaded an enterprise-wide focus on process optimization to deliver the best care possible at the lowest possible price. The results have been remarkable. Fifteen years ago, NH’s bundled costs for open heart surgery in India averaged about $2,000. Now they are about $1,400, or about 1% of average US cost. Interestingly, Dr. Shetty believes that better results are within reach and has set a five year target of $800 for those services.

National Coordinator 6.0: A Blueprint For Success

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Now that it’s public, I’ll offer my thoughts on the next steps for Don and ONC.  Don Rucker is a good pick for the nation, and will be a great National Coordinator.  I’ve gone on record as saying that some others are not qualified, and as many of you know – I don’t mince words.  Don is smart, focused, thoughtful, intentional, and will make good decisions for ONC and HHS.  I have known Don for 20 years.  He’s got a long track record of integrity, he’s a nice person, he deeply understands the challenges, limitations, and opportunities of Health IT.  I have no doubt that he’ll do a good job.  He’s got a lot on his plate.

Where should he focus?

  1. Stay the course with health IT certification.  I disagree with the growing meme that ONC has broadened its certification scope too far.  Certification has one purpose:  to provide consumers with a way to be confident that the product they are purchasing will do what the seller says it does.  Some people seem to have forgotten (or don’t know) that some of the companies that sell health IT solutions have claimed that the products do things they do not do.  There needs to be a process by which these claims are tested, verified and, yes, certified.  If this program is scaled back, health IT systems will be less safe, less interoperable, less usable, and less reliable.  #KeepCertification. 

    2.Keep the Enhanced Oversight Rule in place.  My former colleagues (and Don’s former colleagues) in the vendor community will disagree, as do some of the house Republicans.  As Don will learn first hand in his initial few weeks as NC, some of the companies that have been selling certified health IT products have been misbehaving.  In some cases, products have been de-certified.  In other cases, there have been investigations and resolution of problems without de-certification.  ONC is protecting the public by doing what Congress asked it to do initially.  The certification program is more than testing of products in a petri dish, it’s about what happens with the products in the real world.  Surveillance is therefore a necessary part of making sure that the products do what they were certified to do.  #KeepOversight.

Who Won When the AHCA Failed?

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You may have heard that repealing and replacing Obamacare recently failed.  The analysis of what went wrong comes from many corners.  Andy Slavitt, former insurance executive and most recent director of CMS, writes that the ‘failure of Trumpcare can be seen as a rejection of policies that Americans judged would move the country backward.’  Apparently, the theory goes, moderate republicans, especially in states that expanded heavily and rely on Obamacare Medicaid expansion, were skittish of a repeal and replace plan that endangered the healthcare of millions of constituents.  The conservative David Frum writes in the Atlantic that most Democrats and Republicans have accepted the concept of universal health care coverage – and that the idea of a repeal of the right to healthcare is sheer anathema.  And if the Republicans were wavering, town halls filled with angry constituents were sure to provide an extra dollop of pressure.

The effort to get the messaging right is clearly important to many, but I find most of it functions as a smoke screen seeking to obscure the real battles being fought over your healthcare.

It is certainly true that Obamacare insures millions of Americans.  But it is also true that having health insurance and having health care are two very different things.  To be clear, the folks attempting to preserve the status quo want to preserve the ability to force all Americans to buy health insurance that costs hundreds of dollars per month.  Put another way, the folks attempting to preserve the status quo want to force Americans to give a monthly fee to health insurance companies.  Remember, these plans have deductibles so high that most of the cost of care delivered during the year in the form of labs, copays, and imaging studies falls on the hapless patient.  The insurer, for the average healthy person, doesn’t pay a dime.

A Dishonest Conversation on Healthcare

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The conversation our country is having about healthcare right now is not honest. It’s not just the Republicans, the Democrats are just as dishonest, in a different way. Republicans talk about government death panels denying care. Democrats talk about insurance company death panels. Both positions are intellectually dishonest. Both Republicans and Democrats know that a part of insurance is drawing boundaries around the care that would be paid for by the group.  Any care outside that boundary doesn’t get paid for.  You can frame it any way you want, but this is a critical part of any insurance. 

Insurance, whether healthcare or auto, is a risk pool.  A group of people pay into the pool and hope they don’t have to use it – hope they don’t have a wreck on their car, don’t have to go into the hospital.  Those few that do have to use it consume most of the money in the pool – the risk pool spends tens of thousands on the people that have serious car accidents, or hundreds of thousands of dollars on someone that has cancer.  That means that everybody else in the pool helps pay for the costs of the unlucky few.  Healthy me pays for the costs of tripped and broke his leg Bob.

The worst part of the Affordable Care Act that nobody talks about is its removal of caps on annual and lifetime awards.  There is no limit to the risk that the risk pool assumes.  Before the ACA, an annual cap for an insurance plan might be $500,000, with a lifetime cap of $2 million to $5 million.  Now those caps are gone – there is no limit to the amount of money a risk pool has to pay to keep someone alive.

Price Transparency and All Its Very Large Warts

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Transparency – including price, quality, and effectiveness of medical services is a vital component to lowering costs and improving outcomes.  However, it is imperative transparency go hand-in-hand with financial incentives for patients and consumers; otherwise the quest will be in vain.  The single best way of reducing costs while not worsening health outcomes is to redistribute resources from less cost-effective health services to more cost-effective ones.  Americans are extremely uncomfortable with the idea of making decisions based on cost but we must become fluent in the language of cost and more comfortable making decisions based on price information for healthcare expenditures to stabilize. 

Legislators in more than 30 states have proposed legislation to promote price transparency, with most efforts focused around publishing average or median prices for hospital services. Some states already have price transparency policies in place. California requires hospitals to give patients cost estimates for the 25 most common outpatient procedures. Texas requires providers to disclose price information to patients upon request. Ohio passed price transparency legislation last year; however a lawsuit filed by the Ohio Hospital Association has delayed implementation.  The cost of a knee replacement is $15,500 at the Surgery Center of Oklahoma, whereas the national average is $49,500

Healthcare Economics: Why This Stuff Doesn’t Actually Work The Way You Think It Does

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This is a letter I sent to Gary Cohn, appointed by President Trump to head the National Economic Council and, among other things, come up with a plan for reforming healthcare. Formerly president of Goldman Sachs, Cohn may be a wizard at finance, but healthcare economics are wildly different and famously opaque. So I thought I would help him out.]

Subject: A brief on healthcare economics. (8 minutes)

 o Why healthcare economics are different.

 o Why the ACA is failing.

 o What would work.

Who I am (credentials): Independent healthcare author and analyst since Jimmy Carter’s administration. Speaker, consultant across the industry at all levels, including insurers, hospitals, device manufacturers, employers, Veterans, pharma, World Health Organization, Department of Defense. Look me up: ImagineWhatIf.com. Books on Amazon.

Core problem:
 The core problem in healthcare reform is the actual cost of medical care.

o Healthcare in the U.S. by any measure costs about twice what it should.
o Medical prices are completely disconnected from the cost of production.
o Few medical providers even know the true cost of ownership of their products.
o By a number of analyses at least one third of that (well over $1 trillion this year) is waste, paying for things that we don’t need and that don’t help.
o Solving just the federal part of this would completely wipe out the deficit.

Trying to “take care of everybody” will always be impossible politically and economically as long as healthcare costs twice what it should and wastes trillions of dollars.

Solvable: This is a solvable problem. Change the relationship of the sector to its true customers by shifting the payment structure, prompting business model innovation. Stop paying for waste, and $1 trillion/year in unneeded overtreatment will disappear. Prices will drop to something like a true market price. This will not happen overnight, but it could happen over five years with vigorous implementation.

Why does it cost so much?

No price signals: The structure of the U.S. healthcare market since the early 1980s has made it opaque to price signals. Customers in healthcare ask a different question than customers in most markets. Whether hospitals (as customers of suppliers) or individuals needing an operation, healthcare customers mostly don’t ask, “Can we afford it?” Or even, “What’s the best value for the money?” They ask, “Is it covered? Can we get reimbursed for this?” And the reimbursement or coverage is set by complex non-market mechanisms that in most parts of the market are themselves opaque to the customer. So there is no real customer and no real price signal in most relationships throughout the market.