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POLICY: Rebuttal and rebuke from The Industry Veteran on free (or not) markets and (legal) drug trade

And you thought all the verbal jousting was happening in the swing states. We at THCB find that nothing gets the blood and vituperation flowing as much as talk about drugs and money changing hands, such as these contributions from last week. As you might expect, one particular contributor was not too impressed by what he read. Herewith, the temperate and dulcet tones of The Industry Veteran on the complications of free market analyses (or why the free market in healthcare won’t work, but free trade/reimportation of drugs might), and on the sad downward spiral of the editorial function at THCB:

What the hell is going on? Are you turning your Blog over to free-market assholes ideologues? What’s next, changing the name from THCB to SSOB (Softer Side of Bush)? Who are your recent contributors, physicians? As many times as I’ve told you, you still don’t seem to get it. Whenever a physician says anything involving money, presume until proven otherwise that his/her motives are venality and avarice. It is not for nothing that pharmaceutical reps (i.e., salaried corrupters) refer to the physicians in their territories as “my whores.”

Well it’s a slow morning, so let me again show how your new contributors’ brains are on drugs.

1. The market is the true faith of right-wingers.
The bedrock premise of your poison pen jackals consists of their belief that the market will remedy all the ills of our healthcare system. Are drug prices and health insurance premiums too high? Is access too limited and quality too disparate? The market in its omniscient wisdom will cure all. Were it only so.

Healthcare in the US is such a corrupt racket that it actually would improve if it moved to either a more socialized or a more genuine market system. Several endemic factors, however, make the idea of a self-correcting market system little more than a dream of the great beyond. Contrary to the requirement of multitudinous producers, none of whom can affect prices, most of the manufacturing markets (drugs, diagnostic and therapeutic devices) are oligopolies. Competition among them is thwarted by an anti-competitive, patent system. The top of the labor component, physicians, is a market-snuffing guild that defies supply and demand — a higher concentration of physicians in a geographic area drives up their fees, rather than the converse. The distribution of knowledge among component segments of the healthcare system is wildly asymmetrical, something that allows physicians (and manufacturers who promote to these dishonest brokers) to enjoy an inherent, conflict-of-interest position. I could go on, but suffice it to say that US healthcare can never be more than a Frankenstein’s monster version of a market system.

2. A single payer system inevitably produces rationing that reduces the access and quality of healthcare.
This is ultimate fright wig that greedheads pull out of the closet to discourage a more centralized government planning and paying role. Those poor, neglected Canadians. They live longer than us, they suffer lower rates of infant mortality, and their other indices of health quality are better than ours. The US healthcare system is so demonstrably superior that we pay more per capita for healthcare than any country in the world but our rank in terms of results places us 12th or 14th.

3. We should clamp down on reimportation because the pharmaceutical industry’s charity programs are all we need to provide drugs at affordable prices.
…and the Easter bunny puts quarters underneath your pillow when you lose a tooth. Shame on you, Matthew, for recirculating this garbage. Didn’t a recent posting of yours link to a study that showed the thorough inadequacy of the drug company cards? Why are you trying to court favor with these theocratic fascists? They have enough outlets of their own.

4. Reimportation brings in dangerous drugs.
That’s pure fiction, but if your Dick Cheney-Zell Miller contributors suggest that it’s inefficient for a large segment of the US population to receive its medications through Canada and the UK, their observation about a dog walking on four legs is hardly worthwhile. If the drug supply of a country with high quality standards becomes problematic because of sales back to the US, one of their politicians will relieve the supply problem without choking off a source of domestic profits by invoking compulsory licensing, i.e., breaking the patents and allowing the production of rigorously monitored generics.

Instead of trying to strong-arm other countries into paying what your greedheads call “their fair share,” Big Pharma and its US government lackeys will have to learn that they can still do very well by trading away price in return for added volume. I know that malefactors of great wealth seldom relinquish their cartels voluntarily, so Big Pharma will be brought kicking and screaming into some new realities. In the meanwhile, the sophistry and plutocratic rationalization (i.e., bullshit) for exorbitant pricing that one of your posters throws around (an “insurance policy” against “an increasingly hostile and unpredictable global regulatory environment”) is nauseating.

5. US drug prices are actually lower than Canada’s.
Tell your right-wing posters to kiss my colitis-scented ass. If I’m not mistaken, didn’t you also have a prior posting that exposed such PhRMA-sponsored drivel for the fraud that it is? If I remember correctly, they played fast and loose with generic products so that their results were not an apples-to-apples comparison. If one compares the prices of branded drugs in the two countries, the Canadian prices are 30%-50% cheaper.

If my tone seems overly hostile, it reflects my sorrow at the abuse you’ve permitted these recent posters to inflict on THCB. Over the years THCB has been an unfailing source of clear thinking and truth about a subject regularly obscured by lowlifes. Why now, of all times, would you bring this vermin in the back door?

POLICY: International comparisons, or “How does Japan do it?” revisited

Prompted by a couple of posts from my favorite medical bloggers Robert Centor at Medrants and Sydney Smith at Medpundit, I’ve gone back to my old files (and I mean old). When I was a grad student I spent a lot of time looking at the Japanese health care system, and by now THCB readers know that I’ve spent enough time looking at Canada’s and the UK‘s to be dangerous….

MedRants had this to say in a longer article about private medicine in the UK earlier this week:

The BMJ has run two articles to support the NHS. I would argue that these articles are far from objective. I often rant about the deficiencies in our system. We could certainly use our resources more efficiently. But our system trumps the NHS regularly. Regardless of payor status, if you are truly sick, our system responds. We could do a better job supporting primary care – but even here we trump the NHS

Meanwhile Sydney had rather more vicious things to say about Japan and John Kerry (which are connected in her mind by more than by their first initial):

Single Payer Systems: Japanese doctors are in dire straits:

Doctors in Japan have warned that there could be an exodus from the medical profession unless the of health and welfare ministry increases the fixed fees that doctors receive for treating patients. The ministry–in Tokyo–sets the sums that doctors and hospitals are reimbursed for consultations, treatment, and operations by the country’s social security system. But the Japanese Medical Association says that hundreds of hospitals and general practice clinics are now facing financial ruin because they are being forced to rely on very low, government fixed prices for their income. The situation has become critical, they say, because the cost of treating patients is soaring while the fees have continued to languish at a low level for decades.

The Kerry plan, alive and not-so-well in Japan.


Much as I respect these two bloggers for their writing, not least while they both keep up full time medical practices, sometimes they need to be called on what they say. Particularly when it’s not true.

Robert’s claim that the US trumps the UK may be true in lots of categories but ignores two vital facts.

First, in many ways the UK absolutely trumps the US on primary care. Every UK citizen has a dedicated primary care doctor who is broadly responsible for their overall care. While there are many problems with that system and it does restrict access to expensive specialists and technology, it alleviates the problems both of Americans who do not have access to primary care–especially the uninsured– and that of those patients on dangerous polypharmacy regimens who end up on those dangerous drug combinations by doctor shopping. Virtually all British GPs have computer systems that track their patients’ care. They can tell you pretty instantly which patients are on what drugs, they get reminders out for screenings and tests for things like diabetic eye exams, and since this year, they are actually getting paid for performing to accepted standards. For a variety of reasons this just doesn’t exist in more than a tiny minority of cases in the US. I find it hard to believe that we’re “trumping the UK” in primary care.

Secondly, even if we were trumping the UK, we’re doing it at three times the cost. So at a relative pay for performance level, we’re not doing well at all. But then again our doctors get paid much better.

And apparently physician pay is of great interest to Medpundit Sydney Smith, so much so that she’s upset about its apparent collapse in Japan. Syd should save her tears and perhaps brush up on her language skills and put in for a transfer from Ohio to Osaka.

Japanese private doctors are the highest paid in the world. They are the only ones that make more than Americans. Most of the salary data that’s available conflates this by usually reflecting the salaries of hospital based physicians, who tend to work for the government. The majority of Japanese doctors are independent and run their own clinics. How this works is a little complicated. They also tend to own small hospitals attached to their clinics, and in the Japanese fee-schedule, which is the equivalent of a Medicare-fee-schedule for all, there is no distinction between physician and hospital fees, because hospitals were traditionally extensions of physicians’ practices, as were pharmacies. Hence physicians also dispense (and of course prescribe) drugs. The end result of this was that average earnings for private Japanese physicians in the early 1990s were much higher than those of American physicians. Unfortunately I’m dragging this out of my memory bank (as I don’t have the OECD or Japanese publications available), but my recollection was that it averaged around $300,000 a year back then.

Now there are plenty of other little wrinkles in this, such as the fact that although for-profit hospital chains are banned, there were in fact several chains of clinics owned by wealth physician families (shades of HCA). The Japanese Medical Association, which is the organization complaining about the latest government price reductions, was for years the most powerful force in Japanese medicine, and a relatively much more powerful player in national politics there than the AMA is here. For example some of the early meetings during which the dominant Liberal Democratic party was formed were hosted by the long-time JMA president Taro Takemi. The JMA of course represents mostly these private doctors.

Meanwhile the Ministry of Health and Welfare like other government bureaucracies in Japan sets policy to a much, much greater extent than elected politicians. Over time MHW in Japan put in place several structures that governed the system. They limited the number of physicians in practice. They instituted a single unified fee-schedule that covered every insurer (and tends to reward high-volume but low intensity medicine such as Rx and diagnostics over surgery). That’s right, there is no single payer in Japan, it’s predominantly an employer-based system, but there is a single unified fee-schedule controlled by the Ministry. And of course the JMA and the Ministry are going to fight over that–Duh! But you’d do well not to listen to the rhetoric of just one side in that negotiation. There are some other wrinkles, such as in 1960 the municipal system for the indigent and elderly was expanded so that there are no longer uninsured in Japan, and then in the 1970s a transfer tax was introduced so that the employer groups had to subsidize the public system based on the age of their members.

This was all completed by a slow evolution over time, but the result was that most Japanese kept both the employer based insurance scheme that they were familiar with, and the physicians and providers kept the same format they knew well. So universal multi-payer insurance with free choice of doctor can exist, and can also exist at a reasonable cost. Not much of that is in the Kerry plan, but none of it is in the Bush “plan”.

If you have Health Affairs access, it’s worth reading the article by long term observers of the Japanese scene, Ikegami and Campbell, which details how costs were constrained in the system during the long recession of the 1990s, and even reduced by careful adjustments to the fee schedule and the introduction of user fees. The discussions about these changes were well under way when I was working with health ministry officials in 1991. That they weren’t introduced until 1997 shows the patience of the bureaucrats–a luxury of the Japanese political system. But there is also a sense of noblesse oblige, which the Japanese actually had beaten into them by the New Deal Democrats who ran the initial post-war occupation. One quote from Ikegami and Campbell is well worth pulling out:

Any system of universal health care coverage requires cross-subsidies from the healthier and wealthier segments of the population. Political resistance is inevitable and will intensify in a sour economy. Japan seems to be improvising piecemeal structural reforms to deal with these pressures. However, if the past is any indication of the future, these reforms are likely to be in the direction of more equality, which will be in line with reforms in Europe and stand in marked contrast to those in the United States.

Maybe that sounds like the Kerry plan, but nothing much else about the Japanese health care system does. Adopting something like the Japanese system, unlike the Canadian and British systems, wouldn’t require too much realignment of the existing US system, but it would require a redistribution from the rich and healthy to the poor and sick. That currently appears to be beyond us as a nation.

PHARMA/POLICY: A couple of views on single payer and reimportation, by Terry Nugent & Joe Crea

Today THCB gets turned over to some contributors who may not agree with me on much but do have sensible arguments. First off Terry Nugent wasn’t too impressed by the pleas of the Canadian businesses (reported by Paul Krugman) echoed by their US counterparts about getting health care off their banks onto that of the government. Terry writes:

This is yet another case where what’s good for GM may not be good for the country. Of course big business would like to unload its healthcare costs on the taxpayer. But one wonders why Canadian officials are forced to cite this benefit to big business to the supposed beneficiaries of Canadian monopsony–the proverbial little guy. It’s because like all politicians they’ve written checks they can’t cash.

What if there were only one car company or one grocery store or one clothing emporium? You would take what you get, like the old Soviet GUM store. That’s how it is with Canadian healthcare. If you done like it, lump it. The safety valve is the land of the free south of the border.

If we go single payer, you will see Medicaid-like rationing because gutless politicians will make Social Security like promises without raising taxes to pay the freight.

Nonetheless, the system is imperfect and needs to be improved. Kerry, Clinton, and Frist have some good ideas. Bush has some too. But what makes America different from the rest of the world is what makes her great–free enterprise and free speech. Let’s not forget that. Perhaps, as in Britain, the world ought to change to become more like us.

And then in response to my piece on the way out
for pharma companies Terry writes this on reimportation:


Reimportation is just a straw man for price controls. Here in the State of Illinois, USA, our governor and his pal Rahm Emanuel (a Democratic Congressperson and once and future Clinton operative) are having great fun setting up a reimportation scheme that will allow intrepid residents to personally import drugs from Ireland and the UK. This plan has a few flaws–e.g., it’s limited to 100 drugs, it’s borderline illegal domestically and internationally, it’s subject to pharma supply constraints, there are labeling issues, etc.

But what’s nice about it is that it doesn’t cost the quasi-bankrupt state government a dime and it makes great political hay with the unsuspecting electorate. Meanwhile, the state is being sued for violating federal law by massively underfunding Medicaid, which actually does pay for prescription drugs for those who need them. The hypocrisy involved with this sophistry boggles the mind.

What the industry should do is publicize its own access programs for the uninsured and economically needy, and expose charlatans like our governor for the political opportunists that they are. Based on a recent FDA study of prescriptions ordered from sites linked to the State of Wisconsin Web site, I think there is more of a safety issue here than most informed observers suspected. As the companies squeeze Canadian supplies based on diversion, the Canadian outlets are reaching out internationally for supply. Who’s to say they won’t compromise their standards to take advantage of the windfall business they are getting from the US with the free promotion provided by the sovereign states? As time goes by, I believe safety will become more and more of an issue, and the states that promote this route will potentially assume more and more liability for adverse outcomes. Now those drugs don’t look so cheap, do they? Especially when you can in some cases get a better deal at Costco.

And then we get a new piece on the same topic from new contributor Joe Crea. Joe had a version of this letter published in the Moonie Washington Times, but it was so brutally edited that he asked me to give the unexpurgated version a forum.

The oft quoted examples of U.S. drug prices being several times higher than those in Canada is misleading. The reports that make this claim “cherry-pick” the top selling brand-name drugs only, and value them at AWP (full price) in order to suit their agendas. No doubt that if you choose the most demanded doses of the most demanded brand-name drugs and only look at AWP (which relatively few people pay), and compare them to controlled prices in Canada, this disparity indeed exists. However, this is analogous to comparing the price of cars, or any other product, based on “sticker price” rather than what is actually paid by consumers.

The more disturbing matter is that this demagoguery continues to go popularly unchallenged, and now has become lore. A study by Patricia Danzon at the University of Pennsylvania’s Wharton School compared a representative sample of all drugs in nine countries, and adjusted for pertinent variables including relative purchasing power (apples-to-apples); this true economic analysis showed, in particular, that Canada’s prices were generally 4% higher than those in the U.S.

Another issue, reimportation, or parallel trade, of pharmaceuticals is feasible and should be legal in a free market, but: 1) Even in Europe, where reimportation is legal, most countries get less than 10% of their drugs this way (of course, price and practice controls make it less efficient), 2) About 10% of the U.S. demand would exhaust Canada’s entire drug supply, 3) Not all drugs from Canada originate in the U.S., hence 4) We would have to legislate reciprocal licensing agreements with other countries as exist in the E.U. whereby foreign testing, manufacturing, and distribution standards would have to be equivalent to those in the U.S. Frequently, either theirs would have to be raised, ours lowered, or both.

Thirdly, regardless of whether pharmaceutical companies spend too much on marketing, the fact is, at least in part, that the refusal by other countries to help pay for research and development is what allows them to fix prices. The pharmaceutical sector does have larger profit margins than other industrial sectors; however, this is not prima facia evidence of price gouging, but an insurance policy against future costs in an increasingly hostile and unpredictable global regulatory environment. Like it or not, it is this subsidization of innovation and profit by U.S. and, frankly, Japanese consumers that allows for newer if not always better drugs to come to market. Only about 1 in 3 patented drugs ever recover their full investment, hence the reliance on “blockbuster drugs”. Granted about half of that investment is opportunity costs, which is legitimate, as in any other industry. As can be seen, to the extent that prices are high in the U.S., it is a function of more than just profit motive, despite what most wish to believe- and don’t even get me started on intellectual property rights (patents).

In economic terms, a major driver of these price differentials (apart from government interventions) is consumer demand. While policy and the markets continue to grapple, there are two easy ways to decrease drug expenditures: insist on generic drugs whenever feasible (which is most of the time), and when you receive a prescription or service, ask your physician, “Is this the most cost-effective treatment?” It is such consumerism and the adoption of evidence-based practices that will most affect health care costs, along with prudent lifestyle choices.

In the long run, it will be market demand vis-à-vis consumer behavior and revealed preferences that determine health care costs. Until we stop agreeing to more expensive drugs and services that provide little in return, and accept unaccountable tort and inefficient regulatory systems, we will continue to get what we pay for.

These arguments will run and run, but as with everything the truth is in a murky place in the middle. It is though a pity that big pharma’s advocates have to be individuals writing in THCB, while the head of PhRMA is writing letters about me-too drugs for his mother to the LA Times.

QUALITY/PHARMA: Chemosensitivity Testing and its relation to the Chemotherapy Drug Concession, by Greg Pawelski

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Contributor Gregory Pawelski is back with another look at the chemotherapy market. He’s writing about a wrinkle in the use of chemo drugs that has some big implications. The Sept 1 Press release at this site has the science behind the issue. I’m in no position to judge any of the science being disputed, but the implications for pharma, Medicare, insurers, the taxpayer and oncologists are obvious.

Without information provided by Chemosensitivity Testing (assay-testing), oncologists have the freedom to choose between a multiple of different drug regimens, all of which have approximately the same probability of working. Some of these regimens are highly profitable to oncologists. Other regimens are much less profitable. Assay-testing takes away a lot of this freedom to choose and narrows the selection to those drugs that have the highest probability to be successful but may have lower profitability for the oncologist. This cuts into the oncologist’s bottom line, though it benefits the patient.

Many of these less profitable regimens are oral-dose. As I reiterated in my previous article in office-based oncology practices the core activity in medical oncology is the provision of infusional chemotherapy. The entire structure of the practice revolves around this activity and is what distinguishes medical oncology from most other specialties.

The new Medicare bill offered patients benefits they did not have before. There is now “some” coverage for oral-chemotherapy drugs, which were not available before. Since April of this year, $200 million was available so that some Medicare cancer patients would have transitional coverage for these drugs, until the bill goes into full effect in 2006. Providing some compensation for oral-chemotherapy drugs was a major emphasis for a number of cancer support groups. Although some benefit was realized, more might have been achieved if ASCO (American Society of Clincial Oncology) and other groups had lobbied as much for the oral-chemotherapy drug issue as they did for office-practice expense reimbursement.

ASCO fought long and hard to retain the Chemotherapy Drug Concession and never once suggested the need for a clinical trial to show when drugs were selected with and without the presence of profit differential (which included oral-dose drugs), clinical outcomes would be the same. It is a real credit to oncologists who utilize assay-testing in their management of their cancer patients, despite the fact that their use constrained their freedom to choose and doubtlessly reduced their incomes.

Take an example of ovarian cancer. After 25 years of prospective, randomized clinical trials to identify the best treatments to give to the average patient, there has been absolutely no progress. A meta-analysis of all trials showed that there was no difference. During those 25 years, Taxol came along. Two large clinical trials showed that Taxol/Platinum combinations were better than single platinum regimen. And Taxol became one of the most remunerative cancer drugs of all time. So Taxol/Platinum became “standard” therapy.

But then two more very large trials were done, showing that there was no advantage to giving Taxol/Platinum over single agent platinum (like Carboplatin). And Taxol/Platinum also wasn’t any better than another non-Taxol combination (not previously tested against Taxol/Platinum). But Taxol/Platinum remained “standard” therapy. Now that Taxol is going off patent, some academic oncology groups have (as their major ovarian cancer project) clinical trials to show that Platinum/Taxotere (a drug like Taxol, but still on patent) can now be the new “standard” therapy.

All the while doing this, ASCO is refusing to suggest clinical trials of “cell death endpoint” chemosensitivity testing, because, lacking something patentable or proprietary, all assay-testing laboratories can offer is free assays and not the millions of dollars that someone like Bristol-Myers-Squibb can offer to push its Taxotere trials.

The present system exists to serve the clinical investigators and the clinical oncologists, but not to serve the best interests of the cancer patients. I think it is time to set aside empiric one-size-fits-all treatment in favor of recognizing that breast, lung, ovarian and other forms of cancer represent heterogenous diseases, where the tumors of different patients have different responses to chemotherapy. It requires individualized treatment based on testing the individual properties of each patient’s cancer.

PHARMA: I guess GSK’s not reading THCB

A couple of days ago I posted a long piece about what big pharma might do to get itself out of the bind it’s in over reimportation. My suggestions included bending somewhat on reimportation and taking the high road on patient safety by helping to certify limited sources of imported drugs. Last week, the second biggest drugmaker GlaxoSmithkline decided to take, shall we say, an alternate approach. It’s running ads bascially echoing Jeb Bush’s point of a while back that Canadian drugs are going to kill you.

Actually if you read the ads carefully, they really are saying that drugs of unknown origin purchased over the Internet are going to kill you. So perhaps if you buy them from a certified Canadian pharmacy regulated by the Canadian government, then perhaps not only will they not kill you, but they may even be the exact same drugs as sold in American pharmacies, made in exactly the same factory in Puerto Rico or Ireland.

Pharma companies claim to think long term about their R&D. We’re not seeing a lot of evidence of long-term thinking in their current public policy stance. For instance, what if either HHS/FDA changes its rules or the bill sitting in Congress for reimportation passes before, oh say, November this year. Do they really think that the President will do something 80% of seniors oppose if the election is coming down to the wire in Florida and Pennsylvania? And if pharma loses here, what’s Plan B?

Meanwhile, talking of allegedly unsafe drugs GSK is now facing its first lawsuits over the use of Paxil in kids.

HEALTH PLANS: The power of THCB! Ooh, can’t you just feel it…

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While GSK apparently isn’t bending to my whim, the same may not be true in Oakland. The correspondent who cajoled me into writing about the Kaiser Thrive campaign points out that:

If you need some quick affirmation of your own visibility, it looks like Kaiser finally took down the Northern California Systems Diagrams from the Tripod site. I gripe about for a month: nothing. You blog on it, and two days later the problem is addressed. This of course means the link in your log entry is broken. If you still want to link to the Systems Diagrams, I have a mirror of them (I’m one of at least three people who mirrored the site, actually)

I’m not actually going to repost that link, as part of what I was interested in doing was hoping that Kaiser would tidy up its links. If you’re that keen to find the wiring diagram (and other anti-Kaiser stuff), go over to my correspondent’s site.

Meanwhile I’m going to go and lie down as all the power and influence I’m wielding is making me feel giddy….

QUALITY: Betsy Lehman redux, patient safety crisis continues

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I was gobsmacked when I heard this on the local news today. A patient at San Mateo Medical Center (San Mateo is the small county immediately south of San Francisco and north of Silicon Valley/San Jose) died after being given 10 times the correct chemotherapy dose. We all know that medical errors are a problem that still exists, but this error was exactly the same as that which killed Betsy Lehman, the health columnist of the Boston Globe at Dana Farber cancer center in 1994. Betsy’s death was part of the groundswell that ended up 5 years later in the IOM “to Err is Human” report.

Nearly five years after the report and ten years after the tragedy in Boston, it’s clear that this is still a frequent occurrence. San Mateo Medical Center will hold an enquiry, but it’s almost certain that a miscommunication between the nursing, medical and pharmacy staff, without adequate process or technology back-up systems, is to blame. And there’s been plenty of time for the health care system to call attention to that, but as Michael Millenson says it’s mostly been silence.

POLICY: The Wall Street Journal likes HSAs in theory, but they’re in trouble in practice

Surprise, surprise the intellectual geniuses at the Wall Street Journal editorial pages have decided that they like the HSA concept and that HSAs could help address problems in the U.S. health care system. Well they are entitled to their theoretical opinion, and they are right in that the unfair tax treament of health care insurance purchasing should be rectified. There are unfortunately two major problems with their views.

First, the way that tax break should be rectified is to remove it from everyone not extend it to those who don’t get it now. There is no reason that health care premiums should be bought with pre-tax dollars (and for that matter there’s no reason that housing loans should be too). It’s a fundamental violation of that free-market that the WSJ claims to support–not that many of its conservative fellow-travelers are very interested in it these days. It also means that we spend marginal dollars on health care when we should be spending on something else. But I guess they missed that day in micro-economics class when MR=MC was brought up. In reality it means that Americans take their marginal compensation in health care benefits rather than in taxable income–and this amounts to a direct subsidy to higher level taxpayers (the rich) from lower level ones (the poor)–but it amounts to the same effect.

Secondly, while the theory of HSAs may look all very nice, in practice they are breaking down in the only place that’s ever really used them. That place is the directed free-market dictatorship (with a human face) of Singapore. What’s happening to HSAs in Singapore? Well funnily enough according to the Health Minister Khaw Boon Wan they’ve encouraged risk-shifting and cream-skimming:

There are now 15 other providers of a similar medical insurance scheme, causing the risk pool for insurance to be fragmented. Instead of competing to provide better services at lower premiums, Mr Khaw said private providers are cherry-picking by providing coverage to certain groups only to maximize profits.

Does this sound in the least familiar? Could you possibly imagine that kind of behavior amongst American insurers, which might, just might, not be quite as well-behaved or as subservient to the government as their Singaporean brethren? I suspect so, and that’s why Kaiser Permanente is getting aggressively (for it) involved in the campaign against HSAs, partly by advertising loudly this press release about a study its researchers did using Humana’s data. The study, which was published a few months back in the journal Health Services Research and has been featured before in THCB, concludes that a CDHP offered to Humana employees attracted enrollees 25% to 50% healthier than those in traditional plans. Kaiser of course can’t just create another insurance product without taking money out if its own risk-pool. So CDHP/HSAs, and the prospect of the adverse selection death spiral they bring with them, terrify Kaiser–as they should.

PHARMA: The real debate behind reimportation

So to continue from last week’s rant on reimportation, I got an email from the subject of the rant Stephen Chang. (And correcting something I said in my original post Stephen’s group does have a website Cures California.org (I just couldn’t find it easily on Google). Stephen wrote to me saying:

My you get upset easily! I certainly understand your points and the panels and probaly agree on some of them. However, uncontrolled illegal importation from Canada via trans shipments is not the answer. This will potentially make the issue worse as we will jeopardize our own fragile drug supply. I too have been looking for that answer in how to increase access to drugs and fully agree that something needs to be done. Do you have a sensible plan/policy that could be a win-win for everybody? Would love to hear about it

So I thought about this for a while, but before I spell out my ideas it’s worth noting that many people within the pharma business have serious problems with the industry’s stance. Don’t believe me? Take a look at this thread on the pharma-marketing list-serv about pricing, and look at this opinion piece by Pharma Marketing editor John Mack. John says correctly that ‘Pharma needs to realize that it just can’t “win the argument.” ‘ John also has two excellent articles on both the crisis in professional detailing and (on p 10) about better models to target physicians. There are also stories in the Pharma professional press on how high prices are hurting compliance (i.e. sales). This is all by way of showing that the industry has many sympathetic friends and even big-time supporters who feel that it has lost its way. So this is my reply to Stephen–it’s the closest I’ll ever come to trying to get big pharma to find a “Third Way” out of the mess it’s in.

Stephen–I don’t mean to get angry with you in particular, but you said one or two things on the show that I’m afraid were the straw on the camel’s back, following a year or two of me listening to PhRMA fail to make a serious argument in this debate. I don’t think you did yourself or your organization any favors by a) not speaking to the profit level of pharma companies, and — when countered with two GAO reports by your opponent on the show brought up — b) stating that only that research is expensive (“costs hundreds of millions of dollars”) without producing any evidence of its effectiveness or that pharma actually spends that much on R&D, especially when I’d already said in my call that marketing costs are nearly 3 times those of R&D.

However, you are not a professional PR person, you have a real job and a sincere position, so let me try to tell you why I think that your current position is counterproductive.

1) A simple executive order could allow the FDA to investigate and certify as safe a number of Canadian pharmacies, or a number of US based pharmacies that import from certified European pharmacies. Everyone knows that and that’s why the safety argument (or, worse, now the “terrorism” argument) is so disingenuous. Failing to do this when people are importing pharmaceuticals anyway is in fact increasing the risk of safety violations and means that the government’s position (bought and paid for by a short-sighted PhRMA) is actually increasing the risk to the American people.

2) The reimportation issue cannot be that big a deal for the US pharma market. Currently it’s less than $1 bn of a $200 billion market. Even if it went up tenfold it would be less than 5% of the market. PhRMA’s stance does two things. It stops some seniors getting drugs at a decent price (not that many are stopped I admit, but there are some who don’t want to break the law and it means that reasonable people are forced to flout the law). More importantly, it gives the anti-Pharmaceutical left a huge stick with which to beat the industry. More than 80% of seniors are opposed to the ban. Sometimes when you’re that outvoted you have to realize that your position is untenable.

3) The likely consequence of this is that there’ll be a backlash either in 2005 or 2007 or 2009 against big pharma, and severe price controls will come in shortly thereafter. The only people within pharma who don’t care about this are the senior executives of the big pharma companies who are judged on their current quarterly profits. People who care about the creation of new drugs and the availability of those drugs five to ten years out (i.e. you and your coalition) should be concerned about creating an environment in which those drugs for which the efficacy and cost-effective can be proven are available to patients. Currently big pharma’s only trump card is the vast amount of cash it has spent with the Republicans (even if some of them haven’t stayed bought as they can read polls too). That luck will run out sometime –and this November is my guess as to when.

OK, you asked how we get to a better place? I propose three quick measures which wouldn’t cost pharma companies much and would put them in a much better spot.

a) Help the FDA set up a safe channel for drugs from Canada and commit to supplying a decent amount of drugs in a safe import market. I suspect the amount would be smaller than PhRMA fears, and this would remove the number 1 image problem that pharma has.

b) Announce a voluntary reduction in the size of sales forces and marketing budgets, and transfer some of that money into R&D spending, and some into price cuts. This will have to happen anyway, and by getting ahead of the game pharma will be able to control it. Having the CEOs of Schering, Pfizer, GSK, Amgen, etc take a public salary reduction down below $5m from their current stratospheric levels wouldn’t be a bad idea, although it would alert the public to the obscene amounts they get now.

c) Realize that there is a long-term cost problem with health care and set up a system to deal with it. Expecting the rest of society to keep paying more and more into the bottomless pit of health care costs is not only heads-in-the-sand foolish, but it ends up denying access to health care insurance and basic care to millions of Americans. Pharma R&D has some potential to actually alleviate health care costs (the success of Tagamet in reducing ulcer surgery is a prime example, but the replacement of bone-marrow transplant with Gleevac is another). Pharma should be starting a real debate about how as a society we are going to deal with a future of genomics-inspired drugs, and which ones we should be funding. Again if pharma doesn’t lead that debate, the government will in a few years, and it’ll be much less pretty that you and your group would like.

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