Prescription Drugs -- Outlandish Pricing, Part 2

Posted by Stephen Weinberg, MD FACC FACP

As a followup from the previous post, there are a few other reasons we in the US pay significantly more for drugs than any other country.

Keep in mind that we essentially pay for all of the world's research and development with our inflated prices of drugs!

The FDA has had a significant backlog of generic drug filings to deal with. Any company that wants to produce a generic drug must go through FDA approval to be sure the factory meets acceptable standards and the drug produced is equivalent to the non-generic version. Recent information indicates that the backlog is about 47 months compared to Europe of less than one year. If more generic drugs were approved and on the market, competition would reduce the price. More money and resources need to be expended to improve the approval thru-put.

Finally, there are "orphan drugs" that are for diseases that have less than 200,000 patients. The government encourages the development of these drugs for humanitarian reasons and the drug companies can charge any "reasonable" amount. The government can certainly encourage competition in this area, but it is a small part of the problem and not worth dealing with at this time.

A recent article in the Washington Post, dated December 9, 20018, speaks about price fixing and collusion among numerous generic drug makers which has increased the cost of at least 300 generic drugs in the recent past. An anti-trust lawsuit has been filed and the justice department in Washington has launched an investigation into the matter. We all have and know of generic drugs that have experienced enormous price increases in the past few years for no good reason. I encourage you to read this article. 
Generic Drug Price Fixing.
In my opinion, there should be substantial jail time for those CEO's and others in their organizations that have participated in these schemes.

So what can be done to reduce the cost of prescription medications in the US?

First, we should support the ongoing justice department investigation and the anti-trust lawsuit that is under way.

In looking back to the prior post, the first issue was the establishment of a national panel to determine if a new drug is really any better than existing drugs and whether it is worth the cost. Given our open market philosophy and capitalism, it is unlikely that panels which exist in other countries would be adopted here. On the other hand, we could certainly have, as part of the FDA review, a comprehensive statement about the differences between the new drug and existing ones in the same category and a discussion about pricing and value.

The second point raised was the issue of the prohibition of negotiating pricing from manufacturers as a country or as Medicare or as a large coalition of buyers (such as the American Hospital Association) for the drugs. Allowing a larger buying population to negotiate prices would drastically bring down costs.  The prohibition from 2003 should be eliminated.

The third issue was the illegality of importing drugs from other countries. We should be allowed to shop around for drugs in other countries to obtain a more reasonable price. Since most industrialized countries purchase brand name meds from the same manufacturer and they are deemed safe by the FDA, we should be allowed to buy them from outside the US. Obviously, it is important to be sure that the pharmacy from which the drug is purchased is reputable, but this can be done through licensing. This is called "parallel trade" and can actually be done on a country to country basis. The US could by a drug from say Italy at a much lower price than we can get it from the same manufacturer and Italy could make some money on a markup. Medicare could do the same thing as could other buying cooperatives. Once again, this prohibition was part of the deal when Medicare Part D was established and should be eliminated.

The fourth issue was the $40B rebates that are paid by the manufacturers to the pharmacy intermediaries. This rebate should be passed on to the consumer as lower pricing. At the very least, it should be made public and allow all of us to see who is getting paid to sell which medication. It is unconscionable that this type of bribery is ongoing.

Fifth, it is unreasonable to allow a drug company to extend or renew a patent in a situation where they produce an extended release or combination version of the medication. It is highly likely that they have had this idea on the "shelf" since the drug was discovered and are only putting it forth to extend the patent and period of exclusivity. This practice should be eliminated or at least modified to allow the company to have some means of recouping the cost of producing this variation for the good of the patient.

The sixth issue regarding the payment of a generic manufacturer to not produce a drug coming off patent should be made illegal. In addition, the purchasing of a generic drug manufacturer by the manufacturer of the patented medication should be illegal. This is also clearly done to prevent competition and needs to be prosecuted.

As can be seen by the various issues above, there are numerous problems that can be solved to reduce the cost of prescription medications. To the extent that these companies have the highest profit of any other industry and they often engage in practices that are illegal and certainly unethical, we should expect the federal government to step in and make the industry adhere to the law. We should also expect the federal government to produce an environment that will enhance competition to produce needed drugs at a more reasonable cost. We need to communicate to our congressmen/women that this is a priority!!

Prescription Drugs--Outlandish Pricing

Posted by Stephen Weinberg, MD FACC FACP

Let's take a look at the pharmaceutical industry and try to discern why prescription drugs are so expensive.

Worldwide, the industry has revenue of about $1T, of which $350B comes from the US. Globally, the amount of profit is about $210B annually or 21% of revenue. This is the most profitable industry in the world. The industry spends about $250B per year on sales and marketing and only $93B on research and development.

The cost of developing a new drug is about $2.6B and the patent will last 20 years from the time the actual chemical is discovered and placed under patent. It could take 10 years to get the drug onto the market, leaving only 10 years to make back the money spent on the discovery of the chemical and the studies needed to bring the drug to market. After that time, the drug can be produced as a generic. Of all the chemicals discovered, only a small fraction actually become a salable drug, further increasing the cost of development.

The cost of prescription drugs in the US is greater than twice that of other industrialized countries. Many drugs are far more expensive in the US. Some examples are seen here:

So, the question simply, is why are the prices so high in the US compared to the rest of the world?
There are several reasons for this.

First, other countries have national panels that determine whether the medication to be sold in their country has value above the other medications in their class and if the cost is worth it. The pharmaceutical companies know this and they price their new medications so that they are competitive with existing drugs to enable them to be sold. What this means is that a new drug must demonstrate additional value at a competitive price in order to be accepted by the country of interest. This is not the case in the US. Any drug approved by the FDA can be sold here and the manufacturer depends upon their marketing skill to get the drug into general circulation. Remember, the sales and marketing budget is $250B annually.

Second, the US does not negotiate prices as a nation, or even as Medicare, for the costs of medications. The other industrialized countries negotiate pricing after they decide if the drug is of value. With the US population of 330M, we would have extraordinary negotiating clout as compared to many other countries with much smaller populations. An example is Canada with 1/10 the population of the US and they pay substantially less for drugs. Medicare, with 55M people would have more leverage than Canada with 36M. We cannot negotiate pricing, as a country or as Medicare, as a result of the "compromise/deal" achieved with the pharmaceutical industry in 2003 when Medicare Part D was established under the Bush administration.

Third, it was also established under the Part D law that the US population could not purchase drugs from other countries, legally. Currently, only 2% of drugs are purchased outside of the US, despite the fact that they are produced by US manufacturers.

Fourth, manufacturers generally sell to intermediaries like pharmacy benefit managers (PBM) and provide them with rebates as an inducement to use their drugs. This amounts to more than $40B annually in the US. This enormous sum is not passed on to the patient to lower the cost of the medications and the entire transaction is non-transparent. So the PBM's are making money on the mark up of the drugs plus the rebates.

Fifth, pharmaceutical companies will commonly extend their patent timelines by introducing combination drugs and extended release formulations of the drug. This allows them to sell the medication without competition. It is interesting that they will often "discover" the additional formulations close to the patent expiration date.

Sixth, manufacturers will pay generic manufacturing companies to not produce their patented medication when it comes off patent for 1 or more years. This will allow the original company to reap additional profit without competition.

In the next post, I will detail other reasons for the exorbitant prices of drugs and provide some easy solutions that can be adopted to control the costs and get pricing in the US to be more reasonable and competitive with the other industrialized countries of the world.

At the "end of the day", it is important that we all understand what is happening and then put pressure on Congress to do the right thing and fix the problem.

More to come. Stay tuned...

Book--Healthcare Financing

Posted by Stephen Weinberg, MD FACC FACP

There is a strong, renewed interest in a single payer system or "Medicare for All" as it has become known. I began to think about this subject in 2004 and after 3 years of research and writing, I completed my book "U.S. Healthcare on Life Support". It is 128 pages of heavily annotated research into the field of healthcare financing that is easy to read and comprehend.
The book details the entire healthcare delivery system and provides incites into how the system can be transformed financially, provide excellent healthcare for all, and save a significant amount of money for the entire country. Though the numbers in the book are from 2007, the information in the blogs has updated the numbers to the present.
The book can be purchased through Amazon:  U.S. Healthcare on Life Support
Below, you can find the Table of Contents and the Forward written by Professor Burns from The Wharton Graduate MBA Program.

Another look at a "single payer" system (Part 1)

Posted by Stephen Weinberg, MD FACC FACP

Let’s take another look at a single payer system. 

I have had numerous recent conversations with people regarding a single payer model. In an effort to bring additional clarity to the discussion and cut through the complicated math from the previous post, this post will attempt to simplify the issue.

As soon as one brings up the concept of a single payer health system, there is a great deal of pushback. The arguments include predominantly that this is socialism, the government cannot run any program of that size efficiently, it controls too much of the country’s economy, and the government cannot be trusted to do what is in the best interests of patients and will use this opportunity to ration healthcare similar to Canada and  the United Kingdom.  All of these ascertains may be true in theory, but it seems that, in reality, this is likely not the case.

From a very practical standpoint, Medicare is the largest single payer system in this country. Having been enacted in 1965, it has grown to cover about 55M people, or 1/6 of our population. I have practiced Cardiology since 1978 and I cannot recall a single patient who does not like Medicare. On the contrary, there is not a day that has gone by when a patient did not complain about their private health insurance carrier. These complaints range from lack of coverage, the need for referrals, inability to obtain necessary testing and treatments, rapidly escalating premiums, among others. I never hear that from Medicare patients.

Medicare is efficiently managed with an overhead of about 1.5% compared to private insurance overhead of about 15-20%. A huge difference.

The argument that the government would control a large part of the country’s economy cannot be denied. The US healthcare sector is about 1/6 of the total economy. Legislative controls and oversight could be applied similar to what exists now, which is controlling Medicare effectively; as compared to private insurers with premium increases of 20-30%, higher deductibles, higher copays and less coverage.

The argument that the government cannot be trusted to do what is in the patients’ best interests is also false. Once again, Medicare has always provided comprehensive care coverage since inception, unlike private health care insurance, as virtually anyone will attest who has private coverage.

The issue of rationing care is likewise untrue. This has never been the case with Medicare, as opposed to Canada and Great Britain. The difference between us and them is that the other countries have a fixed, capped budget for healthcare expenses so once the money runs out, care stops. This leads to long waiting periods for testing and care, as well as rationing. This is one of the mechanisms by which they can control costs. In the US, by contrast, there is no budgetary cap. The expenses are open-ended, so care is not rationed. Furthermore, the discussions regarding “death panels” that occurred when Obamacare was being legislated were totally false and were used only as scare tactics by opponents.

So, the arguments against a single payer are without merit. Since Medicare has been successful and extremely well accepted by senior citizens as well as the vast majority of the population, why not provide everyone with the same insurance coverage? As shown in the prior post, we are already spending more than enough money to insure everyone with comprehensive coverage and still save $260B annually. 

The next post will detail how to provide "Medicare for all".

Stay tuned.

The Case for a Single Payer System

Posted by Stephen Weinberg, MD FACC FACP

In an effort to discuss the healthcare system and options to finance it, this post will detail the costs associated with the delivery of care.

Each year the government publishes several large databases that detail the expenditures and revenues of the entire country. The data I will provide is for 2013, the year prior to the inception of “Obamacare” in an effort to simplify the analysis. The numbers are drawn directly from the databases. National Health Expenditure Accounts

	$Billion	# people  in millions	$/person
Total personal HC costs	2,725	316	8,623
Govt Admin (Medicare and Medicaid) expenses	37	108	343
Private Health Insurance Admin expenses	174	165	1,055
Govt Public Health	75
Personal Care costs Net of Expenses	2,439	316	7,810
Out of Pocket	325	316	1,028
Private Health Insurance	834	165	5,055
Medicare	561	52	10,788
Medicaid	407	49	8,306
CHIP	11	8	1,375
VA/Military	89
Other Indian, workers comp, etc	212
Uninsured		45

This chart shows total personal healthcare costs were about $2.7 Trillion with overhead of about $286B leaving net personal healthcare costs (the amount actually spent on care) of about $2.4Trillion.

Medicare overhead was about 1.5% of total expenditures (from the Medicare Trustee Report) or $160/person. As you can see, private insurance overhead was about $1,055/person, or approximately 6.6 times that of Medicare. (Remember the prior post regarding the excess costs of private insurers.) If private insurance overhead was the same as Medicare, the total private insurance overhead would be $160x165M people or $26.4B instead of $174B. The savings would be about $148B annually. Additionally, several studies, (Insurance driven overhead, NEJM insurance overhead) have demonstrated that the excess overhead of hospitals, physicians offices, nursing homes, employers, clinical labs, and home care was about $172B in order to deal with the numerous private insurance companies. The total annual cost of excess overhead of our multipayer system was about $320B in 2013.

The real question is “what are we getting for this additional cost?” I would argue, nothing!

There is also a substantial amount of money being spent by individual states and the federal government in order to provide care for the uninsured, as outlined below.  (Also from 2013)

	$B	# people	$/person
Charity care from states, indigent clinics	20
Federal Govt	33
Other public money	10
Increased private insurance premiums*	66	165	400
Subtotal	129
Total Admin savings from 1.5% overhead	320
Total money available	449

*A study by Families USA demonstrated that private insurance premiums are increased by about $400/person per year as a result of providers (predominantly hospitals) obtaining higher reimbursements to offset the losses from Medicare, Medicaid, and the uninsured. Families USA, Hidden Tax

The cost to provide private insurance to all 45M uninsured (including children) was about $188B annually using the private insurance cost numbers from above. As you can see, there is about $449B available and currently being spent. If everyone had health insurance with a single payer at the current overhead of Medicare (1.5%), we would save about $449-$188 = $260B annually and everyone would have comprehensive health insurance. 

Seems like a good deal to me!

More to come.