Category: Economics

Saved by the professors?

published date
January 2nd, 2007 by

The Guardian reports triumphantly that Scientists find way to slash cost of drugs; Indian-backed approach could aid poor nations and cut NHS bills. There appears to be some merit in the plan for the specific drug program (it’s funded by the Wellcome Trust), but I wouldn’t bet on revolutionary results especially on a large scale. Here’s the basic idea:

  • Make improvements in the molecular structure of an existing, on-patent drug
  • Perform clinical trials in a low-cost location (in this case India)
  • Manufacture the drug in a low-cost location (India again)

According to the Guardian:

The process has the potential to undermine the monopoly of the big drug companies and bring cheaper drugs not only to poor countries but back to the UK…

Multinational drug companies put the cost of the research and development of a new drug at $800m (£408m). Professors Shaunak and Brocchini [the brains behind the operation] say the cost of theirs will be only a few million pounds…

Once the drugs have passed through clinical trials and have been licensed in India, the same data could be used to obtain a European licence so that they could be sold to the NHS as well.

“The pharmaceutical industry has convinced us that we have to spend billions of pounds to invent each drug,” [Shaunak] said. “We have spent a few millions. Yes, it will be a threat to the monopoly that there is.”

An earlier, similarly boastful press release contains hints of the problems this approach is likely to have:

The research team have invented a cost-effective technology which lets them open up the interferon protein, drop in a sugar molecule called PEG and close the protein. The PEGylated-interferon retains its shape and leads to the cure of Hepatitis C infection in many patients. Clinical trials will start in India next year.

Here are some challenges I see:

  • The professors aren’t exactly the first to tweak existing drugs. That’s how companies like Sepracor make their living and it’s one way “me-too” drugs are introduced within a class. Maybe the professors have a technological breakthrough on their hands. If so, can they repeat it for other drugs? On the other hand, will they be sued successfully for patent infringement if the improvement isn’t significant enough?
  • It’s a sign of overconfidence to say the drug “leads to the cure… in many patients” in one sentence and then “clinical trials will start… next year” in the next. Large-scale trials don’t tend to go as smoothly as the professors assume. There’s a good chance the drug will fail or that results will be inconclusive.
  • The $800 million number can’t really be compared with the “few million pounds” the professors cite. First, the $800 million is exaggerated. Second, it includes the cost of failed drugs (i.e., most drugs). Third, it includes all costs of R&D, which it doesn’t seem the professors include.
  • Clinical trials are already often performed in low-cost locations such as India. Why will the clinical trials for this drug be cheaper than if a big pharma or CRO ran them? Will the trials be smaller? Will they be less rigorous? Will they somehow be done more efficiently? Will the Indian government bury the true cost?
  • Drugs are also manufactured in low-cost locations such as India. Will the company the professors are partnering with offer its services at a lower rate than it offers commercial players? Will the manufacturing process be up to European standards?
  • In general, is it worthwhile to begin making tweaks to products once they are already on the market? For traditional drugs, development of generics will be cheaper because clinical trials aren’t needed. High biotech costs can be addressed by improved price regulation even if generics aren’t practical.

I wish this drug well but I don’t think it will change the industry.

Cracking down on abusive medical debt collection practices

published date
December 18th, 2006 by

Thank goodness for the Boston Globe. The four-part series on Debtors’ Hell that ran over the summer highlighted the abusive nature of the debt collection business. Now, at least some Massachusetts counties are responding.

The headlines from the summer series more or less tell you what you need to know:

  • Part 1: Preying on Red-Ink America. No mercy for consumers
  • Part 2: A Court System Compromised. Dignity faces a steamroller
  • Part 3: Enforcers’ might goes unchecked
  • Part 4: National Crisis, Official Silence. Regulators, policy makers seldom intervene

One of the articles in part four, For some, a bitter remedy for overdue medical dental bills, described the following, all-too-common situation:

When Marcy Armington objected to her obstetrician’s bill, believing her health insurance should cover the $300 balance due for the birth of her daughter, she had no idea that such a common dispute would leave her vulnerable to the ”The Hubbard Law Office Experience.”

That would be attorney Richard R. Hubbard of Uxbridge. Hubbard sued Armington on behalf of Dr. Thomas A. Spina of Hopedale – though the suit listed the wrong address, so she knew nothing about it. Last March, two Worcester County sheriff’s deputies came to her Milford home to take her car. To keep it, Armington had to pay $983, to cover the $383 court judgment and the $600 sheriff’s fee.

Debt collection is a very sleazy business to begin with as the series describes—

Constables…carry badges and have arrest powers — yet are untrained and unmonitored. [M]any do the dirty work of property seizure for some of the most aggressive debt collectors in the state… In Boston, 88 of the 186 constables have criminal arrest records of one kind or another…

–so I’m not surprised that debt collectors would try these tactics. But what’s appalling to me is that unpaid, contested medical bills are considered legitimate debt and that sheriffs so willingly participate. Anyone in the medical field knows bills are often just plain wrong and almost always hard to understand.

There’s still nothing like front-page exposure in a big city newspaper to effect change. The Globe reported today that sheriffs in three large counties are no longer seizing cars to repay medical and dental expenses, nor when the amounts owed are less than $1500. Those changes have been enough to drop seizures by half, which tells you something about how common these cases are.

As previously reported, medical bills are a major contributor to bankruptcy filings. Even people with health insurance can end up in BK if they encounter a serious, prolonged illness. One reason is that medical care is expensive. Another is that administrative errors, bureaucratic indifference, and aggressive “debt” collection are enough to drive people over the edge.

In health care, the rich and powerful really aren’t insulated

published date
December 7th, 2006 by

In health care, the rich and powerful really aren’t insulated

Princeton economist Uwe Reinhardt wrote a letter to the Wall St. Journal last week, tweaking the Journal for espousing market forces in health care in the form of high-deductible plans. After all, writes Reinhardt, corporate executives often receive generous, lifetime health insurance and are even reimbursed for out-of-pocket expenses. Shouldn’t they have “skin in the game,” too?

Today the Journal published a thought-provoking response by Matthew Huggins:

Perhaps the… isolation from the market… makes [corporate executives] ill-suited to oversee the wholesale purchase of health-care services for others. [I]nstead of stripping executives of their… coverage, as Prof. Reinhardt wryly suggests, in furtherance of sounder markets, why not strip them of their predominant role in purchasing health-care services? Reassign such purchasing decisions to individual patients by dismantling the regulations and tax incentives that tend greatly to enhance the relative purchasing power of large employers and governmental bodies.

Another letter by Brian Acker pointed out that we don’t advocate equality in other sectors, so we shouldn’t worry about inequality in health care benefits either.

Actually, there is more equality in access to health care services than there is for most other things. For example, think about disparities in transportation from Boston to Washington:

  • Lots of people don’t have enough money to go. They stay home.
  • Others take the bus
  • Some drive –in cars of various levels of comfort
  • Some fly coach
  • Others fly first class
  • Some (like the executives we talked about earlier) go by private jet

Now think about what happens to someone who needs to go to the hospital in Boston

  • Anyone can go to a top hospital like the Brigham and Women’s or Mass General and be treated pretty much the same. You might get hassled by accounting if you don’t have insurance, but the doctors and nurses don’t tend to give you a hard time based on your economic status
  • If you’re someone special (e.g., a big donor) you might find yourself on a VIP floor at Mass General (though it’s unlikely elsewhere). The room’s not that much better, though, and you probably won’t receive better care. And I’ll go out on a limb and say your chance of having something go wrong due to medical “error” is not much affected by being up there. Maybe you can get access to better or more prominent physicians, but not necessarily. And anyway, do you really know how good or bad they are?

Overall, the rich and powerful are highly constrained in their ability to get exceptional service and quality in health care compared to other spheres in their lives. That’s one reason that corporate executives are interested in improving the quality quality and service levels of the US health care system. They are not insulated from commoners in health care the way they are everywhere else. Unlike Huggins, I wouldn’t take health care purchasing out of their hands just yet.

Location, location, location or Price solves everything?

published date
November 17th, 2006 by

Location, location, location or Price solves everything?

In $4 drug program imitated, criticized, the Boston Globe quotes experts downplaying the impact of Wal-Mart’s program to offer $4 generic drugs. To summarize the arguments:

  • It doesn’t include brand name drugs
  • It doesn’t include most generics
  • It won’t help people who have insurance
  • And this one from Harvard Business School Professor Regina Herzlinger, “Location, location, location. The footprint of Wal-Mart is nowhere near as large as the drugstores.”

But as I’ve argued before, it doesn’t make sense to look at Wal-Mart’s move so narrowly.

  • By making people realize that powerful prescription drugs can be had at OTC prices, Wal-Mart will make it easier for people to forego prescription coverage. Why should routine expenses be covered by insurance anyway? It’s expensive and cumbersome to administer and dulls consumers’ shopping instincts. Do people with insurance really want to pay more just for their co-pay than the Wal-Mart cash price? I doubt it. Rather than being irrelevant for people with insurance, the program makes individuals (and employers) realize that a traditional pharmacy benefit isn’t indispensable
  • The program covers a relatively small number of drugs, but even the current list isn’t insignificant. Even if the list doesn’t expand, doctors will start writing prescriptions for those medications because patients will ask them to do so. But I think the most likely path is for the low-cost drug list to expand, even if not everything ends up priced at $4
  • Brand name medications have the most to lose. What would accelerate the erosion of branded statin Lipitor faster than really cheap generic statins? The value of newer, branded drugs over generics often isn’t as high as the current price ratio would suggest. Making that ratio even more dramatic by reducing the price of generics is going to make life tough on the branded players

Reggie Herzlinger plucked the “Location, location, location” saying from the real estate industry. But there’s another, even more powerful concept from real estate: “Price solves everything.”

I think Wal-Mart knows exactly what it’s doing.

Testing, testing, 1, 2, 3

published date
November 14th, 2006 by

Testing, testing, 1, 2, 3

From the Wall Street Journal:

Worried that unnecessary diagnostic tests are adding to the nation’s soaring medical costs, federal health-care officials are moving to shrink loopholes that let doctors profit from referring patients for MRI scans and other costly medical tests.
Medical imaging is one of Medicare’s fastest-growing costs, rising an average of 20% a year since 1999. In 2005, the federal health-insurance program for the elderly paid $7 billion for imaging scans. Some studies have shown that doctors with a financial interest in big-ticket machines for magnetic resonance imaging or other tests are more likely to order those tests.

It is not surprising that doctors will order more tests if they profit from testing. However, even if doctors get no profits from tests a huge problem remains – doctors are ordering tests using “other people’s money” and have little incentive to economize. Spending due to tests being seen as costless is likely to be much greater than spending due to doctors profiting from testing.

This is not a simple problem to solve, but financial incentives to patients and medical professionals to save money by economizing on tests will get doctors to spend more time thinking and looking things up and less money testing.

Non-financial initiatives can work as well, such as educating patients about the dangers of radiation exposure from too many CTs and about the harm that can result when a false positive on an unneeded blood test is followed up with increasingly invasive tests.