Common sense in the drug pricing debate

High drug prices are largely blamed on the pharmaceutical companies, but before we can have a common sense debate we need to look at overall health care costs.  In 2013 the U.S. spent 17.1% of its total GDP on healthcare, 50% more than the second highest spending country, France (11.6%). In 2014, the U.S. spent $2.6 trillion (a 5.0% increase from 2013) on personal health care expenditures, in 2015 the U.S. spent $3.2 trillion, which is about 17.8%. Prescription drugs account for only $.10-$.12 of every healthcare dollar spent. Even if all prescription drugs were free our healthcare costs would still be increasing.

So why is healthcare in the US so expensive?

The real difference between the American health care system and systems abroad is pricing.  Specialists, nurses and primary care doctors all earn significantly more in the U.S. compared to other countries. General physicians in America made an average of $218,173 in 2016 which was double the average of generalists in the other countries, where pay ranged from $86,607 in Sweden to $154,126 in Germany.

Administrative costs, meanwhile, accounted for 8 percent of the GDP in the U.S. For the other countries, they ranged from 1 percent to 3 percent . Health care professionals in America also reported a higher level of “administrative burden.” A survey showed that a significant portion of doctors call the time they lose to issues surrounding insurance claims and reporting clinical data a major problem.

If we are to have an open and honest debate about healthcare costs, we also have to look at ourselves.  Americans’ own habits that are driving health care costs in the United States.

According to the CDC eighty-six percent of the nation’s $2.7 trillion annual health care expenditures are for people with chronic and mental health conditions. These costs can be reduced. The total estimated cost of diagnosed diabetes in 2012 was $245 billion, including $176 billion in direct medical costs and $69 billion in decreased productivity . Decreased productivity includes costs associated with people being absent from work, being less productive while at work, or not being able to work at all because of diabetes.

In addition:

Then there is the argument that PBM’s are costing us all a lot of money.  In 2015, Express Scripts, the largest PBM-only company in the U.S., reported a profit of more than $660 million, from sales exceeding $25 billion.

From their inception, PBMs were able to negotiate prices through both upfront discounts and rebates following sales. PBMs created formularies—lists of preferred drugs—and insisted on certain discounts off the manufacturer’s price of a medication in order to have it included on the formulary. PBM’s lack transparency and they wield a lot of power. The more powerful a PBM is, the greater discount they can demand—and the fact that three PBMs control the vast majority of the market makes these three companies very powerful.

PBMs make more money from paying closer to the list price and receiving a rebate rather than an upfront discount. The higher the price of the drug, the higher the PBM fee at the pharmacy. So they don’t have an incentive to drive upfront prices down as much as they can. They are taking fees based on the list price, but the net price that the PBM is paying for the drug is much lower than that because of rebates.

In addition, pharmaceutical companies now anticipate steep discounts and rebates when they set their list prices. As a result, they set list prices higher so that the eventual negotiated price will be as high as possible.  A PBM could also steer patients to lower co-pay drugs, even though the overall cost is higher because the PBM makes more money.

But doesn’t pharma need high prices for drug development and innovation?

According to HBR “it’s not unexpected that merging companies reduce their R&D spending following a merger. That may be due to the cost savings of pooling efforts and combining their labs. Research has shown that pharma mergers reduce innovation . But what’s suprising and troubling is that new evidence shows that the merging companies’ competitors also spend less on R&D after the merger. Hence, industry competition and innovation become less dynamic overall.

The debate on the development costs of new drugs is still vibrant.  Some suggest it could be as high as $2.5 billion and take 5-10 years, but we can’t ignore the fact that drug companies are investing in areas that produce the greatest return as well as taking a slice of the pie for new therapies. According to the Financial Times “the world’s 12 biggest drug companies are making a return of just 3.2 per cent on their research and development spending in 2017 — down from 10.1 per cent in 2010, according to Deloitte’s annual survey of pharma R&D investment”.

Pharma R&D Through 2022

Statistical modeling in clinical trials has the potential to lower R&D costs substantially and companies that are using modeling have reduced costs of drug development.  A revealing academic study shows, big pharmaceutical companies have spent more on share buybacks and dividends in a recent 10-year period than they did on research and development.

The paper’s five authors concluded that from 2006 through 2015, the 18 drug companies in the Standard & Poor’s 500 index spent a combined $516 billion on buybacks and dividends. This exceeded by 11 percent the companies’ research and development spending of $465 billion during these years. Two examples are Gilead Sciences, which spent $27 billion on buybacks versus $17 billion on research, and Biogen Idec, which repurchased $14.6 billion in stock and spent $13.8 billion on research and development.

The key cause of high drug prices, restricted access to medicines and stifled innovation, is a social disease called ‘maximizing shareholder value, ’” the study’s authors concluded. Indeed pharma CEO’s have made Wall Street their number one customer at the expense of patients.

So what’s the bottom line?

The joke within the pharma industry has been “how can we charge so much for this drug?” with the answer “because we can”.  It’s hard to generate sympathy for drug prices when insulin drug prices have gone up so much that there is a group on Twitter called Insulin For All with posts like these..

Is drug pricing is complicated, but at the root of it all is the motivation for profit and shareholder return. The bigger problem is that the costs of our healthcare are going to continue to go up and pharma CEO’s want their cut of this money.

Truths and fiction within the drug market

  • Drugs are more expensive in America than anywhere else.
  • The president’s plan, which he called the “most sweeping action in history to lower the price of prescription drugs”, lacks potency.
  • The price of drugs is based on what the market will bear.
  • The argument that  nine out of 10 big pharmaceutical companies spend more on marketing than on research is flawed as most of this marketing money is directed at the physicians who do the prescribing, rather than consumers and includes everything from medical journals to expenses for sales people.

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mHealth: The next Theranos?

  • The Journal of Medical Internet Research says “Although mHealth is growing in popularity, the evidence for efficacy is still limited,” wrote the study’s corresponding author, David Novillo-Ortiz, MLIS, MSc, PhD.
  • “More than 100,000 (health) applications are now available in the leading app stores, and the assortment is constantly growing,” says a BAEK study that was discussed at the congress. “But only a fraction of the programs are certified as medical products.”
  • John Torous, MD, a researcher and psychiatry resident at Harvard University, said “We have little evidence about the risks or benefits of smartphone use in clinical care,”
  • “The problem with these apps is they’re so new and novel; it’s probably going to be hard establishing a standard of care, or what a reasonable doctor would, and would not do when using these products,” says Nathan Cortez, a professor and associate dean for research at SMU Dedman School of Law.

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Branded drug makers made billions while blocking generics

  • Makers of brand-name drugs called out by the Trump administration for potentially stalling generic competition have hiked their prices by double-digit percentages since 2012 and cost Medicare and Medicaid nearly $12 billion in 2016, a Kaiser Health News analysis has found.
  • The analysis shows that drug companies that may have engaged in what FDA Commissioner Scott Gottlieb called “shenanigans” to delay the entrance of cheaper competitors onto the market have indeed raised prices and cost taxpayers more money over time.
  • A KHN analysis found that 47 of the drugs cost Medicare and Medicaid almost $12 billion in 2016.

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Theranos was putting people in harm’s way

  • Elizabeth demanded absolute loyalty from her employees and if she sensed that she no longer had it from someone, she could turn on them in a flash.
  • The staff turnover was like nothing ever experienced and the employees were troubled by what they saw as a culture of dishonesty at the company.
  • Lying is a disgusting habit, and it flows through the conversations here (Theranos) like it’s our own currency.

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What happened to the pharma industry?

  • There has been a transformation within the pharma industry during the last decade.
  • Although they say that patients are first their actions indicate that Wall Street is first.
  • It starts with CEO’s that are over compensated and brainwashing employees to believe their products benefit all of us.
  • Career “pharma employees” are hurting the industry while people who understand the challenges are being driven out of the industry.
  • Phony pharma awards don’t help acknowledge the problems of the industry.

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Theranos: Biggest failure of corporate governance in history

  • Elizabeth Holmes built her company Theranos on this invention she named the Edison. A miniaturized blood analyzer that would disrupt the $60 billion lab testing industry dominated by giants LabCorp and Quest Diagnostics.
  • By February 2015 the Theranos fairytale was about to unravel publicly.
  • John Carreyrou, the Wall Street Reporter who broke the story on Holmes and Thernos said “She (Homes) is a pathological liar. She wanted to be a– celebrated tech entrepreneur. She wanted to be rich and famous. And she wouldn’t let anything get in the way of that.
  • For the media, Elizabeth Holmes’ story proved irresistible: a bright young woman revolutionizing blood testing, in Silicon Valley no less. Fortune magazine put her on their cover. Forbes named her one of the richest self-made women in the world. Time selected her as one of its 100 Most Influential People.
  • To this date, most people in the media are not being held accountable for their part in building up Ms Holmes without asking tough questions.

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