July 2012 Archives


That would be news to the companies involved, when criminal prosecution by the DOJ is effectively a corporate death sentence.

Still, a National Journal article on GSK's recent settlement with the Justice Department reads like it was written by Public Citizen (and in fact quotes them prominently). As a result the article is disturbingly one-sided on how companies negotiate with the federal government over allegations of wrong doing, particularly for off-label promotions.

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We've addressed this issue before, including here, here, and here.

National Journal writes that,

In the world of pharmaceuticals, billion dollar profits aren't unusual. Now billion dollar settlements are becoming more common, often because the manufacturers push doctors to prescribe drugs for uses the Food and Drug Administration hasn't blessed. ...

In addition to paying big fines, pharmaceutical companies that settle with the feds often sign agreements to stop illegal practices. But business opportunities keep luring them to violate the law. GlaxoSmithKline generated about $43 billion in revenue in 2011, according to its annual report, for a profit of $12 billion. That $3 billion charge wasn't peanuts, but it was a tolerable loss. Which may explain why, even though the company signed a seven-year "corporate integrity agreement" in
2003, some offenses occurred while it was still on probation. ...

The government is aware of the problem. "Providers that engage in health care fraud may consider civil penalties and criminal fines a cost of doing business," Lewis Morris, chief counsel in the Health and Human Services Department's inspector general's office, told Congress last year. "As long as the profit from fraud outweighs those costs, abusive corporate behavior is likely to continue." But there's only so much regulatory officials can do. After all, the drugmakers provide patients with lifesaving lifesaving medicines, so officials can't exactly toss
them out of Medicare and Medicaid.

The article goes on to quote Sidney Wolfe, from Public Citizen, to the effect that current law doesn't give prosecutors any "credible threat of harm to corporation's bottom line," and that even stiffer legislation is required, by way of barring any healthcare executives convicted of wrongdoing from ever working with the government (Medicare and Medicaid) ever again.

The article never tells you that, in fact, companies convicted of illegal marketing practices can be banned ("debarred") from doing business with the government - an effective death sentence for pharmaceutical manufacturers, since a large part of their revenues comes from public programs like Medicare and Medicaid. This is exactly the cudgel that the DOJ uses to negotiate expensive and burdensome multibillion dollar settlements and compliance agreements from companies.

Indeed, none of these cases go to court for that very reason, even when companies could litigate the factual issues at stake. Granted, DOJ would much prefer not to kick any company out of Medicare or Medicaid, but to say that they have no credible leverage in their negotiations with companies - or that companies simply shrug these settlements off as a cost of doing business - is ludicrous.

My colleague Jim Copland explained the enormous power the federal government wields in these types of suits in a recent paper:

Many businesses can ill afford to fight a criminal investigation: criminal inquiries place significant pressure on stock prices and can impair companies' ability to obtain credit, and businesses in some industries can be debarred from government contracting or denied government licenses upon an indictment or conviction. Precisely because companies cannot afford to face trial and because DPAs and NPAs enable prosecutors to punish perceived corporate wrongdoing without going to trial or facing the specter of an Andersen-like collapse, these tools have become increasingly commonplace. ...

In the process, the Justice Department has emerged as a shadow business regulator. Since 2005, federal prosecutors have entered into 20 or more such agreements annually, with a peak of 41 in 2007 and 40 in 2010. Financial and health-care companies are particularly sensitive to government licensing and contracting. ...

Fines and penalties levied under federal DPAs and NPAs have exceeded $3 billion in each of the last three years. Moreover, in reaching and enforcing these agreements, prosecutors have had sometimes sweeping impacts on business practices...

The process whereby federal prosecutors enter into DPAs and NPAs lacks transparency and judicial oversight, and the broad sweep of these arrangements imposes a little-appreciated regulatory burden with real economic impact.

There are also important First Amendment claims implicated in the FDA's prohibition on off-label prescribing. While it is clear that we do not want companies to peddle snake oil as cancer cures, companies should have the ability to communicate scientifically valid, truthful information about off-label uses to physicians, who are, after all, learned intermediaries who can make their own judgments about the validity of that information. (And who prescribe medicines off-label all the time anyway.)

The state of affairs today is that a physician can prescribe an FDA approved drug for any use they want - but companies are very restricted in when and how they can communicate with physicians about those off-label uses. As a result, off-label communications is a mine field for companies who might otherwise believe they are compliant with FDA guidance.

At least one settlement has actually required a company to cease litigating any First Amendment issues that might have offered additional legal protections for companies. In its settlement with the drug company Allergan, the DOJ explicitly required them to drop First Amendment claims that their communications to physicians were protected First Amendment speech. For an in depth examination of the issues involved, see this article from the Drug and Device Law Blog from 2009.

One of the few cases on off-label promotion that is being litigated now is United States v. Caronia, where the FDA is prosecuting a drug rep for communicating truthful off-label use information to a physician as a result of a direct question from that physician. Ironically, the off-label use of the drug in question was actually approved by the FDA very shortly after this communication took place.

In short, the issues involved in these cases are much more complex (and less Manichean) than National Journal would have you believe.

If the DOJ thinks that debarment is a double-edged sword, because they can't really kick companies out of federal programs, they can seek more nuanced tools that would retain debarment only for the most serious infractions. That, in fact, would be a far better approach.

Of course, a more nuanced approach would also give less leverage to the DOJ to press for sweeping deferred prosecution agreements, and encourage companies to fight out the legal issues in court when they thought they might have a good chance of winning on the merits.

In our view that would be a good thing - particularly for the First Amendment and public health issues involved - because the courthouse shouldn't be closed to anyone, even if the person in question is a corporation.


The Wall Street Journal recently ran a detailed (and disturbing) story on how fake Avastin from Turkey wound up being injected into cancer patients in U.S. doctor's offices.

It all started in Canada, when a Canadian pharmacist and businessman realized he could make enormous profits selling price-controlled Canadian drugs to Americans by circumventing the U.S. supply chain.

Let's be frank: branded drug prices are more expensive in the U.S. because, unlike most of its wealthy competitors, the U.S. doesn't impose price controls on pharmaceuticals. This allows innovation to flourish in the U.S. and also means that U.S. patients typically get faster access to new medicines.

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Encouraging drug innovation has benefits both for patients and the economy. The breakdown occurs not in drug prices, but in the insurance system. Uninsured Americans, and (until 2003) some seniors in Medicare lacked insurance or drug coverage, potentially exposing them to high drug costs in the event of a serious illness. But the solution here is to improve the insurance system, not impose price controls on new medicines.

Still, the gap between U.S. and international prices allows some companies - in this case, Canada Drugs, run by Kris Thorkelson - to open internet portals that sell to Americans looking for a quick discount.

This is a violation of U.S. law, but the FDA only enforces the ban on large scale importation of drugs - not on individuals, who may purchase small quantities of drugs online, or dash across the border into Mexico or Canada. In those cases: caveat emptor, let the buyer beware.

Of course, because Canada isn't big enough to supply the U.S. market, Canadian middlemen have to look further and further abroad to find cheaper drugs, along the way creating a complicated web of middlemen to transport and repackage drugs for American consumers.

This is a recipe for fake or counterfeit drugs infiltrating the U.S. drug supply. And this is exactly what happened in the case of the fake Avastin.

One distressing line in the Journal article was the following:

The incident was alarming because the fakes were billed as lifesaving drugs often prescribed to patients with hard-to-fight cancer. Previous counterfeiting incidents have involved fake pills such as those for cholesterol and erectile dysfunction.

This makes it sounds like counterfeiting drugs other than cancer medicines is a victimless crime. Clearly, this isn't true. Poorly controlled cholesterol can lead to heart attacks. Deaths from heart attacks due to fake statins are equally real, even if they may be harder to detect.

One other issue goes unmentioned. The U.S. should do a much better job of protecting the intellectual property rights of domestic pharmaceutical companies selling their products abroad. Inflicting price controls on pharmaceuticals is no less anticompetitive than if it was done on American made cars or computers.

Companies should charge different prices to different buyers, based on wealth. This allows manufacturers to sell drugs at lower prices in poorer countries, and higher prices in wealthier countries. But when wealthy European countries impose price controls on medicines they blunt incentives for innovation, reducing the number of medicines that will be available in the future for wealthy and poor nations alike.

And insofar as wealthy nations "reference price" new products to the prices of drugs sold in poorer countries, they create powerful incentives for companies to delay launching new products in those countries - the exact opposite of what we should be trying to acheive.

Former FDA Commissioner Mark McClellan put it best in 2003, when he said that:

If we do not find better ways to share the burden of developing new drugs and biologics, all of us will suffer. The benefits of these treatments are global, and so if we think only of the short-term interest of our own country, we all lose the opportunity for a healthier world. The heart of the problem is that we are not all paying our fair share of the costs of bringing new treatments to the world. And the problem is getting worse. . . . The United States is now covering most of these costs of developing a new drug to the point where it can be used by the population of the world.

The U.S. should use international trade negotiations to defend intellectual property rights, and demand that our wealthy trading partners pay their fair share of the costs of developing new medicines.

American patients and insurers shouldn't be asked to bear that burden alone, when the benefits are global.


MPT Contributor Avik Roy published an article on his Forbes blog yesterday that takes up an interesting question that has largely been left out of the national debate surrounding Obamacare--what will the law's proposed Medicaid expansion mean for doctors treating Medicaid patients?

This question deserves more attention than it receives, as Medicaid's chronic underpayment of physicians doesn't just hurt doctors. It also severely undermines the health outcomes of patients who rely on Medicaid for access to health care. Nobody can deny that Medicaid fails to adequately pay doctors for their services: in 2008, the CMS reported that Medicaid reimbursed doctors at just 58% of what they would normally receive from private insurance for comparable services. As a result, nearly one-third of American doctors do not accept Medicaid patients at all, leading to delayed access to care and significantly worse health outcomes for many complex chronic diseases like cancer or cardiovascular disease.

Still, Medicaid is an incredibly expensive proposition for many states, even with the federal government (on average) picking up close to two-thirds of the program's cost (57 percent). States that have rapidly expanded Medicaid coverage and services generally have few tools with which to restrain spending - except for squeezing payment rates to doctors.

And this is exactly what they have done. Roy's article compares states that have stringent eligibility requirements for Medicaid to states that offer Medicaid to their citizens more liberally. The results are ironic, but predictable:

"What's notable is that, of the ten Medicaid states (including D.C.) that pay doctors the least, relative to private insurers, nine are reliably blue: New York (29 percent), Rhode Island (29%), New Jersey (32%), California (38%), D.C. (38%), Maine (42%), Florida (44%), Illinois (46%), Minnesota (46%), and Michigan (47%).

By contrast, of the ten states that pay doctors the most, nine usually vote red: Alaska (113%), Wyoming (94%), Idaho (82%), North Dakota (81%), Delaware (80%), Oklahoma (80%), New Mexico (79%), Arizona (78%), Montana (77%), and North Carolina (76%).

The point of this analysis isn't partisan. Some blue states, like Delaware, pay doctors reasonably well, and some red states, like Texas, don't. But there is a rough correlation of states with extensive Medicaid programs to those with poor physician reimbursement."

The upshot here is that there is no free lunch. Generous Medicaid coverage is a way of claiming political credit for expanding Medicaid access. Stingy physician reimbursements are a subtle way of controlling spending on low-income populations that voters (most of whom aren't on Medicaid) are unaware of. But low reimbursements have real (and negative) health consequences.

As Roy notes, Obamacare temporarily bumps Medicaid reimbursement rates to Medicare levels (roughly 80% of private insurance), but that bump only lasts for two years. What happens beyond that is far from certain, but given the dire fiscal straits of the federal government, it's fair to expect that states will be left holding the bag one way or another.

If Medicaid's reimbursement rates hold to trend - and Obamacare is fully implemented in 2014 - we can expect even more access problems to crop up in states that embrace Obamacare's Medicaid expansion, especially after the federal increase ends in two years. The tragic result will be that an increasingly large share of doctors will either cap the number of Medicaid patients they see or will refuse to accept Medicaid patients altogether, making it even harder for the poor to find adequate health care.


If there is one medical area where drug development has been hampered by extreme caution, it is obesity. Despite the "epidemic" of obesity and its associated type II diabetes we hear so much about, new weight loss candidates have been handled by pharmaceutical companies and the FDA as if they were Kryptonite.

This is clearly due to the fallout from the fen-phen debacle of 1997, when Wyeth was forced to withdraw the two-drug combination pill called Redux because of serious side effects--heart valve damage and, in rare cases, a fatal lung condition called primary pulmonary hypertension. In addition to the people who suffered or died from these side effects, the withdrawal of Redux was a major blow to patients struggling to control their weight, since it was pretty much the only effective weight loss drug available at that time. Even after the withdrawal was announced, some people desperately tried to buy the remaining inventory, since it was the only drug that ever worked for them.

The unfortunate legacy of Redux was a visceral association between diet drugs in general and heart problems. This resulted in extreme caution in the field, and is a major factor behind the 13-year interval between the withdrawal of Redux and the recent approval of two new weight loss drugs, Belviq (lorcaserin) and Qsymia (formerly called Qnexa).

Although the two new drugs both have frightening warning labels, there is no scientific reason to expect that either should have the same side effect profile or risks associated with Redux. This is due to differences in the chemical structures between both drugs.

Fen-phen was an abbreviation for fenfluramine, a stimulant and phentermine, an appetite suppressant, which has been used for more than forty years. All of the adverse effects of Redux were attributed to the "fen" component. And it wasn't actually the fenfluramine itself that was the problem-- it was the major metabolite, norfenfluramine, which is formed by breakdown of the parent drug in the liver.

Norfenfluramine then binds to a subtype of serotonin receptors in the heart, causing an over-proliferation of cells in cardiac valves which leads to fibrosis and subsequent valve damage. Phentermine cannot form norfenfluramine and has not been implicated in the cardiotoxicity from Redux.

Therefore, Qsymia, which contains phentermine and another drug, topimerate (an anti-seizure medication), in place of fenfluramine should be no more likely to cause heart damage than any other new drug.

Yet this did not stop the anti-drug group Public Citizen, formed in 1971 by Ralph Nader, from using their now-familiar scare tactics.

Spokesman and perennial drug-hater Dr. Sidney Wolfe declared it to be "magical and delusional thinking for anyone to believe that a drug will turn off hunger without hitting other targets where it will do harm, usually to the cardiovascular system."

Well, I may be delusional, but I disagree. There is no reason that an appetite suppressant should necessarily cause cardiac toxicity. The problems caused by Redux were caused by a specific metabolism of the fenfluramine component--not the fact that it happened to affect one's appetite. The linking of these two phenomena is scientifically illogical.

As with any drug, Qsymia will have side effects in some people. But to focus simply on the risk without considering its benefit is the typical scare-mongering technique of anti-pharmaceutical activists.

Obesity is a serious problem, with its own long list of serious health effects. To dismiss any new pharmacological therapy because of problems with past drugs is foolish and does a disservice to the millions of people in this country who are struggling with serious weight problems.


Whooping cough is a dangeous and potentially fatal (for infants) bacterial disease that is also highly contagious. It is also highly preventable, provided that children are actually vaccinated against it. More on that in a moment.

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The CDC reports that the U.S. is on course for its worst whooping cough epidemic in fifty years, with 18,000 confirmed cases to date.

There is a lot of this out there, and there may be more coming to a place near you," Dr. Anne Schuchat of the Centers for Disease Control and Prevention said Thursday.

Wisconsin and Washington state each have reported more than 3,000 cases, and high numbers have been seen in a number of other states, including New York, Minnesota, Kansas and Arizona. ...

In rare cases it can be fatal, and nine children have died so far this year.

The CDC reports that, for instance, Washington State has had a 1,300 percent increase compared to the same period last year, and the most cases since - wait for it - 1942.

Why the sudden resurgence in whooping cough? In the late 1990s, concerns over the safety of one version of the pertussis vaccine called "whole cellular" (made with the entire killed pertussis bacteria) led to a replacement with an "acellular" vaccine (which contains several antigens from the bacteria, but not the whole cell). The CDC speculates that the earlier vaccine may have produced a longer lasting immune response than the acellular vaccine:

Since the mid-2000s, the incidence of pertussis among children aged 7-10 years has increased. Moreover, the observed increase in risk by year of life from age 7-10 years suggests a cohort effect of increasing susceptibility as those children who exclusively received acellular vaccines continue to age.

Another factor is undoubtedly the increased reluctance of some parents to have their children vaccinated because of widespread (but entirely debunked) links between vaccines and neurological conditions like autism. Still, anti-vaccine proponents have secured widespread philosophic (as opposed to medical) exemptions from mandatory school vaccinations.

To date, twenty states offer philosophical or personal exemptions from vaccinations. The Mount Vernon News notes that "of the nine states reporting over 200 [pertussis] cases, six of them offer the exemption and together have reported 50 percent of the current cases."

One of those exemption states - with seven times the national incidence of whooping cough - is Washington State.


The U.S. Court of Appeals for the Third Circuit handed down a decision on Monday holding that reverse payment - or so-called "pay to delay" - patent settlement agreements between innovator and generic drug manufacturers may constitute antitrust violations. (The New York Times and Pharmalot offer their views at the links.) That decision sets up a Circuit split that now seems ripe for Supreme Court review, as the Federal Circuit, Second Circuit, and Eleventh Circuit appeals courts have previously ruled that, in most cases, these settlement agreements are not anticompetitive.

To review, current law provides incentives for generic producers to challenge potentially weak drug patents in court. But when faced with the uncertainty of patent litigation, brand manufacturers sometimes offer to settle the lawsuits by paying the challengers to drop the litigation. The patents remain in place that way. But as part of the settlements, the brand manufacturers usually agree to let the generics on the market a few years before the patents in question expire.

The Third Circuit case involves the use of a patented extended-release formula for coating otherwise unpatented potassium chloride drugs. In 1995, two different generic manufacturers (Upsher-Smith Laboratories and ESI Lederle) submitted generic approval applications with the FDA claiming that their formulations did not infringe the patent held by Schering-Plough. Schering sued, alleging that the generic products did in fact infringe. And shortly before the federal district court was set to issue an opinion, the parties settled. Schering paid Upsher $60 million for various things, including an agreement to drop the suit, and it paid ESI Lederle $15 million.

The Federal Trade Commission hates these deals (see here and here) and calls them anti-competitive because successful patent challenges would get generics to market sooner still. That assumes, however, that all or even most such challenges would succeed, a point I address below. Since 2003, federal law has required that any such settlement must be reported to the FTC for antitrust review. And the agency has challenged dozens of these cases in court, almost invariably losing.

In an interesting turn of events, both the FTC and several private plaintiffs (mostly drug wholesalers and retailers) filed separate antitrust challenges to the same Schering-Upsher and Schering-ESI settlements, alleging the identical violations. The FTC case was brought in the Eleventh Circuit; the private plaintiffs filed in the Third Circuit. The Eleventh Circuit ruled in 2005 that the agreement was not anticompetitive, and the Supreme Court refused the FTC's request to hear an appeal (In 2011, the high court also refused to hear an FTC appeal from a loss in a different case.). But organizing the class action in the Third Circuit took a bit longer, so that court has only now issued its opinion.

In the FTC's view, the mere fact that a brand manufacturer paid a generic company to drop litigation should be viewed as evidence that the patent was probably invalid. And the Third Circuit seems to have bought that argument hook, line, and sinker. The court cites two studies (one conducted by the FTC) finding that generic manufacturers prevail in over 70 percent of these patent challenges.

Both conclusions have serious problems, though. For example, the FTC figure combines many dissimilar cases, and the methodology for calculating the figure is never revealed. The second study, conducted by RBC Capital Markets, concluded that generics win 76 percent of cases "when you take into account patent settlements and cases that were dropped". That, of course, presumes the truth of the matter in question: that the generic would have won if there was no settlement. When you count only the cases examined in the RBC study that actually resulted in a court decision, the generic challengers lost a bit over half of the time. And in a slightly older study published in the Michigan Law Review, the generic won only 42 percent of cases.

Thus, prior to reaching a settlement, it is not at all clear whether the patent holder or the generic challenger would prevail. That's why, in six cases decided by the Federal Circuit (here), Second Circuit (here and here), and Eleventh Circuit (here, here and here) Courts of Appeals, federal judges concluded that "a court must judge the antitrust implications of a reverse payment settlement as of the time that the settlement was executed," to quote the Eleventh Circuit in a decision handed down in April of this year.

The mere fact that a patent granted by the U.S. Patent Office might actually be invalid does not mean that a brand manufacturer's decision to settle should be seen, ipso facto, as anticompetitive. Indeed, the Supreme Court long ago held that, even though the PTO does err on occasion, and many granted patents are later found to be invalid or far narrower than their holders imagine, patent holders are entitled to presume that their patents are valid until a court finds otherwise. Thus, federal courts have repeatedly concluded that reverse payment agreements should not automatically be suspect, but are only illegal in certain circumstances.

What's more, as U.S. Seventh Circuit Judge Richard Posner wrote in a 2003 district court decision (it's a long story why a circuit judge was hearing a district court case), these settlement should often be seen as PRO-competitive, not anticompetitive, because the patent holder generally agrees to let the generic product come to market several years before the patent would expire. (In the Schering case, the agreements gave permission for the generic drugs to be sold a full five years before the patent expiration.) In that regard, given what is known at the time of the settlement, these agreements actually tend to accelerate the introduction of generics, not delay them.

Moreover, Posner wrote that U.S. courts, including the Supreme Court, have long believed that out-of-court settlements are an appropriate way for parties to resolve litigation, and "a ban on reverse-payment settlements would reduce the incentive to challenge patents by reducing the challenger's settlement options." He therefore argued that it was the proposed ban on settlements, not the settlements themselves, "that might well be thought anticompetitive."

The Third Circuit Court of Appeals rejected all of these arguments, and it agreed with the FTC and the private plaintiffs that an issued patent should not be entitled to a presumption of validity. Curiously, though, the Third Circuit also argued that it should not matter whether the patent in question was valid or not. All that mattered was the fact that the patent holder paid a challenger to postpone manufacturing a drug (regardless of whether the patent holder did or did not have the legal right to use the patent to do exactly that).

Decisions of various Circuit Courts are not binding on other Circuits, but they are seen as persuasive authority. So, in order to explain away the prior decisions by the Second, Eleventh, and Federal Circuits, the Third Circuit trotted out two decisions from the D.C. Circuit Court of Appeals in which that court held that settlements in which the generic agreed to postpone commercialization were found anticompetitive. But in those cases, the settlements did not resolve the underlying patent disputes, making them entirely unlike the case in question.

In the end, the Third Circuit's decision in this case is a house of cards built on faulty assumptions, circular logic, and inappropriate analogues. The only bright spot is the fact that, by establishing a circuit split (a condition in which two or more Circuit Courts of Appeals have adopted contradictory rules), the Supreme Court may well finally agree to take an appeal in order to settle the matter once and for all.

Given the overwhelming weight of evidence that these settlements are not typically anticompetitive, and the fact that nearly every Circuit Court of Appeals to hear such cases has found them to be lawful in most circumstances, one would expect the Supreme Court to validate the practice. That surely will not end the FTC's vendetta against reverse payment settlements. But it may well put an end to much costly and unnecessary litigation.


Scott Gottlieb had a great piece in RealClearMarkets yesterday explaining how Obamacare is strangling the market for innovation in health care delivery through the two C's: capitation and consolidation. Gottlieb writes that

Today, most patients needing long-term dialysis no longer get it in hospitals but go to less costly, more convenient outpatient clinics. Routine problems like hernias are fixed in outpatient surgery offices; while complex issues like cancer are handled in specialized centers with expertise to better manage these problems, at lower cost.

These and other innovations in delivering medical care, from the advent of outpatient rehabilitation to creation of the first HMO, were pioneered in the last few decades through a common origin: they were incubated in start-ups that were headed by entrepreneurs and backed by venture capital. ...

...Obamacare dictates fixed caps on margins earned by health insurers (their medical loss ratios) and arbitrarily cuts the payment rates of broad swaths of providers. The law empowers an insular agency (the Independent Payment Advisory Board) to survey the profitability of industry segments like nursing homes and hospice providers, and sand down payment schedules when any one of these provider groups enjoys profit margins that exceed some arbitrary norm.

The result is that bold new ideas aren't getting started. Most of the endeavors formed in recent years are pursuing small concepts, such as fashionable plays on healthcare information technology. Venture capital flows into starting new healthcare services ventures have dropped sharply, from $1.2 billion in 2010 to $541 million in 2011 according to data from Dow Jones Venture Source and the National Venture Capital Association. Only about 30 venture-stage healthcare services companies got funded last year, compared to hundreds in previous years. Investments in new, facility-based healthcare start-ups have virtually ended.

President Obama is betting that hospitals, reconfigured as Accountable Care Organizations (ACOs) that absorb independent physician practices (doctors then become salaried employees) will be better able to control costs.

This is very debatable. After all, these new ACOs will also have enormous market power to bargain with government, and few incentives to drive truly disruptive innovations that might make hospitals' enormous investments in fixed capital obsolete.

It also turns healthcare even further away from how innovation works in consumer led markets, centralizing more power with CMS and boards like Obamacare's new Independent Payment Advisory Board.

The government, naturally, prefers to deal with a handful of very large players - this makes it is easier to regulate and negotiate with the industry. On the other hand, dependence on a handful of big players also makes it easier for entrenched interests to capture regulators and build barriers to entry against more nimble competitors. And argue for more health care subsidies to support their existing cost structures.

For more on how consolidation affects hospital costs, see my colleague Avik Roy.

The solution isn't to consolidate more power among providers, but to distribute more power to consumers - who can then reward the firms that are best able to offer truly disruptive innovations.

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On Tuesday the FDA approved Vivus' weight loss drug Qsymia (formerly called Qnexa). This is wonderful news and it will no doubt benefit many American patients. However, let's be clear on what really happened.

The Qsymia family consists of four fixed-dose combinations of immediate-release phentermine hydrochloride and extended-release topiramate. Phentermine hydrochloride has been on the market since the early 1970's and Topamax (topiramate) was approved in 1996. Some physicians have been prescribing a combination of phentermine and topiramate off-label for years, although the doses are probably different that those of Qsymia.

While I am excited and encouraged that the FDA approved Qsymia, what it really did was simply allow Vivus to promote Qsymia, which is a combination of two existing drugs. Let's use an analogy to make this clear.

Imagine that phentermine is chocolate and topiramate is peanut butter and the FDA had previously approved chocolate for consumption alone or in combination with red wine. The FDA also approved peanut butter on crackers and in combination with jelly and bread in PB&J sandwiches. Someone comes along and discovers that chocolate and peanut butter are delicious together. Because both foods have been approved, anyone can mix and eat the two together, although they might botch the proportions or get the serving size wrong.

Along comes Reece's which wants to manufacture and sell peanut butter cups. In our analogy, Reece's can manufacture all the peanut butter cups it wants, but it can't promote them without approval, meaning it shouldn't plan on manufacturing a lot.

To summarize, individual consumers can make their own homebrew Qsymia (peanut butter cups). Physicians can prescribe and therefore promote homebrew Qsymia (peanut butter cups). But without the FDA's explicit approval, Vivus cannot market Qsymia (peanut butter cups). What would we think if Reese's had to run the FDA's approval gauntlet to market peanut butter cups?

Oh, but you say, Qsymia might be harmful to some patients while peanut butter cups are just food. That's not true. Both chocolate and peanuts can cause severe allergies in certain people and can trigger migraines. Approximately 1.8 million Americans suffer from peanut allergies and some number die each year from anaphylactic reactions.

So we can safely assume that if Reese's tried to secure the FDA's approval before marketing Reese's Peanut Butter Cups, it would fail and peanut butter cups would not be available in your grocery store. I, for one, am glad that peanut butter cups are not subject to premarketing approval.


That's the conclusion of an article in the Financial Times earlier this week that highlights the growing importance of companion diagnostics for the pharmaceutical industry.

Traditionally, medicines have been given to large numbers of patients with an apparently common disease, all the while accepting that they will be a failure for many and cause significant side effects. Genetic testing identifies the smaller numbers of sufferers in whom the drugs work, reducing costly and ineffective treatment in others.

The article notes that twenty years ago, cancer drugs might only be effective in ten percent of the patients treated. Today, new diagnostics linked to drugs like Erbitux, used to treat colon cancer, can identify the 60 percent of patients without a mutation in the KRAS gene, which makes them more likely to respond to treatment. The diagnostic spares patients who don't benefit the risk of serious side effects, and ensures that drug spending goes to the patients who are most likely to benefit. It also allows drugmakers to charge higher prices to offset the tremendous costs of developing sophisticated new medicines.

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The development of personalized medicines still faces significant hurdles. Cancers typically develop resistance to even targeted drugs, effectively evolving in real time to bring new cancer promoting growth mechanisms online. Companies and researchers need to do more to understand the complex signaling networks driving cancer growth and mutation, and develop cocktails that can check or slow the development of drug resistant cancers.

Over time, diagnostics willl likely shift away from single gene mutations and towards more complex proteomic (and other "-omics") tests to measure these network interactions and target cocktail therapies appropriately from the initiation of cancer treatment. Some of these cancer roadmaps are already in development for leukemia.

And cancer is far from the only example: it has also become increasingly apparent that complex chronic diseases are rarely the result of a single gene mutation, but are driven by networks of complex gene and protein interactions. Scaling up our understanding of these networks and translating them into the clinic will be an enormous undertaking - and will be unworkable if taking a single new drug to market still takes over a decade and costs over a billion dollars.

We're starting to see the first glimmers of resarch networks take shape that can take advantage of new genomic technologies and sophisticated IT architecture - through, for instance, the NIH's cancer Biomedical Informatics Grid, defined by "information liquidity" and breaking down the "invisible wall" that has traditinally separated the research and treatment communities.

There's a long way to go before the full promise of personalized medicine is realized.

But there's no going back.


As reported on Pharmalot today, the FDA has approved Vivus' anti-obesity drug Qsymia:

The move marked the second time in two weeks that the agency endorsed a diet pill after 13 years in which no new fat fighters were approved, reflecting a desire by the FDA to balance a pressing need to combat obesity with concerns over side effects.

Indeed, the approval came with restrictions. Qsymia must not be used during pregnancy because the pill can harm a fetus. The contains phentermine, which is the surviving half of the fen-phen cocktail, and topiramate, the active ingredient in the Topamax seizure med, which generated concern over cardiovascular and teratogenic risks - specifically, cleft palates - and prompted the agency to reject the drug in 2010.

And since Qsymia can increase heart rate, the effect on patients at high risk for heart attack or stroke is not known. Consequently, usage in patients with unstable heart disease or stroke within the last six months is not recommended. Moreover, regular heart rate monitoring is recommended for all patients, especially when starting the drug or increasing the dose. There will also be a Risk Evaluation and Mitigation Strategy, or REMS, program for the pill.

"Obesity threatens the overall well being of patients and is a major public health concern," Janet Woodcock, who heads the FDA Center for Drug Evaluation and Research, says in a statement. "Qsymia, used responsibly in combination with a healthy lifestyle that includes a reduced-calorie diet and exercise, provides another treatment option for chronic weight management in Americans who are obese or are overweight and have at least one weight-related co-morbid condition."

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The FDA has clearly heard the message from patients' groups and companies that there is a significant unmet need for new treatments to fight obesity, and that legitimate concerns over heart complications for obesity drugs needed to be balanced against the serious risks of obesity - including heart disease, diabetes, and even some cancers.

Interestingly, because the drug is a combination of two older medicines, it had already been prescribed off-label for years before the FDA approved the current combination.


I couldn't let this one go by. Just too slanted and inaccurate. And it's all over the news today.

"Aspirin Isn't a Wonder Drug," is a fine piece of science fiction by "The People's Chemist," Shane Ellison. Ellison also wrote "Over-The-Counter Natural Cures." His credentials, such as they are, consist of a Masters degree in organic chemistry .

Sounds impressive, but it really isn't. Pretty much anyone with the intellectual capacity of plankton can get one.

Thus, it is not surprising that his statements that are carried by multiple news organizations are off scale in their wrongness . Here are some of them:

"Big Pharma didn't invent aspirin. Mother Nature did,"
No she didn't. Aspirin exists nowhere in Nature.

"Thousands of years ago, humans witnessed injured bears gnawing on the bark of white willow trees and people have been using that natural remedy for thousands of years."
So? Thousands of years ago people believed that the sun circled the earth (which was flat), lightning was caused by angry gods, lead could be converted into gold, and drilling a hole in your head would relieve migraine headaches. Thousands of years ago you lived to be thirty and then something ate you.

"White willow bark doesn't contain ASA (acetyl-salicylic acid) or aspirin. Therefore, it won't accidentally kill you.
No it doesn't. It contains salicin, which is converted to salicylic acid upon ingestion. That can kill you. Salicylic acid is almost always used almost topically--for acne, dandruff and warts. But it is also the active ingredient in Doan's Pills, which are supposed to help with back pain. Here are the warnings from the bottle:


  • chest pain, severe dizziness, shortness of breath, slurred speech, problems with vision or balance;

  • sudden numbness or weakness, especially on one side of the body;

  • feeling like you might pass out;

  • black, bloody, or tarry stools;

  • coughing up blood or vomit that looks like coffee grounds;

  • blood in your urine, urinating more or less than usual;

  • hearing problems, ringing in your ears;

  • swelling, rapid weight gain;

  • easy bruising or bleeding, unusual weakness, fever, chills, sore throat, flu symptoms;

  • fast or pounding heartbeats;

  • severe stomach pain, ongoing nausea or vomiting; or

  • dark urine, jaundice (yellowing of the skin or eyes).

Great stuff. And--it barely works. Aspirin is about five times more potent than salicylic acid for pain and fever relief.

"Trash aspirin, use white willow bark and hawthorn," he said.
No. Trash the article.

"The industry couldn't market the natural ingredient as their own. You can't patent Mother Nature."
More nonsense. You might not be able to patent all of Mother Nature, but you can certainly patent the use, isolation, and methods of purification of synthesis of any useful drug that is obtained from her. Many chemotherapy drugs are plant-derived drugs. They were patented.

To have a monopoly, they had to alter it a bit. Chemist Carl R. Gerhardt was the first to do so in 1853. He created a molecular cousin and named it ASA (acetyl-salicylic acid). Bayer trademarked it as aspirin in 1889.
Yes--Bayer altered it. To make it work. And the correct name for ASA is acetylsalicylic acid. No hyphen.

"The small molecular change made for big dangers," he said. "Like deflating a tire, aspirin depletes the body of life-saving nutrients."
Sure. People all over the world are starving because they took Bufferin. Speaking of which, wouldn't this make a great TV show? "Bufferin the Vampire Slayer."

I think I'll patent that.



The blog Political Calculations has a great tool for determining whether it makes sense for you to keep your health insurance in the Obamacare era.

The Affordable Care Act was sold on the promise that anyone who likes his or her insurance will be able to keep it. But since premium costs have already risen sharply since the Affordable Care Act became law (and may well continue to rise for years to come), many people will soon have to ask themselves whether they can afford to keep their insurance - especially if they know that they can buy it again when they become sick, at the same price.

As we all know, the Affordable Care Act encourages the purchase of insurance through new federal subsidies (for those who earn up to 400% of the Federal Poverty Level or about $90,000 for a family of four) and the imposition of a tax on individuals and households that choose to go without coverage. The problem, however, is that the tax levied on forgoing health insurance will turn out to be substantially lower than the annual cost of purchasing insurance for many of the individuals and families subject to it.

The Political Calculations tool allows you to input your annual income, the cost of your health insurance policy, the kind of policy you carry (individual/household), and the odds that you will actually need health insurance this year (based on statistical data). Using these figures, it compares the cost of your insurance to the tax you will have to pay if you choose to go without insurance, while figuring in the odds that you will need health insurance to determine whether going without insurance is worth the risk.

By comparing costs and assessing your (hypothetical) individual risks, Political Calculations can give you some sense of whether or not you should drop your health insurance. The calculator doesn't include the subsidies in its calculation, but you can find those included at the Kaiser Family Foundation subsidy calculator here. Using these tools together will offer you a full picture of the impact that carrying insurance - or paying the ACA's penalty - will have on your and your family's budget.

The results are likely to be surprising - and uncomfortable for supporters of the law.


The Patient Protection and Affordable Care Act (PPACA) is officially "on the books". By upholding PPACA as constitutional, the Supreme Court paved the way for health insurance exchanges to begin operating. As one of the key pieces of Obama's health reform, health insurance exchanges were created primarily to address the issue of affordable access to healthcare for the uninsured, primarily those not covered through an employer-offered program, or taxpayer-funded assistance program (such as Medicaid).

Unfortunately, exchanges merely add layers of bureaucracy and burden to the states, and limit the choices available to consumers. Without a truly market-based model for healthcare - one that is founded on transparency, increased accountability and competition - we will not achieve better health outcomes at lower costs. It's completely understandable that many of the states would resist these "online marketplaces", as they are likely to just add cost and complexity to an ever-growing problem.

Recently, the Galen Institute asked me to conduct research on "What's Wrong With Health Insurance Exchanges..." . The paper, as described in the abstract, explains "why the health insurance exchanges defined in PPACA won't work, won't increase access to affordable health care, and won't do anything to improve health outcomes or increase value." At their core, the exchanges will create barriers to competition and place additional regulations on healthcare that will ultimately make coverage even more unaffordable.

In the paper, I describe several aspects of health insurance exchanges as detrimental to improving healthcare. Costs will increase due to a need for intensive data-gathering responsibilities to determine eligibility. Further compounding the problem, states will be forced to take on onerous costs, as they will be required to operate as a "financial clearinghouse" and watchdog. And current estimates indicate roughly $30 to $40 million in development costs, plus $25 to $50 million in annual operating costs per state.

Additionally, by defining minimum coverage through Essential Health Benefits (EHBs), health insurance exchanges create a limited choice in plans. This poses a problem because it requires consumers to purchase insurance for things they don't need, adding to their list of unnecessary costs. And in cases where the states set even higher minimums, this could result in more financial responsibility placed back on the states, as they would have to fund the cost of those additional benefits.

Finally, there is risk that employers may drop coverage because plans will become more expensive (and the penalty for no coverage is more cost-effective). Employers that don't offer "qualified" coverage would be subject to fines of $2,000 or $3,000 per employee based on circumstances. In most circumstances, fines based on the first 30 employees would be waived. Compared to the average cost of offering coverage under today's standards, approximately $3,800 per employee, the math favors not offering coverage. For example, an employer with 55 employees would have to choose between paying a $75,000 fine (25x$3,000) or funding $209,000 (55x$3,800) in health plan costs!

Consequently, states have been leery of health exchanges from the beginning. As I note in the paper, only ten states and the District of Columbia have enacted exchange laws (as of May 1, 2012), and three others have the authority to do so by executive order. But a majority of states were either waiting for the Supreme Court ruling on PPACA, or actively rejected establishing exchange laws... even though the federal government will implement federally run exchanges (at the state's expense) with or without their assistance by January 2013.

Now that PPACA has been upheld by the Supreme Court, several states continue to oppose the creation of exchanges. Six governors - Bobby Jindal (R-Louisiana), Rick Perry (R-Texas), Bob McDonnell (R-Virginia), Rick Scott (R-Florida), Scott Walker (R-Wisconsin) and John Lynch (D-New Hampshire) - have all recently refused to set up a health insurance exchange within their state. Two (Jindal and McDonnell) indicated they wanted to 'wait and see' if Mitt Romney is elected in the fall and Obamacare is repealed.

Many other states may not have refused health insurance exchanges, but still have not taken action in creating them. This could create a nightmare scenario for the federal government in that they would have to take on the burden of creating all the exchanges for states that have not complied (or demonstrated necessary steps to comply) by mid-November 2012.

These "rogue" states have the right idea. PPACA health exchanges (as mandated) will not work for all of the reasons described above. The exchanges merely add a layer of bureaucracy, create more costs, and create barriers to competition... they just mask the current problems with new ones.

Who's to say whether or not the exchanges (or even PPACA) survive the November election? But the bottom line is that we need to focus on having transparent and accountable care delivery - and significant payment reform - before adding to the complexity of our current problems. States like Texas and Florida understand that health insurance exchanges add unnecessary costs and burdens without focusing on the fundamental issues, and miss the point of creating affordable access to care that delivers better outcomes.

In a future paper, I will be offering recommendations on a framework for finding the right solution for states' unique needs. Stay tuned...



First, by way of background, in his 2010 book Antibiotics: The Perfect Storm, David Shlaes, an expert in antibiotic drug development, surveys the many economic and regulatory factors leading to a general decline in pharmaceutical industry research into antibiotic drug development.

IDSA Ab Approvals.jpg

While not all of the blame can be laid at the feet of regulators, Shlaes argues that the FDA has certainly made it more difficult and expensive for companies to bring new antibiotics to market. As Shlaes writes

Does the FDA contribute to our lack of new antibiotics? In my opinion, the answer to that question is a resounding YES. Without significant changes from the FDA and perhaps from Congress, the lack of new antibiotics can only be expected to worsen. ...

How does the FDA contribute to the perfect storm for antibiotics? Guidance documents from the FDA can be helpful in that they tell everyone the kinds of things they need to do in order that the FDA will approve the products in question. They are currently issuing a series of guidances for the design of clinical trials for antibiotics that make it difficult, and at times impossible, to actually carry out the proposed trials. But if these guidance documents mandate studies that are not feasible - where are we? Nowhere.

On the other hand, regulators in the EU appear to have taken a generally more pragmatic approach to clinical trials designs, as BioCentury noted in 2011 (subscription required):

The European Commission's new action plan to combat antimicrobial resistance could further widen the regulatory gap between the U.S. and Europe, which is already at the point where some physicians worry companies will no longer seek FDA approval of their antibiotics.

Indeed, the U.S. agency's insistence on what companies and clinicians say are clinically irrelevant endpoints has already resulted in one drug being approved in Europe this year but not in the U.S. And FDA's requirements for what companies and doctors say are unfeasible clinical trial designs have already lead some companies to wait for the agency to change its tune before performing Phase III studies for U.S. approval.

The U.S. now looks to be falling farther behind with the EC's announcement last month that it is committed to implementing faster approval processes for new antibiotics and coordinating to achieve "adequate market and pricing conditions for new antibiotics" in the EU.

The regulatory gap between the EMA and the FDA appears to be widening again. In a blog post last week titled Europe Leads the Way, Shlaes writes that

The European Medicines Agency (EMA) has just released their long-awaited addendum to the antibacterial guidance they released late last year. It is an amazing document compared to the guidance documents released in the last few years by the FDA in the US. Clearly, this was the work of a very thoughtful group of smart individuals who kept trial feasibility high on the priority list of considerations.

They also worked hard to avoid the FDA trap of justifying non-inferiority margins at the expense of real-world considerations like trial numbers and endpoints.

Shlaes concludes that "the FDA has to reboot their entire approach to achieve what the EMA has already done", and that Europe has created a significantly more inviting environment for antibiotic drug development.

This is not to say that the FDA doesn't know that it has to reboot its guidelines for antibiotic drug development. It is clearly trying to catch up. Perhaps the EU's new announcement will give FDA leadership the intellectual ammunition it needs to press for more rapid changes.



What are the implications of the recent Supreme Court decision for Health Savings Accounts? Not good, if the Obama Administration continues its undeclared war on HSAs.

The American Bankers Association noted in their HSA update last week that

While the political impact of the Supreme Court decision will be debated, the real-world effect on Health Savings Accounts is certain. Individuals and small businesses will discover that obtaining HSA-qualified health plans - the one thing you must have to open a health savings account - will become increasingly more difficult, a negative result for these consumers.

Individuals and small businesses have more difficulty finding affordable coverage than any other market segment. The Affordable Care Act's many regulations make obtaining coverage harder for these consumers, not easier.

Regulations are slowly strangling HSAs. Under Obamacare, "fully insured" policies must spend at least 80 percent (small group and individual market) or 85 percent (large group market) of every premium dollar on health care related expenses (called the medical loss ratio or MLR). The remainder can be spent on administrative costs (improving health care delivery or combating fraud) and profits.

imagesCAJB0G1D.jpg

The problem is that HSAs have an MLR that is significantly lower (around 60-70 percent) by design because policyholders are paying out-of-pocket for claims before the deductible is met. The insurer spends less on both on administrative claims and health care claims, but is also able to offer the policyholder a significantly lower premium as a result. Consumers get more power over routine spending, and significantly lower premiums. That's a win-win, right?

Not according to the Administration, which refuses to count claims below the deductible against the MLR. In response, companies would have to lower their deductibles, or cover more services below the deductible - both of which would raise premium costs for policyholders. So the Administration is, in effect, demanding that people pay more for even the most basic health care coverage - and making HSAs less competitive with other types of (more expensive) insurance.

Then we come to another key regulation, actuarial value or AV. AV is the percentage of expected health care expenses covered by insurance. Under Obamacare, the AV of plans on state health insurance exchanges starts at 60 percent for Bronze Plans, and goes all the way up to Platinum (90 percent).

Let's say that John Q. Smith buys an HSA qualified plan for himself and his family and starts putting money aside ever year to cover future health care expenses. Does that count against the actuarial value of the plan? Again, not according to the Administration. If the insurer isn't paying, it doesn't count, even if the design of the plan has consumer savings built in.

So regulators are insisting that you buy a more expensive health insurance plan than the one you want (or have already, since the MLR and AV rules will lead at least some Americans to lose the health insurance they have and like today).

Tossing a crumb to the HSA market, the Administration has said that it will allow some some small business contributions (but not the whole amount) made into individual HSA accounts to count against the plans' actuarial value. But employee contributions aren't counted at all.

On net, this will force small employers to purchase more expensive coverage, and take more money out of their employee's paychecks to pay for it - if they can afford to buy coverage at all. Offering HSA qualified plans, and kicking in some money to pay for it - along with higher wages - is discouraged.

Update: "If HSA plans can't meet the MLR and AV requirements, there might not be any "Bronze Plans" available in the insurance exchanges, causing many who are uninsured to remain so," said Roy Ramthun, president of HSA Consulting Services.

The message to the market couldn't be clearer: HSAs will be penalized in favor of more comprehensive and more expensive coverage. (And this from an Administration that has claimed that 30% of more of all health care spending in the U.S. is wasteful.)

HSAs track record of providing affordable, high quality coverage that actually "bends the curve" of health care inflation is indisputable. But since it doesn't fit into the Administration's vision of what "real" insurance is, it is quietly moving to kill it.

When it comes to HSAs, if you like what you have you won't be able to keep it.

(For a more in depth analysis of the challenges facing HSAs, see this article by Roy Ramthun.)



If the FDA didn't exist, pregnant women who wanted to reduce their risk of preterm birth could go to a pharmacy and have hydroxyprogesterone caproate, a synthetic steroid hormone, compounded at a cost of $10 to $20 per dose.

The FDA does exist and the reason, purportedly, is that we need the FDA to make sure that the medicines we consume have been proven to be both safe and effective. Not everyone agrees with this rationale, so the FDA needs the teeth of the law behind it. These laws say that only medicines that have been proven save and efficacious can legally be marketed. However, many drugs are used off-label (outside the approved usage) or are too old or too obscure to have been subjected to the FDA's requirements. To reward pharmaceutical companies that take such "square peg" products through the FDA's approval process, a multi-year marketing exclusivity is granted. The FDA encourages this behavior because these "square peg" products cast doubt on the whole rationale for the FDA.

Of course, the FDA's approval process takes time, costs enormous amounts of money, and is risky. Those companies that successfully negotiate the challenge and receive an effective monopoly act rationally and charge more, usually a lot more, than those companies that didn't incur the costs and had to face aggressive competitors.

These higher prices are normally concealed by circumstances, but sometimes they are present for all to see. When a new drug navigates the FDA approval process, there are usually no existing unapproved products with which to compare and hence the high price of the new drug has no standard of comparison. Occasionally, everything is laid bare for us to see.



New York Times reporter Gina Kolata has written three moving articles on the slow but inexorable (thanks to increasingly powerful "omics" technologies and plummeting prices) journey of whole genome sequencing and proteomics from academic laboratories into the frontlines of cancer treatment.

In her first article, Kolata writes about a young cancer researcher, Dr. Lukas Wartman, struck by one of the very diseases that he had hoped to spend his career researching, adult acute lymphoblastic leukemia.

Fortunately, Wartman happened to work at a cutting edge genomics institute at the Washington University of St. Louis, and his colleagues pooled their talents and tools to try and unravel the driving force of his cancer and find a way to halt it before it killed him.

Wartman also turns out to be "lucky" in one other key respect - his cancer is driven by the "upregulation" of a normal gene (FTL3), which was "wildly active" in his leukemia cells. He gets even luckier when his colleagues realize that there is already a drug approved to inhibit FTL3, Sutent. This particular story has a happy ending, with Wartman's cancer going into remission for a second time.

In her second article, Kolata chronicles a sadder outcome - the story of 69 year old Beth McDaniel, afflicted with a rare type of lymphoma. In McDaniel's case, whole genome sequencing of her cancer leads to only a brief reprieve, as her cancer rapidly develops resistance to another promising drug, Yervoy.

In her third, and final article in the series, Kolata, examines how emerging genetic tests can help predict cancer outcomes (in this case, for a type of ocular melanoma) but not necessarily help patients identify treatments that will change their prognosis.

Writing about emerging treatments at the cutting edge of medicine is a challenging affair. Those who benefit from new treatments and protocols may have better access to new technologies and treatments, whether by dint of employment, friendship, wealth, or connections. It seems like an arbitrary process, and it is.

But this is certainly no more or less arbitrary than the genetic "lottery" of cancer itself, which strikes the wealthy and affluent - like Steve Jobs and Christopher Hitchens - as well as the poor and indigent. And although Jobs and Hitchens were "early adopters" of genomic technologies they may not have benefitted from them and certainly weren't cured by them. And future patients undoubtedly benefit from the efforts of the wealthy afflicted to find cures for their own diseases (through, for instance, intiatives like the Michael J. Fox Foundation).

Cancer may be the most complex human disease, and the effort required to battle it - let alone defeat it - is staggering. And Kolata's series gives a real sense of that: even when we have the technology to identify the molecular drivers of cancer growth, we may not have any drugs that block those targets, or the cancer may rapidly grow resistant to targeted therapies.

But the underlying trends favor cancer patients and their doctors, not cancer. The cost of sequencing technologies is dropping, and dropping rapidly. The analysis of the reams of data generated by sequencing is the current bottleneck, but increasingly powerful computers and information technologies will eventually crack that problem as well. And as more patients have their tumors sequenced, researchers will develop much better "roadmaps" for use in developing cocktail therapies to control metastatic cancers.

The remaining challenges, like the enormous cost of drug development and the speed with which we can validate and test drugs against new targets, are real and serious problems. It may take years, or even decades, to overcome them. But overcome them we will.

In this case, a picture is really worth a thousand words.

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The Supreme Court's ruling upholding Obamacare on the grounds that the individual mandate is (effectively) a tax is certainly giving the Obama Administration a headache, since it appears to violate the president's pledge not to raise taxes on families earning less than $250,000 per year.

But this debate, though certainly important, obscures the law's other enormous tax provisions. The law is, in fact, chock full of taxes on individuals, employers, medical device companies, insurance companies, and pharmaceutical companies. Almost all of these costs will be passed along to employers and individuals in the form of higher insurance premiums, reduced wages or employment, and reduced investment in new products and services. It represents a substantial burden that the U.S. economy - still floundering three years after the end of the 2009 recession - can ill afford.

Consider just a few of the law's central tax provisions:

-Higher income families and individuals will pay a new 3.8% investment income tax, as well as an additional 0.9% Medicare payroll tax. Estimated cost: $210 billion

-Beginning in 2014, employers with more than 49 employees will pay a non-deductible penalty of $2,000 for each employee beyond the first 30 if they don't offer minimum creditable coverage. If an employer fails to provide affordable coverage and at least one employee receives insurance through a state-based exchange, the penalty rises to $3,000 per employee. Estimated cost: $96 billion

-Insurance companies will pay a new annual "premium tax" relative to market share. Estimated cost: $60 billion

-Pharmaceutical companies will pay an annual tax of $2.3 billion. Estimated cost: $22.2 billion

-Medical device companies will pay a 2.3% excise tax on sales, not profits. Consequently, many small, start-up medical device companies will wind up paying this tax even before they have any profits. Estimated cost: $20 billion

It's worth noting while the administration frames the medical device, insurance, and pharmaceutical taxes merely as efforts to force lucrative industries to contribute their "fair share" to health care reform, these taxes will ultimately be borne by consumers of medical services and health insurance--that is to say, nearly everyone. These taxes will result in lower wages, employment, or R&D investments in the affected industries, as many of them shrink or go offshore.

Consider the annual fee levied on health insurance companies that phases in gradually until 2018. To compensate for this expense, insurance companies have a few basic options: reduce profits, reduce administrative costs, reduce labor costs (fewer jobs or lower wages), or raise their premiums. Because global capital markets are highly competitive - and companies already have powerful incentives to eliminate unneeded administrative costs - they are much more likely to raise premiums or reduce labor costs, or (most likely) some combination of both. Also, because some administrative costs - like avoiding waste or fraud - are actually helpful to both insurers and consumers, reducing spending in these areas may have the net effect of actually increasing health care spending, and thus premium prices, in the long run. (For a helpful explanation of why companies are not going to simply eat the tax by reducing their profit margins, see this helpful short paper from the American Action Forum.)

Similar effects are likely to apply to the medical device and pharmaceutical industries.

Of course, it may be true that millions of new Americans will become "customers" of the affected industries, if they sign up for the expensive private insurance coverage mandated by the law, rather than the pay the relatively low penalty tax required under the law. (This is a questionable assumption, since the cost of the tax will be only a fraction of the cost of insurance premiums.)

However, at least half of the coverage under the law (if "successful") will be provided through Medicaid, which pays far lower rates for medical services than private insurance. As a result, providers will have to compensate for losing money on Medicaid patients by charging higher prices to private insurance companies and employers - an invisible but very real tax on private insurance.

On net, Obamacare is a tax on every sector of the U.S. economy to help pay for its $1.76 trillion price tag.

The Supreme Court's decision upholding the individual mandate under Congress's taxing power is in the spotlight for the moment. But we shouldn't miss the forest for the trees. It is incontrovertible is that Obamacare raises taxes, both directly and indirectly, on millions of individuals, families, and businesses all across the income spectrum.


Since the federal government is now requiring that nearly all American citizens purchase health insurance, we must also remember that the federal government is now also the sole arbiter of what constitutes health insurance, and therefore what consumers must actually buy. A great article recently published by Manhattan Institute scholar Steven Malanga in RealClearMarkets explains how this new regulatory power is already undermining sensible health care policy in a whole host of ways. He writes:

Congress took for itself the ability to require that people only buy insurance that provides a minimum of 'essential health benefits'...At hearings held by the Institute of Medicine on what coverage HHS should compel, a spokesman for the National Kidney Foundation pleaded for mandatory coverage of multiple kidney transplants per patient, while an obstetrician argued for mandatory coverage of nutrition counseling. Folks from Connecticut wanted to ensure that treatment of Lyme disease was part of mandatory coverage. No one explained how people or firms are supposed to pay for all of this. After several hours of hearings, the head of the IOM commission complained that, 'We have an impossible task.'

As Malanga explains, the individual mandate along with dozens of new insurance regulations has opened up the floodgates for lobbyists from myriad special interest groups and providers to request that the services they provide (or want) be deemed "essential" for all Americans and covered by all available health insurance plans, public and private. Rather than deciding for themselves what kind of insurance they and their families need, Americans will now be told what they have to buy. Malanga also explains how the federal government has wielded the power of defining minimum "essential" coverage to heavily regulate certain kinds of popular insurance plans (such as health savings accounts), perhaps pushing them out of existence and driving up costs for employers:

The new law has reduced the amount of money you can set aside in health savings accounts, narrowed the products you can buy with them and doubled the penalties the IRS can impose on you for unauthorized purchases made through these accounts. There seems little hope that effective consumer-directed insurance can survive...When you total up the requirements and restrictions on what now constitutes adequate health insurance, no wonder that many small firms keep telling us that they will not expand beyond 49 employees because doing some makes them subject to the complexities and penalties of Obamacare.

Malanga's analysis shows that the survival of the individual mandate is only the tip of the iceberg, given the federal government's new and sweeping regulatory powers that allow it to control nearly every aspect of the health insurance market. While calling for more insurance competition and consumer choice, the federal government is actively engaged in thwarting competition and restricting choices. You can read the full article here.



Instead of "Court Backs Obama on Health Law," the headline last week should have declared, "Five of Nine Supreme Court Justices Don't Understand the Principles of American Government." On this, the 236th birthday of our country, the United States of America, let's give the Supremes a little refresher.

The founders of this country rigorously studied history and witnessed what ruinous things happened when unlimited governments were in charge, which is why they designed a federal government with clearly limited powers. Here's what David R. Henderson and I said in our book, Making Great Decisions in Business and Life:

"Look around the world and you'll notice something quite striking: the countries that are the most successful have governments with limited abilities to act. An unlimited government is a totalitarian dictatorship, able to do anything at any time.

Consider the United States Government. It is directly and clearly limited by the Constitution. The Constitution describes what the federal government may do in general terms, but it specifically describes how these powers are limited. To describe what a government may do isn't very interesting or unique, because in any number of oppressive countries around the world, the government can do anything it wants. What made the U.S. Constitution radical was the awareness that limited governments are better governments. It is this very limitation on its power that enabled U.S. society to become one of the most successful societies the world has ever known. This irony is, sadly, lost on most people. Otherwise, they would understand that the limits on government mainly limit its power to create mischief and thus prevent it from operating as if it, not we, were of primary importance."

Ever willing to abandon the principles of limited government, those bent on government intervention imagine the problems the federal government could solve if it had more money and power. Such government intervention, perhaps helping group A, virtually requires violating the rights of group B and/or degrades into a form of mob rule whereby the 51 percent bully the 49 percent.

The Founders understood this conundrum, which is why they specifically designed the federal government to avoid these problems and stay focused on its primary role, which is to secure the rights of individuals and to represent all Americans.

The reason so many people--including five Supreme Court Justices--were confused on this matter is that for the last century much of what the federal government has done has been unconstitutional. Had the waters not been already muddied, the unconstitutionality of the Patient Protection and Affordable Care Act would have been as clear as an alpine spring.


Via The New York Times, an Associated Press article reported yesterday that GlaxoSmithKline has agreed to pay a record $3 billion in fines to settle various criminal and civil charges associated with 10 of the company's drugs -- making this the largest such settlement in history. (The Times has its own article in today's paper.)

From several sources, including the AP article, Pharmalot, the Justice Department's complaint, and other government materials, we see that the bulk of the settlement was for promoting Paxil, Wellbutrin, Advair, Lamictal, and Zofran for off-label uses. But the company also allegedly failed to report safety problems associated with its diabetes drug Avandia. It allegedly overcharged Medicaid for some drugs by reporting false "best prices" and underpaying rebates owed under the Medicaid Drug Rebate Program. And the company allegedly paid illegal kickbacks "including cash payments disguised as consulting fees, expensive meals, weekend boondoggles, and lavish entertainment to prescribers and other health care professionals to induce them to prescribe and recommend GSK's drugs."

Some of these allegations are, to be sure, troubling. If it's true, for example, that GSK failed to report safety data to FDA and/or submitted false pricing information to Medicaid, then the prosecution on those counts would appear to be fully justified. But as I've written before, promoting drugs for off-label uses when there is evidence of safety and efficacy for those uses should not only be legal, it is also constitutionally protected speech. (I'll stipulate that I don't know whether that evidence exists for the uses in question, but prosecutors in these cases don't ever bother trying to discern whether such evidence does or does not exist.) In those situations, off-label promotion also tends to redound to the benefit of patients by providing prescribers with useful information about treatment options.

What makes off-label promotion prosecutions especially egregious is the government's attitude that a drug claim cannot possibly be true unless the FDA has said it is. In announcing the settlement, Deputy Attorney General James Cole said that, "Today's multi-billion dollar settlement is unprecedented in both size and scope. It underscores the Administration's firm commitment to protecting the American people and holding accountable those who commit health care fraud." Note that the "fraud" Cole was referring to was the off-label promotion.

And the news media, whom you might expect to be defenders of free speech, buy this argument hook, line, and sinker. In what is ostensibly a straight news article, the AP goes so far as to claim that, "This is the latest in a string of settlements related to drug companies putting profits ahead of patients." In reality, it's more like the mainstream media putting its anti-corporate animus ahead of patients and any semblance of fairness.

In his seminal WLF v. Friedman opinion holding unconstitutional the FDA's ban on the dissemination of medical journal articles discussing off-label uses, federal Judge Royce Lamberth dispensed with this argument by revealing it for the absurdity that it is: "In asserting that any and all scientific claims about the safety, effectiveness, contraindications, side effects, and the like regarding prescription drugs are presumptively untruthful or misleading until the FDA has had the opportunity to evaluate them, FDA exaggerates its overall place in the universe" (Washington Legal Foundation v. Friedman, 13 F.Supp.2d 51, 68 (D.D.C. 2000), emphasis added).

The view that a statement must be fraudulent if the government has not approved it is both narrow-minded and dangerous. Fortunately, in the WLF case, FDA was taken to task so soundly that government attorneys had to change their strategy on appeal and acknowledge that manufacturer communication about off-label uses was not ipso facto illegal. Henceforth, the attorneys claimed, prosecutors would only treat off-label speech as one piece of evidence supporting a charge that the company "mis-branded" a drug. In practice, though, off-label speech is almost invariably treated as illegal per se.

That said, GSK acknowledged that some of its sales representatives did promote various drugs for off-label uses, but the company continues to dispute "many allegations and legal conclusions" regarding its behavior. So, why would it cop a plea and agree to the now-record penalty?

As I pointed out in a post back in March, "the federal government has a tool at its disposal that makes an out of court settlement almost guaranteed: the potential exclusion of any of the company's products from Medicare and other federal health programs. Federal anti-fraud laws permit government programs to exclude, suspend, or 'debar' corporations that have merely been accused in an indictment of fraudulent behavior from doing business with the federal government. No guilty verdict is necessary."

Given how big a portion of health care spending is controlled by government, Ropes & Gray attorney Joan McPhee, explains "that virtually all rational corporations ... conclude, as a business matter, that they cannot incur the risks associated with taking an indictment and going to trial, even when, in the corporation's assessment and that of its seasoned counsel, the threatened case is without factual or legal merit."

Government prosecutors leverage this power and the vagueness of federal regulations to force defendants to settle out of court, routinely securing payments from the firms of hundreds of millions, or even billions, of dollars. And it seems that prosecutors are using the threat of debarment to their increasing advantage by rolling together more and more unrelated counts (such as the charge the GSK failed to report certain safety data to the FDA) in order to get drug makers to settle those charges as well.

This "debarment trap" is unfair, and it strips those caught in its web of basic due process rights. In few other areas of law are Americans willing to tolerate the punishment of individuals before any evidence of wrong-doing is produced in court. It is reminiscent of the Red Queen's demand in Alice and Wonderland: "Sentence first -- verdict afterwards." Yet this charade of justice persists largely because few Americans even know it occurs.

I've written for years about the harms to patients that result from FDA's prosecution persecution of off-label speech. But I am increasingly coming to the conclusion that the threat of debarment represents an even bigger threat to the well-being of Americans -- not just patients, but all of us.

Anyone who cares about due process principles and procedural fairness should be made aware that these fundamental rights are being jeopardized by out-of-control federal prosecutors and a set of poorly written anti-fraud laws. It is essential that we begin to reform these laws that effectively strip due process protections from businesses and individuals who now face real criminal punishment with little real opportunity to defend themselves in court.



The FDA's user fee legislation sailed through the Senate last week with enormous bipartisan support (92-4) - although you probably missed it since the vote was drowned out by the Supreme Court's decision on Obamacare two days later. BioCentury's Steve Usdin has a terrific article describing the key provisions of the legislation (subscription required).

The most important aspect of PDUFA V may be that Congress has signaled that the FDA should no longer be hamstrung by the chimera of "perfect safety" as it weighs the risks and benefits of new medicines. Usdin writes that

By enacting the FDA Safety and Innoavtion Act, Congress has explicitly embraced the notion that the appropriate goal of drug regulation is to ensure a positive balance of benefits and risks. It also has implicitly accepted the idea that the risks posed by the lack of therapeutic options must be part of the benefit/risk calculation. [emphasis added]

This is a vital message for the FDA to hear, since Congress has often sent the exact opposite message after post-market safety concerns emerged with drugs like Vioxx and Avandia.

In addition to ploughing $4 billion in user-fees back into the agency over 5 years (2013-2017), the legislation also contains a number of provisions designed to speed up drug development, improve agency transparency and communications with stakeholders, and advance regulatory science.

Among other things, it encourages the FDA to expand the use of Fast Track and Acclerated approval beyond HIV and cancer; elminates caps on conflict of interest waivers for FDA advisory committees; creates a new breakthrough therapies designation that is supposed to allow for expedited development and review of drugs for "serious and life threatening illnesses" that show significant improvement over existing treatments in early stage testing; expands PDUFA review deadlines by 60 days to allow for additional meetings between sponsors and FDA; and requires the FDA to establish a new risk/benefit framework for describing how reviewers are actually evaluating the benefits and risks of new medicines.

How successful will these initiatives be? No one can really say for sure. Skeptics can argue (plausibly) that the FDA already has all of the statutory power it needs to do these things already. But that may be beside the point. The "permission" from Congress may give the FDA's leadership the leverage it needs to push changes down to review staff. It will also fall to Congress to follow through with additional oversight to ensure that FDA meets Congress' goals for advancing innovation and patient access to more effective therapies.

To date, the agency is saying all the right things. "From the FDA's perspective," FDA Commissioner Margaret Hamburg emarked at the recent BIO meeting in Boston, "the critical challenge now becomes implementation...delivering both on expectations and delivering on the real-world opportunities that are presented to us through this agreement and reauthorization legislation."

There are other, broader reasons to be bullish on the future of medical innovation and more flexible regulation. The speed at which the science is advancing in fields like genomics is truly astonishing, and will only continue to accelerate as costs drop (faster than Moore's law).

First, like it or not, the U.S. will find itself in increased regulatory competition with countries in Europe and Asia to commercialize R&D investments and bring them to market as quickly as possible - or risk losing the jobs and tax revenues that come from those R&D investments.

Second, there is the real possibility that the FDA could find itself lagging behind the science of personalized medicine as hospitals and health systems, health IT companies, and drug developers mine new data made available by linking electronic health records with genomic and other data that can translate latent knowledge into improved treatment protocols, promising new drug targets/indications, and more personalized (and thus cost effective) therapies.

Take, for instance, this partnership between Oracle and Aurora Health Care in Wisconsin.

Three or so years ago, Alfred Tector, one of the state's pioneering heart surgeons, contacted Oracle Corp., the database software company, about drawing on Aurora Health Care's electronic health records to find potential candidates for clinical trials of new drugs and medical devices.

Last week, Oracle announced the result of that initial call: the Oracle Health Sciences Network.

The new service will enable drug companies and health systems to cull information, with patients' names and other identifying characteristics removed, from electronic health records and other databases to determine whether a health system has enough patients to participate in a clinical trial.

That initially could enable clinical trials to be done quicker. But, more importantly, if the service is successful, it could become part of the infrastructure needed to develop drugs targeted for patients with a specific genetic makeup and for other medical research, such as comparing the effectiveness of alternate treatments.

Linking the network (as Aurora is already doing) with biospecimens and tissue samples will help make the next logical leap - allowing companies to quickly develop and test hypothesis for emerging biomarkers, recruit patients for clinical trials, and rapidly develop "proof of concept" trials that the treatments work as advertised and have a significant treatment effect. (That is, in itself, a roadmap for developing "breatkthrough therapies.")

In this emerging model, pressures will rapidly build on the FDA - from industry, academic medical centers, patients' groups, and others - for the agency to lead, follow, or just get out of the way. That is a paradigm shift that the FDA isn't in place to grapple with yet, but PDUFA V gives it Congress' imprimatur - and some new tools - for adapting to the new environment.

The challenge of FDA modernization shouldn't be underestimated. But science moves at its own pace. It'll be left for the regulators to catch up.


Friday's Chicago Tribune ran an interesting story on how quality control problems at many dietary supplement manufacturing plants were causing unsafe products that were making people sick.

Interesting, yes, but they completely missed the point.

The article mentioned a few cases, including a factory where a half of a rat found next to a scoop used to fill containers with protein powder. This puzzled me, since I cannot imagine how a half of a rat could possibly climb all the way up a table.

Then there was a case of some imbeciles that poisoned their four-year old with a vitamin "supplement" that contained a little extra selenium--200-times more than it was supposed to contain, and infinity-times the amount of supplemental selenium that should be given to the kid (none).

Yet, this stuff was sold by chiropractors and health stores, probably recommended by a cashier who dropped out of high school. (Of the two, it is not obvious who is less qualified to dispense medical advice.)

The question that the Tribune story should have addressed is why any of this stuff--pure or otherwise--should be sold at all.

But the supplement industry gets away with murder because of the Dietary Supplement Health and Education Act of 1994, a masterpiece of greed and ignorance pushed through Congress by Senator Orin Hatch (whose state, Utah is the home to many supplement manufacturers) and two medically ignorant colleagues, Representative Dan Burton (Indiana) and Tom Harkin (Iowa), who are both firmly in the anti-vaccine camp of crazies.

My March 16 op-ed in The American Spectator talks in detail about some of the absurdities of the law and how supplement manufacturers can skirt FDA authority (and common sense) by using certain doublespeak that ostensibly avoids making specific medical claims.

The key to getting away with this is by use of the word "supports."

When you see a label that something "supports prostate health," mentally substitute "this will fix your prostate," and the real intent of the label becomes evident. And worse, good luck finding a label that doesn't say "natural" or "organic" on it. This disingenuously implies that a given product is safe by exploiting consumer ignorance of the fact that neither of these terms have anything to do with safety, but everything to do with marketing.

And worse, the terms "natural" and "organic" also imply that these products are not drugs by virtue of being natural. This is doubly wrong. Not only are supplements drugs, but they are untested drugs--mostly immune from the authority of the FDA, although there have been some recent, but anemic attempts to get a handle on this.

I could go on for days about the garbage that is being legally sold in health stores. Some of these products include anabolic steroids, amphetamine-like stimulants and toxic metals (silver, in particular). These are supplements? What exactly are they supplementing? An amphetamine deficiency?

The term "herbal" is an especially powerful magic word that unlocks the vault of ignorance (and money). But this is just more nonsense. My 2005 op-ed on the American Council of Science and Health web site debunks the science-fictional aura surrounding the word. For now, suffice it to say that Poison Ivy is actually an herb.

It is surprising that a prestigious newspaper like the Chicago Tribune could take an important issue and turn it into a story that actually promotes ignorance by implying that by simply getting a few rat heads out of a supplement makes it OK to take.

It is not. Purer garbage is still pure garbage.


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