Medical Progress Today

Provider Consolidation Does Not Lower Prices

2013-06-17T16:53:06Z

A wave of healthcare mergers and acquisitions has made headlines lately, but it's not the first time in recent history that healthcare providers have attempted to consolidate their market power this way. In the 1990s hospital systems grew by acquisition and affiliation, but were largely unable to achieve the synergies they wanted. The motivation at that time was to protect -- by acquiring -- their referral base. This time they are driven largely by defensive pressures to increase their clout in negotiation with payers as well as to avoid being taken over themselves. Additionally, some recognize that to form an ACO they need to acquire some specialty practices in order to provide the range of services their assigned beneficiaries require.

These large-and growing-hospital systems are seen by some as an antidote to rising costs. Efficiencies of scale that can be achieved through consolidation will, it is anticipated, drive down costs thus leading to lower prices for all consumers whether government or privately insured. However our confidence in the hospital's ability to achieve these benefits is low based on previous experience in the 1990s and beyond.

In fact, the evidence already suggests the opposite is happening. Costs for basic services at a hospital are often significantly higher than at an independent provider. For example, the charge for a basic MRI in a hospital setting is estimated to be between $1700 and $2200, while the same procedure at an outpatient imaging center is charged at $700-$1000.

Why so much higher? Two often cited rationales are: first, that the hospitals have greater overheads - so much for the synergies of scale - and secondly, that large hospital systems are able to negotiate better reimbursement rates due to their size. Even if they could reduce the cost to treat, why would the hospital feel compelled to shrink their margin by lowering their reimbursement rate? Research from Northwestern University showed that prices were increased by about 40% after the merger of neighboring hospitals.

Another possible reason for such high cost is that the rates quoted from the chargemaster bear little or no relation to the costs incurred to provide service. The justification for the amount in the chargemaster is opaque. The lack of transparency allows hospitals to charge cash-paying patients (those who are uninsured or wealthy medical tourists) whatever they want. This figure is not connected to either the costs incurred or the amount negotiated - increasingly from a position of strength as the only provider in the community.

Hospital systems have a poor track record of creating value from acquisitions and consolidation. They haven't successfully integrated physician practices, nor have they leveraged their scale to reduce their costs and manage their overhead allocation. This is largely because nobody has held them accountable. As long as there continues to be a lack of transparency about not only what they charge but how they calculate these figures, they will continue to create fantastic numbers for inclusion in the chargemaster and use their dominant market position to defend their reimbursement levels.

How To Insure The "One Percent"

2013-06-13T15:11:25Z

The brouhaha over California's premium rates (see Will Wilkinson's terrific coverage for a good summary) is largely dying down, especially as the NSA is now commanding the attention of many journalists. Largely, the debate over California's proposed premiums for 2014 centered around three issues:

1) Are premiums they increasing?

2) Are benefits more comprehensive?

3) Will people pay less?

Thanks to Avik Roy's fantastic coverage and analysis, we know the answers to all three questions. Rates will increase for most young people (the large plurality of the uninsured), even when taking into account subsidies, and even for benefits comparable to Obamacare's minimum requirements.

So, at least in California, there will certainly be rate shock for young people, which may hamper the ability of Obamacare to offer affordable rates to the rest of the incoming uninsured.

But amidst the debate over how much who will pay, one piece of the question was ignored - what is the fundamental goal of expanding coverage? Austin Frakt highlights four options - for my purposes, I would argue that maximizing coverage while minimizing premium increases is the primary goal. And certainly, few would argue that maximizing coverage of young, healthy people in particular, isn't important in minimizing premiums. Therefore, it seems safe to say that in order to maximize coverage while minimizing premium increases, you need to ensure that a large number of young and healthy people sign up for coverage, to balance the risk pool.

Indeed, even more specifically, one could argue that the goal of Obamacare is to expand coverage to those who are unable to get it - that is, those with pre-existing conditions who may be denied coverage or may be charged exorbitant rates. This is why the law includes a pre-existing condition exclusion (rating on health status is no longer allowed) and limits age-rating. The goal is to redistribute from the healthy to the unhealthy - which is why the individual mandate and the premium subsidies are necessary as sticks and carrots, respectively.

It seems odd, then, that we rarely question whether pre-existing conditions are a massive problem in this country. According to HHS, somewhere between 50 and 129 million people under 65 have pre-existing conditions that could preclude them from purchasing individual insurance policies. This number is almost certainly inflated, but even taking it at face value reveals that most of these people likely have employer-sponsored coverage or Medicaid - 160 million Americans receive coverage through their employers; around 56 million receive coverage through Medicaid.

What about the uninsured population? HHS claims that some 25 million uninsured Americans suffer from a pre-existing condition. This is more than likely far from being within the same universe as the real number - data from the Society of Actuaries puts the number of uninsured in poor health at around 500,000; less than one percent of the total number of uninsured. Even taking into account those considered to be in "fair" health, the number rises to about 2.7 million - only about 5 percent of the uninsured.

So if this is the case, that those in poor health make up, at most, 5 percent of the uninsured, an important question comes to mind - is there a better way of covering these people? The fact that California's largely unregulated individual market has become the largest in the country indicates that the majority of the uninsured (the young and healthy) could probably get relatively affordable coverage with minimal intervention. It makes little sense, then, to force an expensive and comprehensive insurance product on them, to cross-subsidize those in poor health. A more straightforward, and less distortionary approach would use high-risk pools to enroll those that truly have pre-existing conditions and are uninsured. To be fair, states have tried high-risk pools in the past, but they have suffered from a lack of funding and significant obstacles (Minnesota being one of the few success stories) - but these issues are easier to address than the adverse selection created by pricing young people out of insurance exchanges to help cover the 1 percent..

Why ACOs Still Won't Deliver Better Healthcare at Lower Cost

2013-06-10T16:19:47Z

In recent weeks, early reporting data from Advocate Health Care's accountable care organization (ACO) has reignited discussion about the sustainability and scalability of the ACO model. This is especially noteworthy since ACO advocates are touting the 2% savings Advocate's ACO has achieved. Unfortunately, most of the discussion so far has focused on the obvious issues, like upfront infrastructure investments and concerns about the fact that patients aren't required to stay within the ACO. But these concerns barely scratch the surface of the issues surrounding ACOs.

Let me put what I see as the real problem with ACOs in context. The goal of ACOs -- getting to better healthcare at lower cost -- is laudable. But the means are fundamentally flawed.

I've been an advocate for healthcare reform in this country for many years... moving to a market-based system that centers on the consumer and reflects transparency in cost and quality while connecting payment with outcomes. The means to do this are there. My firm has identified about $500 billion in unnecessary care, in cost due to medication errors, and in cost due to poor care coordination. Add to that the estimated $250 billion in fraud and abuse, and you have a substantial amount of money in our healthcare system that could be redeployed. That's more than enough to provide coverage for those that can't afford it.

With the Patient Protection and Affordable Care Act (PPACA), there were really 3 goals: insurance reform, delivery reform, and payment reform. So when I read the legislation and saw the 9 pages describing the ACO, I thought, "This is not going to work." It flies in the face of everything we know about organizational design and human behavior. And to make matters worse, it's an overlay on the existing fee-for-service model.

Theoretically, the idea of combining all providers across the continuum of care under one umbrella sounds good. But if you've ever worked at a large company, you know that having everyone nominally working for a single organization doesn't mean that everyone is aligned, and it doesn't mean that you won't have silos. And as designed, the ACO model is very complex, and it's very difficult to implement. It creates a bureaucratic overly on a broken system.

So that 2% that Advocate has saved? They've got a lot further to go to get to $750 billion.

Accountable care is needed. But as I've argued consistently, ACOs are not. So the obvious question becomes, what will get us to better health outcomes at lower cost?

Imagine an alternative where primary care physicians are able to take time to diagnose patients and help them make better choices for their own health. Insurers incent beneficiaries financially to make better health choices. Employers create financial incentives to make good decisions about health. Physicians make information about cost and outcomes available, like in any other industry. It's a fundamentally different approach -- one that is market-based and patient-centered, not organization-centered.

Consider the example of Lasik and cosmetic dermatology. When the technology was first developed, it was very expensive. But in the years since, the costs have gone down while quality has improved -- like in any other industry. Years later, many more people are able to take advantage of these services. And they pay for them differently -- it's a bundled price for a whole procedure, instead of paying separately for every minute detail.

The only way to get costs under control is by changing payment. Providers need to have incentives to keep patients out of the hospital. We're starting to see some signs of that already -- outside of the PPACA legislation -- in CMS's refusal to reimburse "never" events. Ironically, CMS already had the administrative authority to do this and didn't need PPACA.

In the end, it's all about payment for outcomes and putting the consumer at the center. The ACO model fails to do this.

One of the most disappointing things about the recent commentary is that while some questions have been raised about sustainability and scalability, what's largely been absent from the debate are questions about ACOs' viability. ACOs will fail to improve healthcare costs and quality because they take a fundamentally broken system and create a complex bureaucratic overlay, making an already complicated system even more complex. And each layer of complexity will only add cost, decrease efficiency, and reduce transparency.

The answer isn't a new, complex organizational model, but rather greater transparency and greater accountability for costs and outcomes. Creating incentives that focus on achieving quality outcomes, providing choice and allowing real competition will get us there -- ACOs won't.

Hepatitis C miracles--courtesy of "me-too" drugs.

2013-06-05T21:42:42Z

If there is a perfect example of 1) state of the art pharmaceutical research, and 2) the importance of the so-called "me-too" drugs, it is the massive effort over the past two decades to find treatments for (and possibly eradicate) hepatitis C--a blood borne viral infection of the liver that has infected about 200 million people worldwide--four times the number of people infected by HIV.

The causative pathogen, hepatitis C virus (HCV) takes hold in the liver, where it relentlessly replicates, causing irreversible damage, often leading to cirrhosis and less frequently, liver cancer over the course of two to three decades. It is the leading cause of liver transplants in the U.S.

Beginning in the 1990s, virtually all major pharmaceutical companies had major HCV research efforts, and to say that it worked out is quite an understatement. But there was a long way to go.

Until 2011, when two HCV protease inhibitors, Incivek (Vertex) and Victrelis (Schering-Merck), the first direct-acting antiviral agents for HCV were approved, the standard of care was interferon and ribavirin-- a combination that was less than 50% effective and fiendishly toxic, causing many patients to stop treatment, even though they may have been signing their own death certificate in the process.

The two protease inhibitors, which were coincidentally approved within two weeks of each other, boosted the cure rate to about 80%--a huge advance, but not without some problems--sometimes severe skin rashes and anemia. And each drug was meant to be added to the interferon-ribavirin combination rather than replacing it, making the side effects even worse.

As is so often the case in drug research, the breakthrough drug against a given disease, while extremely important, will often be surpassed by the next generation of similar drugs, often referred to (usually in a pejorative way) as me-too drugs. This is precisely what is happening in the world of HCV research right now.

Gilead, Abbott (now AbbieVie), and Bristol-Myers Squibb are leading the way with drugs and cocktails that not only eliminate the need for interferon, but show cure rates approaching 100 percent--something that was unimaginable even 10 years ago.

This has created an interesting dilemma. Three years ago, some doctors were suggesting that patients wait until Incivek and Victrelis were approved rather than undergo the older interferon-based therapy. And this is happening once again. There is an ongoing debate over whether it makes sense for previously-untreated patients to wait a few months until the second-generation drugs are approved.

In drug research, this is about as good as it gets. Using a strategy of drug design similar to one employed in HIV research, pharmaceutical companies succeeded in doing something that was thought to be impossible--potentially wiping out one of the most world's most important viral infections.

These results highlight the obvious-- it is counterproductive and illogical to forgo research in a particular area simply because there are already drugs approved for that indication. Right now there are least three more protease inhibitors in the pipeline and roughly ten different polymerase inhibitors (drugs that act by a different mechanism). Unnecessary? Hardly.

It is all but certain that of the multiple "me-too" drugs in development, some will rise to the top and some will fail as they are subjected to more pre-and post-approval scrutiny. This will mean a world of difference for patients as the best drugs and drug combinations become clear--something that would be impossible without multiple therapy options.

This should really go a long way towards shutting up fools like Marcia Angell of the Harvard Medical School, a perennial industry critic who believes that one drug is sufficient for any disease, and that "me-toos" are simply tools for maximizing drug company profits. It would be impossible for her to be more wrong.

This mindset was dead wrong with HIV. Without multiple choices, optimized cocktails, which are now doing incredible things, would have been impossible. It is just as wrong here. The lives of 200 million people will bear this out.

Why we are becoming a country of medical know-nothings

2013-06-04T15:13:05Z

There are bad headlines and bad headlines.

The bad ones are merely poorly written and confusing. The bad ones actually lead you to the wrong conclusion. When they inevitably get picked up by news organizations and mindlessly passed around, the already-scientifically-ignorant and confused American public absorbs them and becomes even more so.

Last week's, "Diet soda as bad for teeth as meth, dentists prove" hit a new low. It was so wrong on many levels that it is worth tearing to bits. Which is exactly what I happen to be in the mood to do.

Bad headlines are nothing new. I see them all the time. But, this one would have you believe that there was actually a legitimate study that likened the consequences of drinking diet soda to the complete destruction of teeth and gums from chronic use of methamphetamine.

And this idiocy was picked up verbatim by hundreds of news sites, including NPR (!), and will undoubtedly be filed away in the consciousness of the many people who saw it. At this point it becomes fact. Which is especially unfortunate in this case, because just about everything in it is wrong.

For example: According to author Dr. Mohammed Boussiouny, a professor of restorative dentistry at the Temple University School of Dentistry "[m]eth, crack and diet soda have one thing in common: They're highly acidic and can cause erosion and significant damage without good dental hygiene."

But anyone who's made it through a high school chemistry course will tell you that not only are methamphetamine or crack cocaine not acidic, but they are in fact basic--the exact opposite of acidic.

Here are a few more flaws:

"The case study looked at the damage in three people's mouths."
It is not a study. It's an opinion by a dentist, and a mighty stupid one at that.

Yet, somehow this made it into the journal General Dentistry: "You look at it side-to-side with 'meth mouth' or 'coke mouth,' it is startling to see the intensity and extent of damage more or less the same," said Boussiouny.

Boussiouny is basing his "study" on one woman, whose teeth were completely rotted away and unsalvageable. From this he magically concludes that the acidity of diet soda will eat away your teeth until you have something resembling "meth mouth." Look up the photos if you wish, but please have a strong stomach.

The conclusions are based on one person.
The woman drank two liters of diet soda for about 5 years, and for some reason liked to hold it in her mouth before swallowing it. Her teeth rotted, therefore it must have been the diet soda, right?

Not really--the woman in question hadn't seen a dentist in 20 years, which was conveniently left out. Any remote chance this may have had something to do with her condition?

And here's the fundamental problem with a study with one subject: A man walks down 54th street and a piano falls on his head. Therefore, everyone else should make a serious effort to walk on 55th street instead. Ridiculous? You bet. Just like any study of one.

Diet soda is the culprit because it is acidic.
Well, so is regular soda. And it just happens to contain sugar, which has been rumored to cause tooth decay. Duh. So, is it diet soda that is the culprit? Or just the soda? Or the lack of dental care? Or the exchange rate of the Euro? Absolutely impossible to tell. Would this happen to someone who drank two liters of sugared soda a day for 5 years and failed to see a dentist for 20 years? Who knows? They only mention the term "diet" at all because this is what the one woman they based this asinine study on just happened to drink diet soda. Or because someone has an itsy bitsy agenda.

Yet, this will no doubt be taken as an indictment of diet soda, when in fact the fact that the stuff is artificially sweetened is not only irrelevant, but probably less harmful to your teeth.

While it is unlikely that anyone will die from this (except maybe diabetics who switch back to sugar-sweetened soda for no reason), the cumulative effect of sloppy and agenda-driven reporting is a bit more serious.

I have no doubt that it is responsible for a huge database of misinformation that drives people to do exactly the wrong thing: skipping vaccinations, following useless or dangerous diets, taking herbs instead of seeing a doctor, and failing to take potentially life-saving medications because they scared to death over minuscule or non-existent risks.

It is hard enough to make many decisions when you have the correct information at hand. Throw in garbage like this and it becomes impossible.

Discussing California, Seriously

2013-06-03T20:10:15Z

Paul Krugman, the Nobel laureate, Princeton University economics professor, New York Times economics blogger, and die-hard champion of the left, argues in his Saturday piece, that we aren't having a legitimate, serious discussion about Obamacare. He points to my Manhattan Institute colleague, Avik Roy's, recent piece, which claims that in California, insurance premiums are increasing, contrary to what California's Benefit Exchange is claiming.

I've written briefly about California's numbers - one problem is that the exchange is framing them as falling by comparing with small-group plans (employer sponsored insurance); the other is that California already has a large individual market, which means that the current rates shouldn't be as oppressive as those around the country, which in turn means that California isn't representative of the rest of the country.

Roy takes it a step further and actually examines what it would cost 25 year old non-smoking male to buy insurance coverage now and under Obamacare - the median cost more than doubles from $92 to $205 a month (or $184 a month for non-subsidized catastrophic coverage). Ditto for 40 year olds, who will see costs increase from $121 to $261.

It would seem that the result is pretty clear - costs will increase. But that isn't what Dr. Krugman is disputing - the point of contention is that this methodology essentially compares apples to oranges, when oranges won't be available in 2014 (a better way of putting it is comparing two apples - one weighing half-a-pound and the other weighing a pound, when the half-pound apple will be taken off the market next year). To his credit, Krugman is correct. A combination of new benefits requirements, community rating restrictions, maximum out-of-pocket limits, taxes, and various other regulations will make some plans unavailable in 2014 - ostensibly, the cheapest plans available now won't make the cut.

Before delving into questions of benefits etc., it is worth noting that this is one case where comparing apples to oranges is exactly the correct methodology. The very fact that new regulations will make some plans obsolete is one of the main points that those on the right are making. Because the plans being made obsolete are relatively inexpensive, costs will, by definition, increase. Whether consumers are, on average, better off with more comprehensive minimum benefit packages and community rating restrictions, is an altogether different question. It is certainly within the realm of possibilities that consumers could be made better off (total consumer surplus increases) with new regulations. That isn't a question that can be answered now, however - Obamacare will have to be studied years after the fact to understand its impact. Moreover, other questions remain - for instance, costs aside, since the uninsured are predominantly young and (relatively) healthy, it is questionable whether we should be requiring them to purchase relatively comprehensive insurance coverage.

The question of costs, however, is easy to answer now. Costs are - no matter how you measure them - increasing.

But what if we were to make a more "apples to apples" comparison - that is, compare relatively generous plans now, with the default generous plans under Obamacare?

Let's take our 40-year old non-smoking male, and assume that he is fairly risk-averse. Let's say he earns close to GDP per-capita - about $50,000. Our 40-year old is currently uninsured, and being risk-averse as he is, would probably like to cover a good number of eventualities, meaning that his plan should have a relatively higher actuarial value - similar to those mandated under Obamacare.

If our 40-year old currently lives in Southern Los Angeles, a good option might be the Cigna "CA Open Access Value 3000" plan - coming at $227 per-month, with a relatively low deductible of $3,000. The plan includes maternity coverage, and a prescription drug plan, and covers preventive services without a deductible. Indeed, the plan's brochure indicates that the plan design is intended to comply with Obamacare regulations. What will be the cheapest plan available on the exchange for this 40-year old? It will be 9.3 percent more expensive, at $242 dollars (and this doesn't take into account potentially higher deductibles).

This isn't quite the doubling of premiums that Roy discusses - because this does compare similar plan designs. And yes, as some have noted, premium tax credits may brunt the impact for individuals buying insurance on the exchange. But the point is the same - even comparing plans that offer similar benefits, other regulations in Obamacare will make the insurance market more expensive, driving up costs.

Note: Current insurance rates here are based on estimates from www.ehealthinsurance.com.

Medicare Trustees: Two Charts That Should Scare You

2013-06-01T11:32:43Z

In what is emblematic of every annual Medicare trustee report, the most recent offers a word of warning (which is about as urgent as any warning you can expect from an actuary):

Without unprecedented changes...Medicare prices would be considerably below the current relative level of Medicaid prices, which have already led to access problems for Medicaid enrollees, and far below the levels paid by private health insurance. Well before that point, Congress would have to intervene to prevent the withdrawal of providers from the Medicare market and the severe problems with beneficiary access to care that would result.

Perhaps former CBO director, Douglas Holtz-Eakin summed it up best when he tweeted:

Medicare and Social Security are still broken, going broke...because we've done nothing to fix them.

In a word, yes - this is the message that Medicare's trustees are sending Congress and the President. Neither Democrats (who may otherwise wish to sit on their laurels, confident that the ACA's cuts to Medicare have saved the program), nor Republicans can ignore the fact that Medicare - the health insurance safety net for over 50 million elderly and disabled Americans - is hemorrhaging money and efficiency.

It makes sense then, to take a moment to review how and why, and what can be done about it.

1. When You Assume

All projections - whether they come from the CBO, Medicare's Trustees, the White House, or the private sector - are based on a comprehensive set of assumptions. Assumptions can incorporate the gamut from changes in GDP, productivity, costs and virtually anything else that the authors find is relevant in their modeling efforts.

Of course, as the leading experts in risk-adjustment and financial modeling, actuaries know this well. And while the front-page projections of government accounting are usually based on a "current law" baseline (that law takes effect as written), there are often major differences between what is supposed to occur and what actually does. The latter is known in the policy world as "current policy" - what is expected to happen.

There are several important areas where current policy baselines are important to keep in mind, but one very salient example in the health policy realm is Medicare's infamous "sustainable growth rate" (SGR). The SGR governs the rate at which Medicare's payments to providers changes annually, and for many years the SGR required that physician payment rates be reduced - last year, the reduction would have been close to 30 percent. Because it is widely agreed that reductions in Medicare's payment rate would result in much worse access to care for Medicare's population, Congress has routinely overridden the reductions in its annual "doc fix." So, because it's unlikely that Congress will allow payment rates to be reduced, part of Medicare's "current policy" baseline is to assume that SGR cuts will not happen.

This "alternative scenario" has become so important, that now every report by Medicare's actuaries includes alternatives to current law.

Over time, the difference between current law and the SGR alternative projection will about to about 0.7 percent of GDP (over $100 billion); through the modeling period, the difference in Medicare spending comes to about 11 percent (well over $1 trillion). But that's not all. The top line in the graph assumes that IPAB is relatively ineffective, SGR cuts are overridden, and the ACA's cuts to Medicare will not be sustained past 2020 (a point that was made in the 2011 technical review of Medicare's actuarial reports) - the difference from the current law baseline to the full alternative policy is a massive 3.3 percent. This grows over the modeling period, and while the actuaries don't provide a full estimate, the total difference in Medicare spending between the two scenarios would be massive.

Unfortunately, there is likely no single solution here. The first step (and kudos to President Obama for including this in his FY14 budget) is to eliminate the SGR and immediately develop a new payment formula, replacing the SGR temporarily with a 1 or 2 percent increase in payment rates. The new formula would need to ensure that evaluation and management services are adequately compensated (so as not to skew too far in favor of specialists). This would address part of the issue, eliminating the need for a "doc fix" and moving current policy closer to current law. But ultimately, as long as Congress (and the President) believes in using gimmicks like provider payment reductions to hold down Medicare spending, we will continue to see a disconnect between current law and current policy - this only serves to make Medicare's future less certain, to no one's benefit.

2. Medicare Is (only slightly) More Solvent

During the last election cycle, a popular talking point became the solvency of Medicare's trust fund. For clarification, when we discuss Medicare's trust fund we usually refer to Medicare Part A - Hospital Insurance. This fund pays for inpatient hospital services, Part B (which actually has an increasing fund balance over the modeling period) pays for outpatient services, and Part D (which is funded largely through premiums) covers prescription drugs.

The new ominous deadline for Medicare Part A is now 2026 - a two year improvement from last year's report which projected that the trust fund would be depleted by 2024. This "improvement" is likely due to expenditures last year being lower than expected coupled with more optimistic forecasts about economic growth in later years (which in turn means greater payroll tax revenue).

But there's more to it than that. The 2026 figure comes from "intermediate" assumptions regarding costs - under the worst-case scenario assumptions the trust fund would be depleted 7 years earlier, in 2019.

Perhaps the solution here is simple. The actuaries note several times that there is no provision to pay Medicare Part A benefits with general revenue - so for some, the obvious fix would be to allow general revenue to be used for Part A. However, this would be short-sighted; it misses the entire point that Medicare, as is (even with the ACA's "productivity adjustments"), is unsustainable - both in the short-run and the long-run.

That one federal program alone will eat up at least 6.5 percent of GDP in the future should not be taken lightly by policymakers. Containing Medicare's costs is critical - reworking the SGR (as noted above) and Medicare's payment formula is an important step. Simplifying Medicare, by combining Part A and B deductibles, for instance, can help eliminate some of the program's "hospital favoritism." More drastic measures would forbid MediGap plans from covering deductibles or copays to ensure that beneficiaries still have some skin in the game and make smarter decisions. Going further, Medicare's eligibility age can be raised little by little, which would reduce Medicare spending by $148 billion over ten years.

What policymakers should not do, is rest easy thinking that existing "productivity" adjustments are good enough.

While the Medicare trustees report is rife with scary language (and many other scary charts), the actuaries make one point above all else: Medicare is not sustainable. The program is broken and will not survive without major changes - the earlier the better.

The U.S. prescription drug market is dominated by generics. Is that a good thing?

2013-05-31T16:17:29Z

The U.S. market for prescription drugs is dominated by me-too products.

Just not the kind that is much maligned in the press. Pharmaceutical companies are often attacked for spinning out "me-too" drugs that are only slightly different than earlier versions, but cost as much (or more). The real story there is a bit more complicated, but let's save that argument for another day.

The real "me-too" drugs sold in the U.S. are generics, i.e. drugs that are (for the most part) exact copies of branded (patent-protected) drugs, but sold at a fraction of the price. According to a recent report by IMS health, generics account for the vast majority of all U.S. prescription drugs - a whopping 84%. IMS estimates that by 2016 this figure will rise to 87%. This is a sea change from the late 1990s, when generics only accounted for about 40 percent of the market.

Is this good for patients, and for the health care system? Yes. Is this bad for the patients, and the health care system? Yes. It depends on whether you look at the short run or long run, and what aspect of the system you want to focus on.

First a little history and some explanation: Why are generics, from a volume perspective at least, dominating the U.S. market?

The pharmaceutical industry is, as we've said many times, largely a victim of its own success. The late 1980s and 1990s saw a slew of "blockbuster" drugs launched (Prozac, Prilosec, Zocor), largely for primary care indications like depression, high cholesterol, and acid reflux. This strategy generated billions in profits for the industry, because these indications represent very large patient populations, and patients have to take some of these drugs indefinitely - perhaps for the rest of their lives.

Blockbuster has something of a pejorative connotation, but drug treatment can represent a very cost-effective way of preventing more dangerous and much more expensive complications. Harvard health economist David Cutler, for instance, has estimated that effective use of recommended antihypertensive medicines avoids 833,000 hospitalizations and 86,000 deaths annually. And if untreated hypertensive patients were effectively treated, it could prevent another 420,000 hospitalizations and 89,000 premature deaths.

Even the Congressional Budget Office (CBO), which is very conservative when it comes to estimating offsets for health care innovations, estimates that a 1 percent increase in Medicare Part D prescription drug spending saves about 0.2 percent in other Medicare costs.

But all good things must come to an end, and all patents come with an expiration date. Blockbuster drugs patented in the 1990s or early 2000s have already lost patent protection or will do so in the next few years.

This leaves industry with a pipeline problem, since they haven't produced anywhere near enough new drugs to compensate for the products going generic. And this explains the sea change: companies just aren't moving enough patients onto new drugs as patents expire. When a generic is available, patients will chose the generic 95% of the time. In fact, this year, for the first time ever, total U.S. drug spending actually declined, at least in part because of this tremendous shift towards generics (IMS suggests other factors as well).

Why have branded companies had so much trouble filling their pipelines? They've run into something of a perfect storm.

The FDA has raised the bar for approving drugs for primary care indications, and insurers are also scrutinizing new drugs more closely when it comes to reimbursement. After being stung by rare side effects linked to FDA approved drugs like Vioxx, Avandia, and Phen-Fen, the FDA wants more data from larger clinical trials for primary care indications to rule out rare side-effect problems for drugs that are likely to be used in hundreds of thousands, or maybe even millions, of American patients after the FDA grants marketing approval. This means more tests, larger trials, and closer scrutiny of the potential for rare side effects.

Arguably, this makes sense. With many good, effective drugs already approved, regulators and payers are inevitably going to look askance at new drug candidates that don't have a clear safety or efficacy advantage over existing, and very cheap, generic medicines.

But with development costs rising (due to the aforementioned FDA regulations), industry is rationally going to walk away from developing products that might have incremental benefits, but can't generate sufficient profits to justify the investment required to bring them to market. So products that might have been commercially viable - and would make a real difference to patients - a decade ago just aren't sustainable today.

Scientifically, the low hanging fruit has been picked. If you're looking, for instance, for a drug to lower the risk of heart attacks, we've got LDL cholesterol pretty clearly licked, and you're going to have to look elsewhere (scientifically) to gain a competitive position in a patient population that is taking generic atorvastatin (formerly Lipitor).

So companies find themselves chasing novel mechanisms of action where the science is less well understood. Pfizer, and other companies, got into trouble in this area when they went after drugs to raise HDL cholesterol, and found that, in cases like torcetrapib, raising HDL cholesterol actually resulted in more deaths, not fewer - which was the opposite of what the research had previously suggested.

As companies chase more novel targets they face more scientific, financial, and regulatory risks. Add to this the fact that big time investments in genomics and other new strategies haven't (yet) paid off as handsomely or as quickly as many expected, and you've got a (at least in the short term) a severe pipeline problem.

Bigger isn't necessarily better. As pipelines thinned or slowed, companies looked to restock their shelves and improve their earnings through consolidation, i.e., insourcing other people's pipelines. From a balance sheet perspective, this can make a lot of sense, but it's also a one shot strategy - financial gains from consolidation, in terms of combining sales forces and drawing in outside revenues, can only happen once. Consolidation also makes sense given the regulatory environment (which requires more sophistication) and reimbursement environment (i.e., having more products on market gives you additional bargaining leverage with large insurers and PBMs).

But from an innovation perspective, this approach may not be effective. It's not clear that when you take two different R&D teams, with different cultures and approaches to doing research, each of which might be successful independently, and cram them together - along with the associated layoffs - you're really better off. You just might be more schizophrenic.

Where does that leave industry and patients? Increasingly, companies are focusing on "unmet medical needs" - in therapeutic areas like cancer, multiple sclerosis, cystic fibrosis, and other orphan diseases where there are few good treatment options and less generic competition. This is good for patients, who literally face life and death challenges, and it also gives industry some (frankly) much needed revenues to fund ongoing R&D.

The FDA approved 39 new drugs last year, a record, but 19 of those were for either cancer or orphan diseases. IMS also notes that out of the 28 drugs launched from last year's approvals (a number were approved late in the year, and weren't launched until 2013), representing $10.8 billion in new drug spending, specialty drugs accounted for $7 billion. That gives you a pretty good picture of where the industry's growth strategy is pointed, at least for the time being.

So are we headed to a two tiered market, where generics dominate (at least by volume) for primary care indications, and pharma/biotech focuses on specialty indications? And if that is the industry division of labor, is it sustainable?

Some of the new specialty treatments, like Kalydeco, are also truly game changers for patients. Although Kalydeco helps just 4% of cystic fibrosis patients, the drug seems to be an effective cure for those patients. That's tremendous science, and should be applauded. Cancer is another area where the industry is poised to make tremendous gains.

But all of these medicines are tremendously expensive, because of the "numbers" problem: With a smaller patient population, companies have far fewer (i.e., thousands or even hundreds) patients over which to spread their development costs and generate profits, especially since effective patent times have been flat or declining. Kalydeco, for instance, costs $294,000 annually.

As more expensive products push into the rare disease space, insurers and government payers are eventually going to balk at paying those prices, and they already are to some extent - requiring much higher co-pays from patients for some drugs.

On the other hand, the shift away from primary care indications is deeply troubling because of the enormous impact of chronic disease on patient health and the economy (through both direct and indirect costs, like lost productivity). Diabetes, heart disease, stroke and drug resistant pathogens all require much better treatments.

Source: http://www.chronicdiseaseimpact.com/

Without a different approach from the FDA, and a reimbursement environment that rewards incremental and breakthrough innovations in these disease areas, to say nothing of Alzheimer's, we're looking at a tsunami of health care costs and expensive complications from these diseases as the population ages.

The Solution: Broaden Innovative Pathways to Market for All Indications

Policymakers are apt to cheer cheaper generics today without thinking deeply about the implications for innovation tomorrow. Fundamentally, there is a very clear tradeoff between lower drug prices today, and less innovation for patients tomorrow.

The Obama Administration, for instance, seems blissfully untroubled by the implications of imposing Medicaid price controls on Part D, or reducing exclusivity for biologic medicines down from 12 years to 7. The former would save an estimated $123 billion over 10 years, and the latter would save $3 billion over the same time period--but the lost revenues would clearly reduce the industry's capacity to invest in innovation. And research suggests that future innovation has far higher returns to society than lower drug prices today - something on the order of 3-1 - but current policy debates are much more short-sighted than economics suggests that they should be.

What can we do to change the equation? Policymakers should encourage innovation across many different disease areas, both primary care and specialty.

For starters, we should revisit Hatch-Waxman, and slow the erosion in effective patent times so as to encourage more innovation. Companies should get back all of the patent time they lose in FDA mandated clinical trials and drug reviews. This won't prevent a single drug from going generic, but it will allow drug makers to spread their costs over more years, and help reduce short term pricing pressures.

Second, we should expedite pathways for new or repurposed drugs targeted at subgroups of patients. Drugs that come to market with companion diagnostics could be granted short patent extensions, say six months. Taking old generics and developing new uses for them, including conducting the clinical trials required for FDA approval, should be rewarded with new patent or marketing exclusivity. Repurposing old drugs is less expensive than developing new drugs, given that significant data already exists on their safety profile and mechanism of action. Encouraging more co-development of drugs and companion diagnostics will increase their cost-effectiveness, and help energizing the diagnostics industry. (Here, the MODDERN Cures Act is a great step in the right direction.)

Finally, FDA approval pathways - like accelerated approval or the new Breakthrough Therapies designation - need to be opened other classes of drugs beyond cancer, orphan drugs, and HIV. Here, the Obama Administration can heed the excellent report from the President's council of scientific advisors on doubling drug innovation in the U.S. over the next decade.

The agency and its stakeholders should develop standards for using novel biomarkers and adaptive clinical trial designs to approve drugs for targeted populations for primary care indications and antibiotics as well as specialty and orphan drugs. This would help industry, as well as society, replenish our supply of new medicines in these vital areas.

In the short run, the triumph of generics may seem like financial a windfall to payers and consumers. And largely, it is. But with an aging population, these gains will be short lived and will be far outweighed by the human and economic cost of lost or foregone innovations tomorrow.

Privacy in the Age of Big Data-Driven Health Care

2013-05-30T18:42:12Z

It is almost axiomatic today that the future of health care delivery will be dominated by gadgets, apps, and everything in between that track your vital signs in real-time, use genomic and phenotypic testing to guide treatment selection, and portable electronic health records that do away with doctors' chicken scratch and seamlessly integrate across thousands of different systems. Of course, we always tend to view the future through rose-colored glasses, and tend to discount the possibility that things may not work out as we hope (electronic health records have not brought the expected cost savings, for instance), and there will still be many kinks to work out when it comes to precision medicine.

Nevertheless, the trajectory of our health care system is clear - much of the data that will fuel the big data revolution is already on the cloud (many apps readily use this data for various purposes but simply the data isn't completely interoperable across systems) - the velocity (whether we get there 5 or 20 years from now) is less relevant.

But amidst all the hubbub about these new developments (like the potential Star Trek-ification of future health care diagnostics) some have cried foul on an issue that Americans take very seriously - privacy.

Imagine a decade from now, that throughout the day, you're wearing the Apple iWatch - it monitors everything including your blood pressure, body temperature, and the amount of calories burned throughout the day. The information is uploaded to your iTunes account so you can track your daily activity, it shares the information with your electronic health record (maintained by your local physician, ACO etc.) so your health care provider knows what you mean when you say "I run every day!", and somewhere along the line, it ends up being part of a study looking at the effects of wearing the Apple iWatch on weight loss. Of course, the researchers are careful to aggregate the data - removing information like zip codes, addresses, social security numbers and other identifiable characteristics to make sure that no one - not the government, not your health insurer, nor any marketing agencies interested in maximizing their outreach efforts - can use the data to identify any individuals. Unfortunately, the reality is that no matter how careful researchers are, someone is bound to make a mistake - although the risks of re-identification (particularly post-HIPAA) are estimated to be fairly low, as information becomes more digitized this will increasingly become an issue.

Not only is re-identification an issue, but security of the records - protecting against data breaches - will become ever more important. As health information gets stored on the cloud - in a server that is just as likely to be located domestically as it is in India or the UK - it becomes, by definition, less secure. Of course, advances such as public key cryptography (where data is locked by one "public" password, but can only be unlocked by another "private" password), MD5 hashes, and ever-increasing encryption complexity, help to protect against these threats. The impending digitization of health care data will make these innovations ever more important, and federal (as well as state) regulatory standards will have to keep pace.

But let's assume for a moment that digital security will be able to prevent nearly all data breaches, personal information will be stripped where necessary, and federal regulations will help, not hinder, these efforts. There still remains a question that privacy advocates should worry about - that of permission. High profile lawsuits against companies like Facebook (which used members' profile information to help target ads) occur because companies can be negligent (whether intentionally or not) about requesting their users' permission to use personal data. For the time being this isn't a major issue (of course, there are exceptions) - health insurers aren't constantly scouring Facebook just yet to help them determine your premiums. But once again, as information becomes more digitized - particularly relevant health-related information (for instance, how much you run during the week, how many calories you intake etc.) - different stakeholders, like insurers, employers, and the government will certainly have an interest in accessing it (whether to adjust your insurance premiums or to investigate fraudulent disability claims).

The incentive for various stakeholders to seek out relevant personal information about you will put enormous pressure on developers of these gadgets and apps of the future, particularly when it comes to using your data. To maximize the use of these innovative technologies and maximize their benefit to society, companies will need to assure their customers that they will retain complete discretion over how their information is used. Privacy policies will need to be simplified from legalese into easy-to-read language so customers understand when they're signing away their information to be sold to third parties. One competitor for Qualcomm's Tricorder Prize (a competition to develop a Star Trek-like medical device), the Scanadu, offers what may very well be a gold standard for privacy:

The most recent data will be stored on your phone. But you will help us define the way data is stored for the long term. It is anonymized and encrypted. It is your data. What ever we'll do - it will always be opt-in.

You are the only person that has access to your data. You do however have the ability to share the data with doctors or even your friends and only if you want to.

It doesn't really get any simpler than that. A simple checkbox that simply asks "yes or no" is all that's necessary (here is where federal regulations can help - the DOJ can issue simple "model" privacy language for developers to build off of).

But what about insurers? Surely, they have a right to know (and risk-adjust appropriately) if you have a genetic abnormality that predisposes you to a particular form of breast cancer. Let's ignore, for a moment, the fact that insurers are currently not permitted to discriminate based on genetics. There are other ways for insurers to encourage consumers to share this kind of information without bringing to mind a "big brother" corporate dystopia. The car insurer, Progressive, for example, lets prospective customers attach a device to their car to track their driving for a period of time. The information gathered can then be used to reduce their insurance premiums, but the company promises not to use the information to increase premiums (say, if you're a more erratic driver than other, similar drivers). Rather than penalizing people for sharing their risk factors, insurers can reward them - for instance, by helping to decide what the most appropriate and cost-effective course of action is, if a mutation in the BRCA gene is discovered.

Nevertheless, the onus will remain on developers that are leading the big data revolution in health care to ensure that customers understand what they're sharing (if anything), who they're sharing it with, and most importantly developers will have to allow customers to opt-out of sharing as well. Indeed, the big data revolution in health care can be accelerated if consumers trust that their data is safe and secure, and that they are in control of their data, rather than the big bad insurer, hospital, or generic "corporate giant." The market, along with smart and lean government regulations will ensure that companies that protect their customers' privacy will be the ones that succeed in the big data era.

Bundled Payment for Healthcare Taking Off

2013-05-29T21:54:43Z

In today's evolving healthcare market, hospitals are under increasing pressure to provide better quality of care at lower cost. The fee-for-service payment system that's been in place for years rewards volume, not value. It unintentionally encourages the inefficient use of resources, thereby driving up medical costs because it doesn't connect payment to outcomes. As commercial and public payers attempt to get healthcare costs under control, there is growing recognition that we need new payment models. One approach gaining momentum is bundled pricing.

It was previously reported that over 500 organizations will participate in CMS's bundled payment initiative within the next year. In addition, we know that many commercial payers and providers are collaborating to implement bundled payment programs. As we predicted, bundled pricing is here to stay.

But not all bundled pricing is created equal. There are many definitions. Some approaches are more likely to work than others; and some are a really bad idea, likely to repeat the problems of HMOs in the 1990s. Until accountability for outcomes is tied to payment and the market becomes more transparent, we won't see the changes that are needed within the healthcare system.

One concern is that as hospitals quickly move to adopt bundled pricing initiatives, including those sponsored by CMS, these programs will only focus on lowering costs without delivering better outcomes. Effective bundled payments must deliver a "standardized," evidence-based set of services for a fixed price with specific quality guarantees. This approach will force care providers to align their efforts to manage underlying cost drivers and focus on outcomes.

Healthcare providers must realize that bundled pricing requires more than combining relevant procedural codes and offering services at a reduced price. Implementing bundled pricing requires significant preparation and organizational change. When designing a bundled payment model, measures must be in place to track variability in cost and quality across the continuum of care. The model also requires an environment where clinicians and administrators have established a partnership involving strong communication and coordination. Hospitals that fail to take these steps will have a difficult road ahead of them as stakeholders across the industry demand more value for their healthcare dollar.

As I discuss in Healthcare at a Turning Point, a well-structured bundled pricing model that delivers defined outcomes at a specific price will better meet the demands of both payers and patients. It will ensure that we achieve the ultimate objective - better health outcomes at lower cost. Keeping this objective in mind, how are you seeing the changes described above playing out in your area of work? Please share your thoughts.

Does California Redeem Obamacare? Not At All

2013-05-29T12:30:33Z

Last week, California released proposed rates for health plans to be sold on the state's exchange - and listening to those championing Obamacare, there wouldn't appear to be much "rate shock" in the proposed premiums. Indeed, the statewide average of the three lowest cost silver plans is around $321, and according the way that California's health benefit exchange frames it, it would appear that premiums are actually falling!

Are premiums really falling? Will lower than expected competition, more comprehensive benefit requirements, and tighter age-band restrictions cut costs?

Let's take a moment to review the evidence.

1. The claim that premiums are falling is likely not true. The California health benefits exchange compares the average of the three-lowest cost silver plans that will be offered in 2014, to the average and "comparable" rate for the small group market in 2013. In most cases, the new plans that will be offered come with a lower price tag than the existing small group plans. But this is an improper comparison. The plans offered on the health insurance exchanges will cater to the individual market - the small group market is used by organizations and companies, and likely offers more comprehensive, employer-sponsored coverage (CBO has noted that employer-sponsored coverage has, on average, higher actuarial value than the individual market).

Estimates of average insurance rates are hard to come by, and can vary depending on the source. Earlier this year, however, consultancy Milliman released a report on the Californian individual health insurance market which indicates a 2013 average premium of about $314 - judging by this standard, the increase is small (around 2 percent, but it is an increase nevertheless). Yet, looking at other data - such as that from the Kaiser Family Foundation - makes it look as though premiums have truly skyrocketed. In 2010, the average individual market premium in California was $157 - this means that over 4 years, premiums will have spiked by around 104 percent. It isn't a stretch to think that insurers would have begun increasing pricing steadily over those years, so that come 2014, the increase didn't resemble a "rate shock."

2. California already has the largest individual market in the country. According to data from the Society of Actuaries, California's "non-group" market pre-Obamacare, was the largest in the country, at around 1.8 million individuals. The next largest was in Texas, at less than half that number. One of the reasons that generally, the individual market is so expensive, is that there really isn't much of an individual market across the country. The large majority of people receive coverage through employers, and the rest through Medicaid or Medicare - and fragmented state rules for how insurers can conduct business in the individual market have led to an expensive an inefficient status quo.

Bucking the trend, however, California's individual market was well developed pre-Obamacare (and California's lower-than-average individual market premium in 2010 is emblematic of that). Yet, one would expect that the new regulations being imposed in California (such as guaranteed issue) would contribute quite a bit to premium hikes. However, the Milliman analysis mentioned above indicates that the newly insured in California will likely have better average health status than the existing insured - a risk pool where the average beneficiary becomes healthier can stymie premium hikes.

3. California is not representative of the country as a whole. Only a handful of states have issued their 2014 rates. As other states confirm what their insurance marketplace will look like, we will have a better idea of the wide-ranging impacts of Obamacare on insurance costs. States with relatively non-existent individual markets that are largely unregulated will likely see the largest premium hikes. California is unique in that it already has a fairly robust individual market. States with a largely non-existent individual market, with uninsured that are in poor health will see the biggest impact. At the very least, champions of the president's 2010 health care law should be cautious about using California as evidence that the law is "working."

Regardless of which narrative is most convincing, the underlying point is this - premiums are increasing in California. And they will increase in most states as well. It is illogical and unrealistic to think that Obamacare's health exchanges with comprehensive health insurance policies will lower premiums or slow health care costs - they won't.

Ranbaxy, intellectual property rights, and access to quality medicines.

2013-05-28T15:16:19Z

As a follow up to our post last week on Katherine Eban's disturbing article on Ranbaxy's massive fraud on the FDA, we thought we'd follow up with a closer look at the U.S.-India trade environment, particularly with regard to pharmaceuticals and intellectual property rights (IPR).

The U.S. runs an $18 billion trade deficit with India, of which approximately $4.5 billion (or 25 percent) is attributable to pharmaceuticals, primarily generic drugs. Although India is an attractive and growing market for U.S. companies, U.S.-based pharma companies have been hesitant to invest in India or to make more of their products available to Indian patients for fear that their IPR will be stolen by Indian companies - with the blessing of the Indian government and courts.

These concerns are not unfounded. In a May 2013 report from the U.S. Trade Representative, India was highlighted on the USTR's "Priority Watch List" for countries with weak IPR and enforcement.

While investors have been hoping for several years that India would strengthen its IP regime and begin to move up the pharmaceutical value chain by producing more innovative pharmaceuticals, it seems to be a case of one step forward, two steps back. The USTR notes that:

In many areas, however, IPR protection and enforcement challenges are growing, and there are serious questions regarding the future condition of the innovation climate in India across multiple sectors and disciplines. ...

In the pharmaceutical sector, some innovators are facing serious challenges in securing and enforcing patents in India. ...

The United States is concerned that the recent decision by India's Supreme Court with respect to India's prohibition on patents for certain chemical forms absent a showing of "enhanced efficacy" may have the effect of limiting the patentability of potentially beneficial innovations. Such innovations would include drugs with fewer side effects, decreased toxicity, or improved delivery systems. Moreover, the decision appears to confirm that India's law creates a special, additional criterion for select technologies, like pharmaceuticals, which could preclude issuance of a patent even if the applicant demonstrates that the invention is new, involves an inventive step, and is capable of industrial application.

The United States will also continue to monitor closely developments concerning compulsory licensing of patents in India, particularly following the broad interpretation of Indian law in a recent decision by the Indian Intellectual Property Appellate Board (IPAB).... In particular, India's decision in this case to restrict patent rights of an innovator based, in part, on the innovator's decision to import its products, rather than manufacture them in India, establishes a troubling precedent. Unless overturned, the decision could potentially compel innovators outside India - including those in sectors well beyond pharmaceuticals, such as green technology and information and communications technology - to manufacture in India in order to avoid being forced to license an invention to third parties.

In other words, India is clearly maintaining policies designed to bolster its domestic generic pharmaceutical industry profits at the expense of foreign competitors and IPR.

When the patent for Novartis' leukemia drug Glivec was overturned, for instance, Novartis was already giving away, for free, supplies that met 95% of the Indian oncology market, selling just 5 percent of its product to the small sliver of insured or affluent Indians that could afford pay a higher price or co-pay for the drug. That's hardly a record of profiteering on human misery.

Indian courts have also overturned patents on drugs like Glivec, Bexxar, and Viread.

At the end of the day, Indian generic companies don't subsist on charity. Indian companies make billions in profits from sales to customers in other affluent and mid-market nations, including the U.S. (about 40% of all pharmaceutical Indian exports), Latin America, and the European Union. Wealthy country taxpayers also underwrite the Indian industry, since 70% of the drugs purchased through international aid programs come from India.

Because generic drug companies don't have to conduct clinical trials to prove that their products are safe and effective, producing generic drugs for export is an enormously profitable business, allowing generic drug companies like Ranbaxy to become large multinational companies in their own right (Ranbaxy currently is the 9th largest drug company in the U.S.; overall, Indian exports around $11 billion in drugs annually.)

As the Ranbaxy case shows, however, the sheltered treatment of Indian generics firms like Ranbaxy from domestic regulators and international aid groups appears to have led to a culture of complacency, entitlement, and greed. As Eban writes,

[Ranbaxy's own] confidential report laid bare systemic fraud in Ranbaxy's worldwide regulatory filings. It found that "the majority of products filed in Brazil, Mexico, Middle East, Russia, Romania, Myanmar, Thailand, Vietnam, Malaysia, African Nations, have data submitted which did not exist or data from different products and from different countries ..." The company not only invented data but also fraudulently mixed and matched data, taking the best results from manufacturing in one market and presenting it to regulators elsewhere as data unique to the drugs in their markets.

Sometimes all the data were made up. In India and Latin America, the report noted the "non-availability" of validation methods, stability data, and bio-equivalence reports. In short, Ranbaxy had almost no method whatsoever for validating the content of the drugs in those markets. The drugs for Brazil were particularly troubling. The report showed that of the 163 drug products approved and sold there since 2000, only eight had been fully and accurately tested. The rest had been filed with phony data because they had been only partially tested, or not at all.

No corner of the globe was untouched by Ranbaxy's fraud - including drug's purchased by the World Health Organization's antiretroviral programs in Africa.

In other words, Ranbaxy fell into the trap that all domestic industries that are shielded from international competition eventually fall into: shoddy quality, bloated profit margins, and negligent management.

Competition is the best solution to this problem. Large Western pharmaceutical companies are increasingly recognizing that there is a business and a moral case to be made in pricing both new products and branded generics at prices that are affordable in many developing nations.

Partly, this is because the market for their products in wealthy countries is saturated, with sales flat or declining (thanks in part to patent expirations, the total value of the U.S. prescription drug market actually declined in 2012, according to IMS). Not only does the developing world represent a new sales and profit opportunity, Western companies can compete on quality - backing up, with their brands, the quality of their product in markets where fake or substandard products routinely sold to patients.

Broadly, Western companies are also making much better efforts to expand access to their newer products. GlaxoSmithKline, for instance, caps prices of its products in 49 of the world's poorest countries at 25 percent of their developed world prices.

GSK and Merck have also pledged to make their rotavirus vaccines available to developing countries at sharply reduced prices through the Global Alliance for Vaccines and Immunisations (GAVI). Gilead, a leading innovator in HIV/AIDS either sells its life-saving AIDS medicines at little or no profit in poor countries, or licenses them (as in the case of South Africa) to local producers who sell them at affordable prices.

How does this relate to intellectual property rights and Ranbaxy's fraud?

Strong IPR regimes in developing countries - including India - will encourage large Western firms to expand access and sales even more broadly in developing markets.

Protecting IPR would also open India's domestic market to more foreign direct investment, injecting the much-needed expertise, technology, and adherence to international regulatory norms into India's pharmaceutical industry. This would be a win-win, for India, which would be able to raise the quality of its generic products while also expanding into the production of branded drugs.

Generic companies that make excess profits selling substandard drugs are the only companies who have anything to fear from greater competition. Indian patients would benefit from improved access to higher quality, but still affordable generic and branded medicines.

Ironically, regulators in the U.S. and EU - when they pay attention, as they likely will now - already have enough muscle to police Indian companies. It is the world's poorest countries, where regulation is weakest, who have the most to gain from bringing international regulatory and IPR standards to bear on Indian manufacturers.

India won't likely get serious about fixing its lax regulations and weak IPR restrictions until Congress and the Obama Administration signal that the status quo is unacceptable, given the risk to American patients. And if they don't, America should look elsewhere for high quality generic drugs.

Health Care Spending Slowdown: Don't Jump For Joy Just Yet

2013-05-24T17:05:10Z

Reports and news stories abound with news of a slowdown in national medical spending over the past few years. Indeed, from 2009 to 2011, growth in health expenditures has remained relatively steady at 3.9% annually - moreover, in 2010, the gap between GDP growth and growth in health spending was only 0.1%, while in 2011 GDP grew 0.1% faster than health spending. If this trend can be sustained, the story goes, we may finally be seeing health care spending growth reach a plateau. Unfortunately, a few sobering facts make this unlikely.

2 Years of Growth Are a Poor Prediction

Evaluating the optimistic claim, Victor Fuchs writes in the New England Journal of Medicine:

Some observers place great emphasis on the particularly slow growth of national health care expenditures in 2010 and 2011. How useful is the experience of growth over a period of 2 years...[t]he answer seems to be not at all.

Fuchs compares 2-year rates of growth in health care spending and the subsequent 20-year growth rates, finding that there is surprisingly a negative relationship, but one that isn't statistically significant. Indeed, it seems odd to take the results of 2 years of growth and assume that they are indicative of a new, long-term trend. The Great Recession without a doubt contributed to a slowdown in health care spending (and utilization) as well - so unless we are entering a "new economic normal" of perpetually weak growth (certainly undesirable no matter how much it slows health care spending) examining two years of growth in a vacuum speaks little about the future of health care spending.

Even as costs for certain segments of the health care market (like inpatient services or pharmaceuticals) grow slower than before (for instance, part of the slowdown in health spending has been attributed to the "patent cliff" that hit pharmaceutical companies), costs will continue to grow - and there is little reason to think that the dynamic of health care costs growing faster than GDP will change in the near future.

Demographic Changes Will Grow Health Spending

Not only is a two-year benchmark a poor estimate for the next decade, it also ignores something that is almost a cliché - the population is aging, and aging fast.

Source: Census Bureau

According to Census Projections, the elderly population will skyrocket by 2030 - and this trend will continue unabated to 2050. By 2050, the percentage of the population that is 65 years and older will grow to 20 percent, from around 13 percent in 2010. And while this may be a long-term trend, the short-term doesn't look much better either. In their recent updated budget outlook, the CBO notes that an aging population will play heavily into increasing deficits in the later part of this decade.

An aging population means more individuals with health care needs that include chronic diseases like diabetes and Alzheimer's - all of which are expensive and difficult to treat.

Obamacare Expands Health Insurance Coverage

Although in the long-run, and relative to the total size of our health expenditures, this may not be very much, Obamacare is projected by CMS to increase health care spending by about $500 billion over 10 years. As my colleague, Paul Howard, and I discussed at great length in a recent report, Obamacare's focus on a comprehensive insurance expansion along with reducing out-of-pocket spending means that under any and all assumptions, the law will certainly increase health care costs and spending.

Simply put, having more people with comprehensive insurance coverage that covers everything from routine doctor's visits to $9 birth control pills, will result in more people using health care resources - all culminating in greater health expenditures.

Fundamentally, all evidence points to the dip in health care spending growth being a temporary slowdown. Without radical reform to our health care system that encourages (rather than discourages) thriftiness with health care spending (by focusing on high-deductible plans and HSAs) and without broad reform to major government health programs (as opposed to gimmicky savings under Obamacare) health care spending growth will grow unabated.

Indian generic drug industry on trial?

2013-05-22T19:02:15Z

If you haven't read Katherine Eban's gripping (and somewhat terrifying) exposé of gross fraud and deception at the Indian generics multinational Ranbaxy, you don't know what you're missing. Or more accurately, what might have been hiding in your medicine cabinet for the better part of a decade. Eban writes that,

On May 13, Ranbaxy pleaded guilty to seven federal criminal counts of selling adulterated drugs with intent to defraud, failing to report that its drugs didn't meet specifications, and making intentionally false statements to the government. Ranbaxy agreed to pay $500 million in fines, forfeitures, and penalties -- the most ever levied against a generic-drug company. (No current or former Ranbaxy executives were charged with crimes.) ...

Fortune's account of what occurred inside Ranbaxy and how the FDA responded to it raises serious questions about whether our government can effectively safeguard a drug supply that last year was 84% generic, according to the IMS Institute for Healthcare Informatics, much of that manufactured in distant places. More than 80% of active pharmaceutical ingredients for all U.S. drugs now come from overseas, as do 40% of finished pills and capsules.

In a nutshell, Ranbaxy duped the FDA and other international regulators for years, fabricating documents and tests that the drugs it was selling met regulatory requirements for safety and efficacy, especially in comparison to the innovator medicines they were meant to mimic.

The story isn't likely to end with last week's settlement, since Ranbaxy has already said it is laying off 1/3 of its global sales force, and the company's officers may still face additional criminal charges or lawsuits from individual consumers.

For years (exactly how long is unclear) Ranbaxy submitted fake data to the FDA, falsifying or backdating records requested by regulators, and substituting tests on branded drugs for their own putative manufacturing runs. The scale of the fraud is breathtaking, and calls into question how the FDA could've been fooled so thoroughly for so long.

Most disturbingly, we don't know if Ranbaxy is a rogue actor or the tip of a corrupt iceberg in the loosely regulated Indian pharmaceutical industry. This is especially disconcerting given that Indian drugmakers have been growing their stakes in the U.S. generics market.

Source: http://thomsonreuters.com/content/science/pdf/ls/newport-deals.pdf

FDA regulators and inspectors have a tremendous workload, especially as the industry has shifted to a global manufacturing model. They simply cannot inspect every manufacturing facility outside the U.S. on the same schedule they do for the U.S. (According to the GAO, 40% of domestic facilities are inspected every year; which means U.S facilities are inspected about once every two-and-a-half years; internationally, that falls to around 11% or once ever nine years). (To the agency's credit, they have been making progress in inspecting more facilities, as the GAO report notes.)

Broadly speaking then, the FDA regulatory system operates on trust. Trust that the data submitted to the agency by the regulated companies and their contractors is genuine. This is different from a rogue contractor substituting substandard ingredients in Heparin, or oncologists buying drugs on the internet in an effort to boost their margins. Here we have a large multinational company, the ninth largest generic drug company in the U.S., and the second largest drugmaker in India (just behind Abbot's Indian subsidiary) simply thumbing its nose at U.S. and E.U. regulations with a sense of total impunity.

Last year's PDUFA agreement, FDASIA, for the first time included a new generic prescription drug user fee program, to allow the FDA to hire more reviewers to review - and likely expedite - generic drug applications. Hopefully, this will also lead to more scrutiny of companies, like Ranbaxy, that operate outside the U.S. (as per GAO's recommendations) and whose manufacturing facilities face less scrutiny from U.S. regulators - and weak enforcement from domestic regulators.

FDASIA also contains provisions for increasing the inspection of foreign facilities, and for working with foreign regulators to task agency inspectors at the highest risk facilities (less inspections, for instance would be required in the E.U.) and more in higher risk countries with lax regulation, like India.

But the FDA is never going to be able, for cultural and logistic reasons, to simply show up at Indian plants and deliver the same degree of scrutiny that they can at U.S. based operators.

Here's another idea: Congress should consider requiring the FDA should to utilize its own or private laboratories to conduct spot inspections of foreign generic drug shipments on a regular but random basis to ensure that companies (especially those without a proven record of consistent quality) haven't run up a "test batch" for FDA scrutiny and then later substituted substandard or adulterated drugs for the U.S. market.

This should be done on a "trust but verify" basis, with more frequent spot inspections from high risk countries or suppliers with a spotty safety record, with inspections tailing off after the company demonstrates it can consistently deliver high quality products.

The results of all FDA testing should be shared with the public, on a website, to name and shame companies that don't meet FDA standards (and help consumers identify those that do). If a company batch fails a testing requirement, they should be fined and a larger inspection of that entire drug line should begin.

If widespread problems are detected sanctions should escalate rapidly, and repeat offenders should be debarred from selling to any federal programs and/or loss of Hatch-Waxman exclusivity until the problems are resolved. The key will be to prevent companies like Ranbaxy from playing shell games with the agency while violations drag on for years.

These may seem like harsh penalties - and the FDA is rightly concerned about drug shortages for critical medicines - but until the FDA and Congress signal that the integrity of the U.S drug market is a priority, unscrupulous firms will bet that their frauds will go undetected and unpunished.

The 1984 Hatch-Waxman Act has led to a sea change in the U.S. drug market, accelerating generic drug access and rewarding companies that are "first to file" successful patent challenges with six-months of exclusivity. But the enormous financial stakes, combined with fiercely competitive generic industry, may push companies to cut corners in an effort to lower costs and maintain high profit margins. This is what seems to have happened at Ranbaxy.

Worse yet, Eban's article implies that Ranbaxy's substandard drugs may have killed people, including AIDS patients in Africa. A list of drugs currently supplied by Ranbaxy includes medicines for anxiety, high blood pressure, Alzheimer's, depression, and malaria. Poorly controlled disease due to substandard medicines could've easily led to serious hospitalizations or deaths for these indications.

The FDA says that it doesn't think that anyone was harmed by these drugs, and the vast majority of generic medicines are (probably) safe. But Eban's article should shake everyone's confidence. Given the size of the U.S. market, and the relatively high background rate of morbidity and mortality for many chronic diseases, it might be very difficult to detect complications or side effects resulting from Ranbaxy's drugs. But that doesn't mean that they aren't there. And this isn't the first time that the FDA has had to walk back assurances of generic drug effectiveness or safety.

Whatever you think of the FDA's approach to regulation of innovator drugs, this is one area that conservatives and liberals should rally together and demand higher standards. The Ranbaxy story strikes at the heart of the FDA's core mission of ensuring that a drug is safe, contains the ingredients listed in the label, and performs as advertised compared to its branded cousin.

It's especially disquieting that it took the FDA years to crack down on Ranbaxy, and that the agency continued to approve Ranbaxy drugs - including generic Lipitor (which itself erupted in a scandal due to glass particles being found in the drug) - long after whistleblowers were feeding the agency inside information.

Here's one final question this time for Indian patients, policymakers, and international aid groups that have championed India's generic drug industry: If Ranbaxy is willing to treat its largest and most important market with complete contempt, what standards operate inside India or other developing countries, especially when, as Eban notes, Ranbaxy's own executives refused to expose themselves or their families to the firm's drugs?

In the U.S., the expansion of the FDA's powers to regulate drug safety grew out of a number of scandals and deaths that called into question the industry's ability to self-regulate. If India wants to continue to have access to the U.S. market, Indian policymakers should seize this opportunity to raise the quality level across the entire industry, and prevent even worse scandals down the road.

If Indian regulators don't act, Congress should restrict access to the U.S. market until they do.

(Roger Bate, at AEI, provides an excellent overview of quality problems afflicting the Indian generic drug market. He also suggests that one of the forces inhibiting the development of a "quality first" drug culture at Indian pharma firms is the country's weak intellectual property regime, which discourages foreign companies operating in more stringent regulatory environments from investing in Indian subsidiaries. From this perspective, it will be interesting to see if Daiichi Sankyo's takeover of Ranbaxy will help change the company's dysfunctional corporate culture. Or maybe the Japanese company will find some way to walk away, given the current scandal.)

Insuring The Routine

2013-05-20T20:23:53Z

As I've written here and elsewhere, Obamacare furthers a public misconception of what "health insurance" is meant to be. The law requires plans that are sold on health insurance exchanges to cover a vast array of benefits ("Essential Required Benefits") that include basic, inexpensive preventive care with no cost-sharing. And by doing so, the law mistakes what insurance actually is - a financial instrument to help individuals pay for costly, unexpected, events.

You want insurance that covers everything from an annual doctor's visit to the $9-a-month birth control pill? Then be prepared to pay more.

Ultimately, however, the insurance exchanges are likely to affect a relatively small share of Americans - at last count, about 25 million according to the CBO.

The majority of Americans - around 160 million - will continue to receive insurance through their employers (whether this is desirable or not is a whole different question - hint: most economists believe it isn't). But even here, Obamacare's miscalculation of what insurance should be, is creeping in.

Perhaps what's most noteworthy about Obamacare is that it offers a case study for Econ 101 students in unintended consequences.

Obamacare's major change to employer-sponsored coverage is that firms with 50 or more (full-time equivalent) employees will be required to offer health insurance to their full-timers, else pay a per-worker penalty of $2,000 (there is a separate penalty for workers who are offered "unaffordable" health coverage).

Because one goal of the health reform law was to disrupt as little as possible existing coverage (remember that "you can keep your coverage if you like it"), requirements for employer-sponsored insurance are significantly less onerous than those for plans sold on the exchanges. The only real requirement is that employer-sponsored plans have to cover preventive services with no lifetime benefit limits.

As can be expected, we've already seen employers discuss cutting hours and employment as ways of avoiding this mandate. But a WSJ piece out on Sunday offers insight into a third strategy: cutting benefits.

As the WSJ article points out, a number of businesses including two food-chains in Texas will offer "skinny," mini-med plans - relatively inexpensive form of health insurance. These types of policies have been around well before Obamacare and typically don't include coverage for surgeries or hospital stays, and when it comes to drug coverage, tend to only cover generics - they can often be priced at under $100-a-month.

For those of us concerned about health care costs and waste in the health care system, this is a mixed blessing. Perhaps few employers will embrace mini-med plans; maybe many will. The big picture, however, is what deserves attention. There appears to be a growing industry-level move that focuses more on insuring routine health events like doctor's visits along with (or, as in the case of mini-meds, instead of) expensive events like surgeries and hospitalizations.

This is exact opposite of what you'd want to see. We should be encouraging people to pay for more routine costs out of pocket, rather than relying on insurance. For really big ticket items - like hospitalization or expensive chronic illnesses, insurance should bear the cost.

Such is the law of unintended consequences that Obamacare is extending coverage for many services where the evidence on value is actually pretty weak.

Before Obamacare, the American health care system was bifurcated (trifurcated, really - but that's a discussion for another day): those with health insurance and those without.

Underpinning the law was unambiguously a belief that when someone wants to see a doctor, they should be able to do so at minimum cost to them - costs to others be damned! That regular doctor visits are cheap (and getting cheaper courtesy of companies like Wal-Mart!), or that annual physical exams (that will now be effectively free) have not been shown to improve health outcomes was never a concern to the drafters of the law. But they missed something potentially worse - further fragmentation of the health care system.

Those receiving health insurance as a result of the employer mandate (or those whose employer-sponsored insurance will change its benefits package) might end up becoming "second-class" policyholders who can see a physician at no cost to them, but god forbid they land a kidney infection that requires a weeklong hospitalization. We know that this wasn't the intention of Obamacare's backers, but their preferences blinded them to another set of problems. It's understandable that the authors of the law missed such potential market shifts - after all, it's hard to see the forest for the trees when you're layering regulations on a market with very few signals thanks to other regulations.

"Reformers of the reform" should take heed and remember that insurance doesn't need to be comprehensive - covering the most unexpected events is all that's necessary. Direct Primary Care memberships - like Primary Care 1 in West Virginia - can be cost-competitive with mini-med plans, while offering a far wider range of services. Layering catastrophic insurance on top of that would help cover rare but expensive events that mini-meds don't. And in a bit of good news, Obamacare allows such plans to be sold on the exchanges and they even qualify for federal subsidies (albeit with a requirement that the DPC plan provide a "medical home" as well).

Those in Congress concerned about how the implementation of the law will play out should focus their energies on making the law more friendly to catastrophic plans on their own (for those who are healthy enough and don't need an annual doctor's visit, for instance) by allowing the use of premium subsidies for these low-cost plans.