Home > Business of Medicine, Cost of Healthcare > Why Healthcare is So Expensive Part 5 – Pharma Gone Wild

Why Healthcare is So Expensive Part 5 – Pharma Gone Wild

 

A few days ago a patient of mine developed a cold sore on her lip and wanted a prescription for Zovirax, a medication she had used many times in the past.   When she got to the pharmacy, I got the dreaded call that the medication needed a prior authorization.   For Zovirax?  So strange, since its a common med and is inexpensive.

Insights-Closing-the-digital-gap-in-pharma-1536x1536-300_StandardWell I did a little research and found out that Zovirax was recently sold by its original manufacturer to Valeant, a drug company that is known for buying small drugs and jacking up the prices dramatically.  It turns out that a small tube of Zovirax now costs $2500.  For an ointment for cold sores.

What the heck is this all about?   How is it possible that it is legal for a company to corner the market on a common and old drug and makes it extremely expensive?  Unfortunately it is entirely legal.

The real problem is that our health care system doesn’t operate as a traditional market. In most cases, doctors and patients don’t feel the direct costs of their decisions.  As such, real market forces don’t apply.  If pharma were a functioning market, increasing the price would have an effect on demand, and an equilibrium would be reached with the price balanced the demand.  But since the user of the drug doesn’t feel the cost, demand is relatively static relative to price (or is “inelastic” in economic terms.)  And since many insurers, including the government, can’t negotiate with pharma companies on what they will pay for drugs, there is almost no incentive for the pharma companies to charge less.  And as we discussed in a previous post, insurance companies have no incentive to decrease the cost of care, so the insurance compaies don’t really want to push back too hard on drug costs.  Remember, the more they spend on healthcare the more they can charge in premiums, and thus the more money they can make.   So there is no one in the system that is actually incentivized to make drugs costs less, and every incentive for them to cost more.

All this has led to some really shady activity in the pharma market.

Lately, there has been this new strategy of buying up an old drug that is no longer very profitable and raising the price dramatically.   This was big in the news surrounding the activities of Retropin and Turing Pharmaceutical and their former CEO and now criminal Martin Shkreli, who dramatically increased the price of Daraprim, a drug primarily used in HIV treatment.  We basically are seeing the same thing with Zovirax, which went from $30 dollars a tube to approximately $2500.

There is no regulation at all in pricing, which leads businesspeople to treat drugs like stocks to be bought and sold, shorted and optioned.  They buy the drug and price it in a way that makes the maximum amount of money, even if that means that its use goes down by 900% in return for a 10,000% increase in cost.  They don’t care that this means that most people won’t benefit from the drug anymore – they just care that this pricing leads to more profits.  This so called “predatory pricing” is completely against the very nature of why people would create drugs – to actually help people with disease.   So this is a regulatory problem in that we are allowing drugs to be acquired in this way.  You have to ask yourself – why is a person whose primary education is in running hedge funds starting to operate pharma companies?  The answer is because its an entirely unregulated market where they can turn all kinds of dials to make a ton of money.  That’s what hedge fund people are about – making money.  That’s fine for hedge funds, but drugs aren’t stocks and bonds.  Yet they’re being treated like they are.  There are a lot of ultra capitalists that like to believe that complete pursuit of profit will lead to the best outcomes for all, and maybe that’s true and maybe its not.  But what we have now is neither a regulated market nor a complete free market.  Its some kind of bizarre market where both the consumer of a service and payer for that service have no control over pricing, and the provider can actually set prices anywhere they want and still see significant demand.

We also see a bizarre situation where drugs are priced not based on cost of research and production plus a profit margin, but by a “discount to the condition being treated.” for example, there was a drug called Makena that was a branded version of a drug that previously cost about $200 per treatment course.   This drug reduced the incidence of preterm birth.  They figured that preterm births cost a lot of money, and so if they increased the incidence they could charge some discount to the cost of managing that condition and thus be providing “value”.  The problem was that with this gorilla mathematics they came up with a price of 25k-30k per treatment course, whereas it was previously $200.  This is just crazy, even if it is a discount to the cost of condition being managed.   We will never drop the cost of healthcare if all we want is a slight discount to what we are doing now.  We have to rethink things fundamentally without anchoring to previous numbers.

Now I’m not against new drug development, and it does cost a tremendous amount to bring a drug to the market.  Many drugs fail during development process, and there is an argument that pharma has to recoup on drugs that are successful all the losses on the drugs that weren’t.  But is that really a good argument?   If I buy a house, am I expected to pay for that house enough money to make up for all the failures the builder had on previous projects?   Shouldn’t I pay based on the inherent value of that house?  How is it my problem that they lost money on other jobs?  Something to think about.

I’m entirely not sure what the answer is, but I’m sure that its part of the problem in American Healthcare.   We have allowed pharma to run rampant.   Profit cannot be the sole motivator of how pharma companies work, but since they are publicly traded companies, they have fiduciary responsibility to make as much money as they can.  So that’s a broken system, and we have to fix it somehow.

 

  1. August 28, 2017 at 5:52 am

    I would have thought that already existing rules against monopolies would have prevented such abuse as you write about in the article. Since Zovirax and other such meds are now no longer protected under patent, what is preventing other drug companies from starting up production of these drugs so that there can be competition once again?

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