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Sen. Sander's prescription drug bill

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http://www.guardian.co.uk/commentisfree/cifamerica/2011/may/31/healthcare-pharmaceuticals-industry?CMP=twt_fd

 

 

 

Senator Bernie Sanders proposes a major reform of the way we pay for prescription drugs and fund research. He's patently right, drugs

are cheap. There are few drugs that would sell for more than $5-$10 a prescription in a free market. However, many drugs in the United States sell for hundreds of dollars per prescription and, sometimes, several thousand dollars per prescription. There is a simple reason for this fact: government-granted patent monopolies.

 

The government gives patent monopolies to provide an incentive for drug companies to carry through research. This is an incredibly backward and inefficient way to pay for research. It leaves us paying huge amounts of money for cheap drugs. It also often leads to bad medicine. We can do better – and Senator Bernie Sanders has proposed a way. He has introduced a bill to create a prize fund that would buy up patents, so that drugs could then be sold at a free market price. Sanders's bill would appropriate 0.55% of GDP (about $80bn a year, with the economy's current size) for buying up patents, which would then be placed in the public domain so that any manufacturer could use them at no cost.

 

This money would come from a tax on public and private insurers. The savings from lower-cost drugs would immediately repay more than 100% of the tax. The country is projected to spend almost $300bn a year on prescription drugs this year. Prices would fall to roughly one-tenth this amount in the absence of patent monopolies, leading to savings of more than $250bn. The savings on lower drug prices should easily exceed the size of the tax, leaving a substantial net reduction in costs to the government and private insurers.

 

The Sanders prize fund bill would go far towards eliminating the problems that pervade the drug industry. First, it would end the nonsense around getting insurers or the government to pay for drugs. If drugs cost $5-$10 per prescription, there would be no big issues about who pays for drugs. This would eliminate the need for the paperwork and the bureaucracy that the insurance industry has created to contain its drug payments.

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This sounds pretty cool. Do you know of any good studies of the proposal or similar ones? Has a similar model ever been tried elsewhere? etc.

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This doesn't make sense. Why would drug makers (who, according to those figures, are taking in about $300 billion in revenue now) sell off their patents for a mere $80 billion? Sure, consumers could save about $250 billion, but only if pharmaceutical companies lose about $250 billion in revenue. It's zero-sum.

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This doesn't make sense. Why would drug makers (who, according to those figures, are taking in about $300 billion in revenue now) sell off their patents for a mere $80 billion? Sure, consumers could save about $250 billion, but only if pharmaceutical companies lose about $250 billion in revenue. It's zero-sum.

Yes, and?

 

It's not like this bill will go anywhere.

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They go somewhat hand-in-hand

Lobbyists are equal-opportunity offenders when it comes to partisan preferences, my friend.

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Yes, and?

 

It's not like this bill will go anywhere.

There are lots of good ideas that go nowhere too. I'm just wondering why Sanders thinks this is even a good idea.

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Lobbyists are equal-opportunity offenders when it comes to partisan preferences, my friend.

 

That may be true, but Boehner'opposition skews the bias against the legislation primarily to the conservative side on the issue.

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This doesn't make sense. Why would drug makers (who, according to those figures, are taking in about $300 billion in revenue now) sell off their patents for a mere $80 billion? Sure, consumers could save about $250 billion, but only if pharmaceutical companies lose about $250 billion in revenue. It's zero-sum.

 

because sanders is basically undoing Part D, and then bringing in the a piece british model. the plan alleviates much of the r+d costs, gives direct revenue for select drugs, while leaving much of the pharm monopolies in place.

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because sanders is basically undoing Part D, and then bringing in the a piece british model. the plan alleviates much of the r+d costs, gives direct revenue for select drugs, while leaving much of the pharm monopolies in place.

Where does R&D money come from under his plan then?

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Where does R&D money come from under his plan then?

 

where it currently comes from, selling massive amounts of drugs

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I love how everyone points to pharmaceutical companies as a huge drivers of healthcare expenditures when it only accounts for 10% of all expenditures... and in both absolute and relative scales, its not accountable for the significant growth in cost.

 

That alone makes bills like this horribly idiotic.

 

That is... aside from it being idiotic on its merits

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Where does R&D money come from under his plan then?

 

Wouldn't the incentive come from the $80 billion for buying the patents? It's a lot less than $250 billion, but it's not chump change.

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Wouldn't the incentive come from the $80 billion for buying the patents? It's a lot less than $250 billion, but it's not chump change.

I think any industry would have a tough time maintaining anywhere near current quality and output levels if its budget were cut by more than two-thirds, pharmaceutical R&D included. So in that sense, it is chump change. Even if it weren't, no company would give up its slice of $250 billion in exchange for an equivalent percentage of $80 billion, so none would sell their patents to this pool anyway.

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I think any industry would have a tough time maintaining anywhere near current quality and output levels if its budget were cut by more than two-thirds, pharmaceutical R&D included. So in that sense, it is chump change. Even if it weren't, no company would give up its slice of $250 billion in exchange for an equivalent percentage of $80 billion, so none would sell their patents to this pool anyway.

time value of money. $80 bil today or $250 bill down the road?

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time value of money. $80 bil today or $250 bill down the road?

Unless I misread, the figures from the Guardian article in the first post are annual figures. So the manufacturers would lose $250b per year in exchange for $80b per year. So the time-value of money would be irrelevant.

 

Even then, citing to the time-value of money assumes that they are placing their money in some form of investment to gain interest rather than spending it right away. And, assuming a generous 10% annual interest rate, it would take more than 13 years to turn $80b into $250b that way.

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PRIMER ON HEALTHCARE COSTS

If you cant read the figures, right click to copy the source url for the image on flickr and then paste into the address bar.

 

Question #1: Why Do Premiums Increase Exponentially Instead Of Linearly?

This is an oversimplified explanation but functional to demonstrate the reason why insurance premiums have been increasing rapidly over the last decade or so. Insurance fundamentally works on risk management principles. Private insurance companies will estimate the probability of making payments (and its expected dollar value) to healthcare providers, medical laboratories, etc based on disease prevalence statistics and projections. This expected cost is then divided up amongst the ill and all insurance plan holders in the form of monthly premiums. Deductions are the insurance company's means to deter beneficiaries from overutilizing healthcare services because at each office visit or for each prescription, a patient will be required to pay a flat fee or a percentage of the cost. This cost deferral also retains the benefit of placing a greater burden of the cost of being ill on the ill so that the healthy are not forced to burden the entire cost. Theoretically, this should serve as an incentive for people to maintain their health as long as possible. The expected costs are given a range of possibilities with the upper bound selected as the cost to be divided as insurance companies will ensure that they can cover the expected costs.

The cost of chronic illnesses is increasing exponentially because we are sharing the burden of cost as a society. The healthcare system is suffering the same woes as social security - just as there are proportionately fewer workers contributing social security tax dollars to the number of people drawing social security, there are fewer healthy workers contributing to the pot and more ill drawing from it. In the insurance world, the sick are a net negative on the balance sheet because though they may be contributing their premiums and deductibles, they are still costing more than they contribute. The healthy tend to underutilize healthcare services and as a result they contribute more than their share. As the country gets more unhealthy (not a debatable subject), there are more people drawing from the system and fewer contributing.

To show what I mean, lets perform a simple math example. Let us say that the average annual cost of a chronic illness is $10000 and that the nation shares the cost. But because a chronic illness limits the ability of a citizen to contribute to the healthcare payments, they can only pay half the cost of the $10000 (can also be considered the cap on out-of-pocket expenses), and society as a whole must pick up the tab. Assuming a constant 300MM person society, lets plug in different percentages of chronically ill patients. If you have only 5% of the population chronically ill, then the healthy person per-person cost sharing is $263. That doesn't sound awful. If we double the number of chronically ill, the healthy per-person cost sharing is now $555. Also not horrible, but this is not merely a doubling of the healthy person per-person cost at 5%! Thats because though costs are going up linearly, the burden paid by the healthy members of society is proportionately greater. Its not linear, its exponential growth! Now lets look at more severe percentages of chronically ill. At 30% chronically ill (not a randomly chosen number), the healthy person cost sharing is $2142 - thats more than $500 more per person than expected under a linear growth model.

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Maybe you think my oversimplified numbers are an issue, but no matter what numbers you want to use, the basic conclusion is not really fallible. The reason that our individual premiums are increasing in the private sector is because there are more sick and fewer healthy to pay for them. Unfortunately, wages do not increase at the same rate, therefore, as the premiums increase exponentially, a greater percentage of the population is unable to pay monthly premiums and the number of uninsured increases. Because the sick cannot afford healthcare, they allow themselves to get sick to the point where emergency room visits become necessary and hospital service utilization increases.

 

Posit #2: The Sick Cost Money, The Dead Cost Nothing

Many years ago, when healthcare was in its infancy, many chronic diseases resulted in premature death. For example, before defibrillators, suffering heart attack often meant death. Before insulin was discovered, patients died before reaching reproductive age, therefore, the genetic predisposition towards juvenile diabetes was never passed on to future generations. Before you go jumping to conclusions, it is important to note that I am not advocating anything silly like killing the ill before they cost money or sterilizing them before they can reproduce and infect society with poor genes. I am only suggesting that society open their eyes to the reality that modern medicine saves lives but in doing so prolongs their cost to society. According to an NHDS Survey with the WHO and Census Bureau, the rate of deaths from heart attacks has steadily fallen 2% per year from 1979 to 2000, however, the rate of heart attacks increased by 2% per year and expensive life-saving and quality of life-focused procedures such as angioplasties increased by 400% over the same time period. It is commonly said that by the time an individual reaches 70 years of age, they have some form of arthritis. All chronic ailments tend to require some form of healthcare. Modern medicine suggests comprehensive care results in the best therapy for patients, but that requires the time and energy of an entire medical team - physicians, nurses, pharmacists, physical therapists and so on. This is costly!

That being said, for most patients who do not die of catastrophic injury, whether its a heart attack or accident, the most expensive period of their life tends to be the last six-twelve months of their life. Repeated visits to emergency departments, hospital stays, use of assisted living facilities, use of expensive medications and receiving palliative care can cost upwards of $100,000. So a premature death from illness without the cost of end of life therapies, would be a huge cost savings. It just goes to show that the sicker that individuals are (i.e. that they do not die of natural causes), the more expensive their end of life care will be and it is an enormous driver of costs.

 

Posit #3: Won't Centralized Healthcare Fix The Cost Problems Such As Exponential Growth In Cost?

Absolutely not! Whether it is government or insurance companies, the cost of healthcare is being shared, it doesn't matter. If your citizens are increasingly ill, their presenteeism suffers, income goes down and taxes paid on the income decreases exponentially (we live in a progressive tax system, remember?). With lower tax revenue, the financial burden of healthcare is being born disproportionately by the healthy. This is why I chose the numbers I did in my math example from the first posit. As long as the number of sick is increasing, it doesn't matter who is paying for the services, the cost is born by the healthy and the per person expenditures will continue to go up. So it ultimately will not matter whether you are paying for private insurance premiums, socialized care, or a single payer system.

 

 

Posit #4: So If More People Being Ill Is The Problem, Why Are So Many People Increasingly Sick?

Infinite number of reasons. In my clinical opinion, the number one culprit is obesity. Obesity has causal links to cardiovascular disease, diabetes, cancer, and all manner of other illnesses. Diabetes, for example, is the leading cause for chronic kidney disease (CKD), blindness, and amputations in the United States. If you think about the costs of these secondary illnesses to diabetes, you will quickly realize the expense of diabetes. Treating CKD involves kidney transplants and dialysis; neither of which is cheap. While being blind or disabled is not directly costly in terms of medicines or healthcare utilization, (though there is a higher rate of depression), they do bear disproportionately greater expense in the form of support services such as caravan service, braille teachers, durable medical equipment, etc. Untold costs are the costs of absenteeism from work. Diabetes is also the leading cause of employees taking paid sick days and unpaid medical leave from work.

Couple this with the increasing numbers of uninsured citizens. As they are unable to pay for basic healthcare services, even the most minor of illnesses or injuries go untreated and have the capability of evolving into major cost drivers. For example, perhaps the simple upper respiratory infection evolves into pneumonia or what one initially thought was simply a bad headache turns out to be a stroke. While granting these individuals healthcare is inherently a positive thing, it will not rein in healthcare spending because as a society we continue to become increasingly unhealthy.

 

5850850235_0f93cd7d80.jpg

** Figure note: Note the equations of the binomial best-fit lines. Remembering that the obesity scale is off by a factor of 100 compared to the cost scale (10's to 1000's), multiply the obesity equation by 100. Note how close the numbers of both equations are. (yes, to the math geeks, I know its not this simple, nor so accurate, but you get the point).

 

People make a big deal of prescription costs, however, this isn't necessarily the large cost driver. Only about 10% of national healthcare expenditures are spent on drugs. Since 1970, we spend $200 billion more per year on prescription drugs, yet over the same time period, we spend $600 billion more per year on hospitals and $600 billion more on physicians and related services. No one seems to be looking towards trimming costs from physicians or hospitals. Even if we forced pharmaceutical companies to give up 20% of their annual revenue, healthcare costs would only come down by $40 billion dollars! If we managed to instantaneously return 20% of the obese population to normal health, we would be saving hundreds of billions! The real reason the public is sensitive to the costs is that it is the only part of the healthcare cost that the patient will see. When a patient picks up a prescription at the pharmacy, the patient is often required to pay a percentage of the cost and it goes up as the drug costs go up. Most patients will never see the real costs of their healthcare - e.g. physician services, nursing homes, hospitals etc because those costs are largely covered by their insurance. But given the previous analysis about patients living longer with chronic disease, and a larger percentage of sicker citizens, it makes perfect sense that prescription costs were going up. Most physicians will agree that prescription drugs are the best way to keep their sick patients live and well.

 

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Catlin A, Cowan C, Hartman M et al. "National Health Spending In 2006: A Year Of Change For Prescription Drugs." Health Affairs 27, no. 1(2008): 14-29.

 

 

 

Posit #5: So What Are Logically Superior Alternatives to Current Healthcare Design?

Value-based benefit design coupled with appropriate incentivizers for appropriate medical service use. Most pharmacy benefit plans have a tiered system. Tier 1 is most generic drugs and selected few approved brand drugs for which the co-pay is negligible. Tier 2 is preferred brand drugs but with a higher copay and Tier 3 is the remainder of brand drugs with a very high copay. This is based entirely on the economic principle that its better to pay for something tomorrow than to pay for it today. However, companies like Pitney Bowes have come to realize that optimizing pharmacy plans means that we cannot be evaluating pharmacy plans in a vacuum. Value based design front loads Tier 1 with medicines and services which are more expensive but have scientific evidence for producing greatest outcomes in patients. So continuing with the diabetes examples, if we were to give every newly diagnosed diabetic access to a nutritionist to improve their diet, consultation with pharmacists to improve medication adherence, and resulting compliance with antidiabetic therapy would bring the A1C down (goal is <7.0%, ideal goal <6.5%). This would prolong their healthier years pushing off into the future their greater costs of amputations, blindness, etc. If its pushed off far into the future, the patients could die of more natural causes before the costs of secondary ailments ever materialize! Better still, if you push the secondary costs to the point after death, then the patient lived a relatively normal, happy, healthy life! Isn't that ultimately the goal of healthcare anyways?! The best part of value-based medicine is that it can be implemented within the current healthcare model without creating new administrative costs. It requires us to evaluate the insurance programs and identify therapies which are most likely to produce cost effective therapy, not cost-savings.

 

 

Conclusion

While I agree that healthcare should be a fundamental right in modern society, it is impossible to escape the economics of the situation which ensure that healthcare is a still an economic commodity. There can only be so many physicians, nurses, therapists, etc. Simply giving the uninsured coverage through government won't stop costs from increasing (and this is aside from the debacle of government intrusion). To ensure society receives the greatest benefit, there must be a balance in healthcare use to prevent both underutilization and overutilization of healthcare. Its economics 101 - costs are U shaped with the minimum cost and greatest return provided at the mid-point. If healthcare is underutilized, society is receiving little benefit and long-term costs increase because patients wait until catastrophic problems occur before seeing a healthcare provider. If healthcare is overutilized, supply-demand drives immediate costs up and whatever cost savings occur by treating patients early is overwhelmed by the fact that the ill may need to wait weeks or months before seeing a healthcare provider and in that time, the condition may develop into something serious. Simple strep throat, if untreated but resolved naturally, has the potential to cause kidney failure! To this end, healthcare companies have been getting it right - they have been successfully managing the balance between under- and over-utilization of healthcare services. Yes, I realize there are individual cases of wrongful denials of coverage, and the whole pre-existing condition provision was wrongful from the start, but taken as a whole, most patients are appropriately cared for under the current system. It is a fallacy to think that universal coverage would prevent cases of denial because even with coverage, utilization review would still prevent people from receiving just any healthcare service. About the only positive with a more centralized system is the administrative benefits and the potential for expanded use of electronic medical records. But there is nothing preventing these efficiency gains in the current system - it would simply be mandated by statute under a centralized system. Just like how all the cellular phone companies banded together and developed a common charger port (do you remember the days when every phone had its own port?), there is nothing preventing insurance companies from streamlining their practices or from letting someone develop a universal electronic medical records system.

 

It seems obvious to me, and to many healthcare providers, that the best option for improving American healthcare system is to improve the health of Americans first. Simply having healthcare does not translate to better health. Having access to doctors under Obamacare (or any other centralized system) does not mean that patients won't end up diabetic. And once diagnosed, that doesn't mean that patients will be better off. I see patients who refuse to pick up their antihypertensive medications, or worse, their antiretrovirals (for HIV)... yet they will pick up their Viagra. Simply having access to healthcare doesn't change the fact that most citizens do nothing to help themselves and don't even follow medical advice. Patients do not lose weight simply because their doctor tells them to do so. A cultural revolution emphasizing personal responsibility for health must occur for healthcare costs to come down. To that end, I don't mind restrictions on trans-fat or banning fast food type options in schools. These positions may be 'anti-capitalist' or government overreach beyond its statutory mandates (yes, I am talking to you libertarians), but we have come to the point where the American public is too selfish to realize that society is no longer willing to pay for an individual's excessive indulgences (poor diet, smoking, and lack of exercise being the three biggest culprits). Vaccines should be paid for by government and distributed freely. Improving access to natural, healthy foods must be a priority. Providing incentives for public transportation costs is important to reinforce a more centralized urban planning model which then encourages less use of cars and more walking. Developing inner city parks and recreation facilities (or cleaning up the drug and crime ridden ones that already exist) is important, and they can even include skateboard parks! Policies which do not emphasize and reinforce the cultural revolution that must take occur have no place in politics - that includes Obamacare and this new bill.

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The logic in #3 is a little suspect. There are a few relationships that should be explored. 1st, there are a disproportionate amount of chronically ill people who are poor. (like 38%?) Its safe to say access to preventative medicine and health education could go a long way in reducing those numbers (something centralized care claims to help). Second, countries with singe payer medicine are getting way more health care for each dollar, reducing costs across the board. The Federal Government already spends more money per pupil than the UK on health care and gets a way worse result. Structural improvements to deliver more efficient care AND a system of finances that directly pools risks would allow us to direct monies where they are needed most or could have the largest systemic financial impact. Efficiencies compound over time. The current system almost always involves a 17-30% rake, taken by insurance companies, who produce nothing of value in the equation.

 

So, it does matter who pays: health outcomes change depending on who foots the bill. Those outcomes have a compounding advantage. The system itself determines how many chronically ill patients we are willing to create in a pennywise, pound-foolish fashion.

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For all of those who are interested in Foucault, one of his more interesting articles seems to have anticipated this issue more than 30 years ago. In an article titled "Social Security" (reprinted in Politics, Philosophy, Culture) Foucault says:

 

"I don't see, and nobody can explain to me how, technically, it would be possible to satisfy all health needs however much they may expand. And even though I have no idea where the line ought to be drawn, it would in any case be impossible to allow expenditure to increase at the rate seen in recent years.

 

A machinery set up to give people a certain security in the area of health has, then, reached a point in its development at which we will have to decide what illness, what type of pain, will no longer receive coverage - a point at which, in certain cases, life itself will be at risk. This poses a political and moral problem not unrelated, all things considered, to the question of the right enjoyed by a state to ask an individual to go and get himself killed in war..."

 

Later, in response to a question about whether this would suggest the use of eugenics and the choice of life and death, Foucault responds:

 

"Such choices are being made all the time, even though it is not being admitted. They are made in the logic of a certain rationality and are then justified in various ways."

 

There is much more of interest to the current heath care debate in this article. If anyone around here has read it, I'd love your thoughts and its impact on this debate.

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