
Fed Up with Drug Companies, Hospitals Decide to Start Their Own - stanleydrew
https://www.nytimes.com/2018/01/18/health/drug-prices-hospitals.html
======
tacon
For a fantastic discussion about the Byzantine process for generic drug
approval, I recommend a recent episode of EconTalk[0]. The guest wrote a book
called "Drug Wars: How Big Pharma Raises Prices and Keeps Generics off the
Market"[1]. When up to half a billion dollars of revenue is at stake, the drug
companies have incredible incentives to delay or prevent generics coming to
market. Believe or not, they often simply refuse to give a sample of the old
drug to the generic company. No sample to compare, no FDA approval. It is
illegal to dispense a drug without a prescription, and the sample is not for a
patient, so it can take some maneuvers to get a legal sample. Or the drug
company can change a tiny feature of the drug, re-patent the new drug, and
then destroy/withhold all the old drug. No old drug sample, no FDA approval of
an "identical" generic. The drug companies will contract with a generic
company that never, actually gets to production (wink, wink). Those contracts
are finally being understood by judges, so now they are going to a second
level of contract obfuscation that is even harder to notice, but still keeps
the generic off the market.

[0][http://www.econtalk.org/archives/2017/06/robin_feldman_o.htm...](http://www.econtalk.org/archives/2017/06/robin_feldman_o.html)

[1][https://www.amazon.com/Drug-Wars-Pharma-Raises-
Generics/dp/1...](https://www.amazon.com/Drug-Wars-Pharma-Raises-
Generics/dp/1107168481/)

~~~
rtpg
Is this a worldwide problem? Or is this really an American failing?

~~~
steiger
I live in Brazil and generics for drugs which patents are expired are widely
available, accounting for 30~40% of all drug market. If I'm not mistaken, we
even broke patents in some cases (HIV drugs), which is cool.

~~~
roadnottaken
Why is that cool? Intellectual property law is necessary for industries like
Pharma. No IP, no new drugs.

~~~
yequalsx
The people who do the actual discovery are not paid an exorbitant amount of
money. They mostly just want to do research and solve problems while living a
comfortable life. A pharma company making billions in profit isn’t necessary.
It’s just the common way it currently is done. There are other ways to
accomplish the same goal. We could try to replicate Jonas Salks’ way Of doing
things.

~~~
roadnottaken
I work in drug discovery. You're right that the bench-scientists don't usually
get rich. But it's an extraordinarily risky, expensive, and unpredictable
business and for every billion dollar drug there's a graveyard of failed
companies and projects that didn't make it. The only business reason to take
those risks are for a chance at patent-protected profit. And those bench
scientists wouldn't have labs to work in if investors and rich companies
weren't willing to pay for it.

~~~
yequalsx
What about government funding research? It doesn’t have to be just rich people
or corporations. It could be all of us in the form of government. I believe
that most of a drug’s overall cost is marketing. I might be wrong on this but
it is a significant, useless expense. Remove filthy rich profit motive and we
might get drug companies that don’t resort to shenanigans.

~~~
roadnottaken
You are simply wrong on this. It costs hundreds of millions of dollars to
_develop_ a new drug, prior to approval and marketing. What percent of a
companies budget is spend on marketing versus R&D at a given time is kind of
irrelevant because (1) the development costs occur before market and (2) often
drugs are in-licensed or acquired after significant expense towards R&D has
been expended. They don’t buy all the companies whose products fail (most of
them) so that cost isn’t factored in. Making new drugs is very expensive and
risky.

Edit: I’m describing the development of novel drugs here. “Me-too” drugs are
significantly less risky and probably less costly but there’s still a lot of
risk amd expense.

~~~
grasshopperpurp
>We found that the premiums pharmaceutical companies earn from charging
substantially higher prices for their medications in the US compared to other
Western countries generates substantially more than the companies spend
globally on their research and development. This finding counters the claim
that the higher prices paid by US patients and taxpayers are necessary to fund
research and development. Rather, there are billions of dollars left over even
after worldwide research budgets are covered. To put the excess revenue in
perspective, lowering the magnitude of the US premium to a level where it
matches global R&D expenditures across the 15 companies we assessed would have
saved US patients, businesses, and taxpayers approximately $40 billion in
2015, a year for which the Centers for Medicare and Medicaid Services (CMS)
reported that total US spending on pharmaceuticals was $325 billion.

Curious to hear your thoughts.

[https://www.healthaffairs.org/do/10.1377/hblog20170307.05903...](https://www.healthaffairs.org/do/10.1377/hblog20170307.059036/full/)

------
shykes
This article makes it seem like drug companies alone are responsible for
predatory pricing in US healthcare, with hospitals being somehow on the
consumer's side of the issue. In reality US hospitals are just as guilty of
predatory behavior. If they do achieve lower costs through a new generics
company, I do not trust them one bit to pass on the savings to patients. Why
would they?

~~~
siquick
> If they do achieve lower costs through a new generics company, I do not
> trust them one bit to pass on the savings to patients. Why would they?

As a non-American (UK and Australia citizen) it bewilders me that this is
considered a possibility.

Why are hospitals doing the opposite to offering the best care possible to all
citizens? Are they for-profit in the US?

~~~
dragonwriter
> Why are hospitals doing the opposite to offering the best care possible to
> all citizens? Are they for-profit in the US?

Contrary to sibling comments, no, they generally are not. Most (58.5%) US
hospitals are private nonprofits, and another 20.2% are public. Only 21.3% are
private, for-profit. [0]

[0] [https://www.beckershospitalreview.com/hospital-management-
ad...](https://www.beckershospitalreview.com/hospital-management-
administration/50-things-to-know-about-the-hospital-industry-2017.html)

~~~
thaumaturgy
Contrary to your comment, yes, they generally are; they're just using
Hollywood accounting and referring to their profits as "excess earnings".

"A study published in the May issue of Health Affairs revealed that in 2013,
seven of the top ten most profitable hospitals in the United States were
nonprofit hospitals, with each earning over $163 million in profits from
patient care."

[https://www.forbes.com/sites/brucelee/2016/05/08/very-
profit...](https://www.forbes.com/sites/brucelee/2016/05/08/very-profitable-
nonprofit-hospitals-but-where-are-the-profits-going/)

(Forbes, yuck, I know. This Washington Post link covers the same story:
[https://www.washingtonpost.com/news/to-your-
health/wp/2016/0...](https://www.washingtonpost.com/news/to-your-
health/wp/2016/05/02/these-hospitals-make-the-most-money-off-patients-and-
theyre-mostly-nonprofits/))

That article links to a CBS "investigation" into the University of Pittsburgh
Medical Center, which claims to be a nonprofit but made $948 million from 2011
to 2012, pays its CEO $6 million a year, gets a private chef, chauffeur, and a
jet for additional compensation, and has a dozen other administrators each
making over a million dollars a year.

[https://www.youtube.com/watch?v=zikgppxCFnA](https://www.youtube.com/watch?v=zikgppxCFnA)

Claiming themselves to be a nonprofit saves them about $200 million in state
and federal taxes. So, they're just an "accidentally profitable" nonprofit.

But yeah, sure, let's just keep taking the health care industry at its word
when it says it's not profitable.

edit: more, because why use a scalpel when a hammer will work just as well?

"Many nonprofit hospitals calculate their charitable care by using something
known as “charge master” pricing; exorbitant, non-negotiated prices which are
inflated many times higher than what private insurance or Medicare would pay.
This allows facilities to overstate their provision of “charity care,”
calculated as revenue loss by the hospital in exchange for their lucrative tax
exemptions. In a patient evaluated with chest pain, the allowable for Medicare
is $3600; however, in an uninsured patient, the hospital may “write-off” an
inflated $25,600 in uncompensated costs, which is 8 times higher than actual
cost of care provided."

[http://thehealthcareblog.com/blog/2017/04/25/the-fairy-
tale-...](http://thehealthcareblog.com/blog/2017/04/25/the-fairy-tale-of-a-
non-profit-hospital/)

"But even many hospitals that showed losses on patient care had positive
margins overall. The study found that median net income per adjusted discharge
from all activities—including investments, charitable contributions and space
rental—was $353 for all hospitals and $178 for hospitals with 50 or fewer
beds."

[http://www.modernhealthcare.com/article/20160502/NEWS/160509...](http://www.modernhealthcare.com/article/20160502/NEWS/160509991)

"Non-profit is instead simply a tax status, and specifically, it exempts
hospitals from paying real estate and other taxes in exchange for contributing
a fixed portion of their revenues to ‘community benefit’ rather than paying
dividends to shareholders. ... Cleveland Clinic, one of the largest health
systems in the country, was held up as an example of a wildly profitable non-
profit in a recent article in Politico."

[https://www.acsh.org/news/2017/07/19/non-profit-hospitals-
ca...](https://www.acsh.org/news/2017/07/19/non-profit-hospitals-can-be-
extremely-profitable-11572)

(read that one, it's a good breakdown of the accounting that hospitals use to
maintain their nonprofit status while behaving in every other way like any
other for-profit business.)

~~~
dragonwriter
> Contrary to your comment, yes, they generally are;

No, they're not.

> they're just using Hollywood accounting and referring to their profits as
> "excess earnings".

No, they aren't. Excess earnings are the correct technical term. Non-profit
status, even in theory, _has nothing to do with whether you earn more in
revenue than you expend in costs_ , it has to do with whether there are
stockholders or others who have a claim on accumulated returns.

More specifically, _charitable_ nonprofits (which non-profit _hospitals_ are)
have a wide variety of additional requirements and restrictions (both in
general, and specific additional requirements for hospitals, including several
added by the ACA.)

> read that one, it's a good breakdown of the accounting that hospitals use to
> maintain their nonprofit status while behaving in every other way like any
> other for-profit business.

No, it's just a bunch of dishonest, or perhaps merely clueless,
mischaracterizing; the most obvious example being considering money expended
in providing Medicaid services but not covered by Medicaid reimbursement as
money the hospital “paid to itself” rather than an external benefit. This
isn't money the hospital paid to itself, it's money the hospital paid out to
provide services under a public program providing healthcare to the medically
indigent but which was not reimbursed by that public program (in general,
Medicaid is a money-losing program for providers, as—while there are some
exceptions—reimbursement is generally at the lowest of three things: a state
set rate, the actual cost of providong the service, or the provider's usual
and customary charge for the same or substantially similar service. This is
_at best_ break even, but over all, across all providers, it's always going to
be, in practice, below actual cost.

~~~
pas
So why aren't for profits the most profitable then?

And the simple fact that a non profit can spend 6M USD on compensation to its
CEO loudly advertises the healthcare provider market inefficiency.

~~~
maxerickson
With revenue in the billions that doesn't represent a significant cost (Say 1%
on the higher side).

I'm pretty convinced the market for CEOs in general is broken, but it's also
the case that largely eliminating CEO compensation wouldn't move prices much
in any business.

------
indescions_2018
I always assumed it would be CVS that got into the game. There are are
probably a dozen or so drugs that account for the majority of consumption. Flu
vaccines, blood pressure, cholesterol, thyroid, insulin, asthma, progesterone,
beta-blockers, gerd, etc. Providing these at minimum cost, as well as
community public health services. Could be enormously cost effective. And
extend general wellness and productivity many times over.

>>> "the trick will be in selecting the right third-party manufacturer to
ensure good quality"

Obvious subtext here is outsourcing mass market generics to be produced in
India, China and other emerging markets. "Pharma-security" might be a popular
way to phrase it today. Quality is undoubtedly reflected in price. And there
is enormous opportunity in exponentially reducing R&D costs and finding
efficiencies.

~~~
Clubber
I they seem to be explicitly targeting generics, so R&D doesn't come into
play. It's really just find someone who can build a known compound and press
it into a pill. This has the potential to be massively disruptive.

~~~
mirimir
Even generics need FDA approval. Manufacturers must demonstrate therapeutic
equivalence.

~~~
akozak
That's interesting - even if they can prove chemically they're producing
something that's already been approved?

~~~
mirimir
Yes. Bioavailability and absorption kinetics are major factors.

------
fludlight
Let's say they succeed in launching a new generics company. Ten years down the
line they will divest in order to build each hospital a shiny new geriatrics
wing. Within six months the spun-off drug company will jack up prices and the
cycle will continue.

~~~
TillE
From that perspective, does any country have their own publicly owned
pharmaceutical manufacturer? It's the kind of thing the NHS _should_ do, since
they control most other aspects of health care, but I don't think they do.

There's so little benefit to competition with generics, you may as well have
that vertical integration to at least provide what hospitals need.

~~~
ekianjo
Country-owned means of production have usually not fared well vs competitive
forces in the past. And it could be considered as unfair competition: a state-
owned manufacturer could basically have a blank check from the government for
any kind of investment and would not have to worry at all about profitability.
It sounds very nice as a thought exercise, but economical incentives are very
tightly linked with productivity.

~~~
chrisbennet
Thinking of it as “unfair competition” implies that companies have some sort
of entitlement to a market. They don’t.

If my town wants to have its own fire department, it’s not “unfair” to
privately owned fire departments anymore than working on my own car is
“unfair” to professional mechanics.

~~~
apatters
Nationalized production is usually something to discourage for the same reason
monopolies and oligopolies should be discouraged--they are insulated from
competition in special ways, and as a result in the long run they tend to
become inefficient (which in the worst case translates to basically extorting
customers).

The root of the problem with American drug companies is that they're insulated
from open market competition by a government approvals process that costs
billions--only a few companies have enough money to take a new drug to market.
The government could reform this process but chooses not to, claiming it's
necessary for consumer safety (certainly some kind of approvals process is).

------
WalterBright
When there's lack of competition, one needs to look for artificial barriers.

Ah, found it:

"Intermountain executives said that they would seek approval to manufacture
the products from the Food and Drug Administration, which has vowed to give
priority to companies that want to make generics in markets for which there is
little competition."

~~~
nradov
I certainly hope you're not suggesting that we dispense with FDA approval for
drug manufacturers just for the sake of increasing competition.

~~~
WalterBright
I don't need government approval to start manufacturing cars. Why for generic
drugs?

Note that you're paying plenty for having the FDA as gatekeeper.

~~~
wcunning
You actually do need approval for selling cars -- EPA and CARB. Similar
organizations worldwide.

~~~
WalterBright
For emissions, but not for safety. My understanding is the NTHSA does not
actually approve a car for sale in the US, it just requires that the
manufacturer certify it meets the regulations.

------
pstuart
Here's a great analysis of the overall problem:
[http://truecostofhealthcare.org/](http://truecostofhealthcare.org/)

~~~
TrainedMonkey
This site is sluggish on a pretty beefy laptop.

edit: Using Google Chrome Version 63.0.3239.132 (Official Build) (64-bit)

~~~
cheeze
Highjacks my scrolling to make it "smooth" as well...

------
maxxxxx
I am not sure if patients will see any of the savings though. I view hospitals
as fundamentally dishonest organizations after a few experiences. Their
medical treatment is fine but their financial practices are borderline
fraudulent.

~~~
programmingpol
Some, if not most, of this is a result of the insurance system. The insurance
companies only pay x% of any given item, therefore the hospitals have to jack
prices through the roof to collect enough to survive.

The problem with our healthcare system is that too much money goes to drug
companies, medical device makers, and insurance companies and not enough makes
it to the people actually providing the care. Its a bit more complicated than
that, I'd admit, but that's the TLDR version.

~~~
cjalmeida
Oh please. Doctors in the US get huge amounts of money, to the point they're
the actual 1%. You don't see anything like this in OCDE countries.

Doctor associations all across the country create enormous barriers to the
opening of new medical schools to avoid competition.

Don't get me wrong, medical doctors are generally good hard working people.
But we need to acknowledge they're part of the problem.

~~~
cjalmeida
To downvoted, some data.

A surgeon in CA earns on average about $400k while its peer in UK makes $100.

4x the cost of labor should partially explain why a surgery can easily cost 6
figures.

~~~
jinglebells
Although, remember that surgeon won't need to pay for health insurance, so
that saves some cash :D

------
Feniks
This is happening in my country and the government has said they'll back any
pharmacy deciding to mix the drugs themselves. Healthcare costs are spiralling
out of control.

It'll lead to a metric ton of courtcases all the way to Strasbourg and beyond
though. The Americans may threaten to invade.

~~~
fencepost
Just offer to let Trump put his name on a hotel there, or a condo building
attractive to Russians wanting to launder some money. Tada, no risk of a US
invasion and you may even get better trade deals.

------
AllegedAlec
People don't seem to understand how prohibitively expensive it is to develop
new drugs and get them approved for use. Yeah, drug companies charge huge
premiums, and they don't like generic versions of their product, but with a
good reason: they spend huge amounts of money not just to make the drugs, but
also to make the process more efficient, and before they even know whether a
product will be successful, they spent a fortune on research and development.

Take for example the case of Matuzumab, a medicine which was to be used
against various forms of epidermal cancer. In 2007 a clinical trial failed and
they had to give up on the idea. This company spent tens millions of dollars
on the costs of this research, only for it to fail.

------
thousandautumns
A lot of people here seem to conflate the pharmaceutical companies causing the
issue with the entire pharmaceutical industry. Even in the article, the
hospital reps say they are specifically targeting the handful of bad actors,
like Valeant Pharmaceuticals and Martin Shkreli types, who specialize in
buying up cheap/old drugs and jacking up the prices. This is not a group of
hospitals trying to take on the entire industry. Nor is it an entire industry
taking advantage of hospitals/patients.

------
ultim8k
Why not having even "open source" medicine? IT industry got a huge benefit
from it.

------
chiefalchemist
It will be interesting to see which side Amazon takes. In theory, it would
seem to be these hospitals. However, Big Pharma has the (financial and
political) muscle (and will) to add friction to any Amazon.

------
narrator
Kaiser getting into the drug business would be awesome. Insurance, Hospitals
and Drugs all under one roof.

~~~
jopsen
Really, bigger conglomerates?

------
reaperducer
Coincidentally, some insurance companies that are fed up with hospitals are
starting their own.

~~~
eatbitseveryday
Any source, example, etc.? Your comment reads like one of those click-bait
advertisements.

~~~
nradov
It's really not click bait. Kaiser Permanente already operates under that
model with a single organization acting as an insurer and owning hospitals.
Other payers are moving in the same direction by acquiring or creating
provider organizations. In some markets all of the major providers have merged
together in order to gain more negotiating power so the only way payers can
get some leverage back is by having providers as employees instead of vendors.

~~~
tssva
Kaiser only operates in this manner in certain of the 8 regions they service.
Mostly on the west coast. In the regions on the east coast Kaiser contracts
with existing hospitals.

------
known
effectivehealthcare.ahrq.gov does good comparative analysis

