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Hospitals to launch their own drug company to fight high prices and shortages (npr.org)
242 points by stevetodd 6 months ago | hide | past | web | favorite | 138 comments

If you think about it, the entire US pharma industry paradigm doesn’t really make sense. A lot of exploratory research into drugs is publicly funded, but for some reason we then rely on private companies to pass FDA trials and bring the drug to market, at the cost of profits/subsidies/advertising/executive compensation/rent seeking IP.

Why not publicly fund R&D all the way up to when a drug passes FDA trials, then allow any private company to produce a generic version of the drug? That way you have competition on the price of manufacturing without all the unnecessary costs involved with private IP

This is a good question that is difficult to answer.

I think the answer is that drug development is the kind of process which public institutions are particularly ill suited to manage. That isn’t to say it’s impossible, but the chance of messing it up is very high. A public institution simply cannot fund a research process purely based on facts. There are always other political motivations involved, about where the money goes, who gets the money, who is getting too much money etc. A drug company is free to pursue and fund development of drugs based on merit alone.

> I think the answer is that drug development is the kind of process which public institutions are particularly ill suited to manage.

> A drug company is free to pursue and fund development of drugs based on merit alone.


The argument that only they can provide what the public needs is just an excuse to avoid competition, as it is everytime you hear it being made in any industry: Municipal broadband is not able to fulfill the requirements of the fast-pacing telecommunications market so we should outlaw it and subsidize the private sector even more so you can finally have that 1MB dsl line you were due in 1999.

The Pharma industry has been "caught" many times preferring and in some cases preventing development of "cures" to instead sell long lasting treatments. Like most businesses, the only merit they care about is what makes them the most money, and there is nothing wrong with that, but let's not make them the gallant saviors of the masses when their evident greed becomes apparent every quarterly report and lobbying all over the world to avoid any form of competition is just the latest example of it.

>The Pharma industry has been "caught" many times preferring and in some cases preventing development of "cures" to instead sell long lasting treatments.


I don’t see any argument refuting my point that governments could not replace big pharma. I agree with you that big pharma are like any other large corporation at the end of the day, it’s all about the bottom line.

It is however an indisputable fact that big pharma have delivered novel drugs which do make a large difference to many patients’ lives. The scale of their research operations dwarfs all other biomedical research by orders of magnitude. It is highly speculative that a public institution could do research at this scale. If you have ever worked in an academic department this would be immediately obvious.

> I don’t see any argument refuting my point that governments could not replace big pharma.

I'm not trying to. I'm refuting the argument that they "develop drugs based on merit alone" and thus somehow because of that don't need competition.

Should be if a company gets a public grant for research their research must become public domain. Wishful thinking though, that'd never happen.

Is that the basis on which drug companies currently pursue and fund development of drugs?

To the extent that merit is equal to profit anyway.

Yes, in my experience.

Because the US govt can't file for most patents. The constitution says any IP developed by the US is in the public domain (there are secret patents but they may not survive a skeptical supreme court). The US govt wants American companies to own patents so the profits come to the US.

US developed products and research used to be free to everyone (the US govt funded BSD). The US govt stopped that when Japanese companies started bring new inventions to market that American companies didn't want to because it threatened it's current product line.

With tax shifting strategies and countries negotiating deep discounts while Americans pay much higher prices; it is difficult to justify the current practice now.

But I am suggesting that these developed drugs do become part of the public domain! Let the government develop it and let anyone who meets manufacturing standards manufacture it. It sucks when Japan does that to cars, but it would suck a lot less if Japan did that for lifesaving pharmaceuticals. In that case it’s not an investment in technology that could be used to strengthen the economy directly, but instead an investment in public health (which will of course benefit the economy indirectly)

I love the spirit, but "let the government do it" usually means contacting.

Edit: which is considerably more expensive than it should be.

The gov. could "contract" the way they do with research grants, and could also expand the FDA/NIH to do more in house. Traditional government contracting sucks, I fully agree

Makes me wonder. Can the usps file for patents? Can they have trade secrets? What about trade marks?

Not too sure about an independent agency or a GSE, but the courts have allowed third parties to trademark certain designs and transfer them to the fed govt.

They have definitely enforced trade mark. I remember hearing that they had sued the band "The Postal Service".

"ZIP Code" was originally trademarked, but I believe it has expired now.

The State of New Jersey actually sued a Florida pizza place for trademark violations: https://www.nbcnewyork.com/news/local/New-Jersey-Loses-Trade... they lost, however, because nobody ever confused a Florida pizza place with a New Jersey highway.

That’s bizarre. Lots of countries have postal services. Does USPS think they have a monopoly on the concept of delivering mail?

The settlement was The Postal Service playing a small concert for USPS employees, so the end result was kind of cute :)

Trademarks are inherently geographically limited. They apply in regions where the trademark holder does business under that name, not over the whole world.

The bizarre part is trying to apply their trademark to an area of business that is not related to what USPS does. USPS does not play music gigs. There would be no danger of someone confusing USPS with a band. Trademarks are also limited to the line of business that the trademark holder operates in. This is why Apple Computers and Apple Records (the record label for the Beatles) were able to operate without trademark conflicts for decades until Apple Computers started getting involved with music and then needed to come to an arrangement with Apple Records.

Apple computer and Apple records early on had a trademark spat, and subsequent settlement. The reason why the Beatles took so long to show up on iTunes was related to the fallout of breaking that agreement.


> Does USPS think they have a monopoly on the concept of delivering mail?

Under the name "The Postal Service" and within US borders? Yes, they do think that, and their trademark would agree with them.

Yes they legally have a monopoly mail service. You cannot compete against them. Package delivery services like ups or FedEx are a different type of service and distinctly defined. But mail carrier is exclusive to USPS.

Why are people down voting my above comment? It had up votes until recently and people are not posting any counters.

It’s factually incorrect. The US government can hold patents. https://www.law.cornell.edu/cfr/text/34/6.3

More widely, if someone argues that changing the law to do X is a good idea. You can’t argue that the law prevents Y because changing the law is the idea.

> It’s factually incorrect. The US government can hold patents. https://www.law.cornell.edu/cfr/text/34/6.3

Fine, that small part about filing is incorrect. But most of my argument is correct.

The US govt allows private companies to monopolize public funded research to keep jobs and tax revenue that research would make in the US, because the US govt can't legally restrict them by filling patents of it's own (except for certain secret patents I read in Wired magazine).

> More widely, if someone argues that changing the law to do X is a good idea. You can’t argue that the law prevents Y because changing the law is the idea.

I was answering OP's question. The US govt wanted a return for it's funding of ALL RESEARCH and this was a way to deal with it ~40 years ago. This is now having issues with drug patents today.

If you actually read my argument more carefully you would see I agree with OP at least with drug patents.

> With tax shifting strategies and countries negotiating deep discounts while Americans pay much higher prices; it is difficult to justify the current practice now.

Please actually comment instead of just downvoting; this isn't reddit.

which drugs do you fund? I doubt that public funding of drug R&D will be as efficient as a privately funded effort. If it were all publicly funded, the incentives for selecting drug candidates throughout all stages of the pipeline are shifted.

The government already does decide which drugs to fund, just at a different stage of the pipeline.

Also, it honestly probably will be about as efficient, since we subsidize a lot of medicine’s private R&D already (eg orphan drugs), not to mention eliminating the rentiership of private IP and (some of) the waste of pharmaceutical marketing

Public health outcomes. The model would be something like the UK's NICE. It has many fewer perverse incentives than the current model (which focusses on diseases of wealth).

It's not at all clear that it wouldn't be markedly more efficient in terms of public health outcomes.

How do you apply NICE’s framework to in early R&D when you have no idea what the clinical benefit might be?

As I'm sure you could guess, the reality is much much more complicated. Drug dev is really hard, and really expensive. Private money funds an order of magnitude more R&D than the government. That private money takes a huge amount of risk, and most investors lose money (even in the last few years when VCs and public equity investors have made money, those profits will probably be offset by poor returns to pharma companies for their expensive acquisitions of risky assets). The actual rent seekers in the US healthcare system are large hospital systems, although that's not something that is discussed much in the public debate (hospital spend accounts for 30% of US healthcare spend compared to 10% for prescription drugs, and the strategy of hospitals the last decade or so has been to consolidate into local monopolies so they can capture market share and drive higher rates with payers -- pretty much the definition of rent seeking)

Drug company R&D productivity has been declining for years, and probably will be zero or negative in a decade barring breakthroughs. From my limited experience working with NIH and FDA, the government would be way, way worse -- there is very little accountability so simple things are really hard and slow.

NIH spends ~$34B on R&D. Private industry spends over $200B (mostly US pharma companies, with a good number of EU and some Japanese as well). Top 15 biopharma companies spend like $70B per year on R&D in aggregate. Global venture funding is on pace to be $15-20B this year for biopharma

Despite all this money, we got 47 new drugs in 2017 in the US. Most for cancer and rare disease, because those are the only remaining therapeutic areas where you have enough of a shot of making money to attract private capital. If you look at the top 10 causes of death in the US, only one -- cancer -- receives much private funding and new drugs -- very few new drugs for diseases like heart disease, diabetes, mental illness etc. That doesn't even account for the world's most devastating diseases, many of which receive very little funding and innovation, because the economics dont work

To replace for-profit R&D with government R&D in the US, we'd need to probably quadruple or quintuple the NIH budget -- assuming NIH is just as efficient as private industry. If we wanted to allocate spend to the biggest unmet medical needs rather than those that can make a profit, we'd probably need to spend 10x the ~$300B+ the world spends now on drug R&D (that's basically a guess but I don't think it is crazy directionally, considering how little investment goes into cardiovascular disease, psychiatric disease, infectious disease, stroke, pretty much anything other than cancer)

Apologies for the rant and i know this is an unpopular opinion, but I think the public debate on drug pricing and healthcare costs in general is way off and is a huge obstacle to actually making healthcare better and developing new medicines

Regarding risk and most investors losing money, that makes government funding actually more attractive because it pools risk in basically the largest pool possible.

Additionally regarding the private industry paying $X while the NIH pays $Y, private industry would not have $X for funding (minus the money spent on new drug companies) without at least the prospect of consumers paying for those drugs - that is, the funding is still coming from taxpayers' insurance / Medicare / Medicaid / pocketbooks. If we ignore insurance (because that may introduce a lot more factors), this configuration can only be desirable if we determine that, dollar for dollar, government R&D is less effective than private industry's R&D + all other costs regarding marketing/executive comp/profit that wouldn't already be incurred from their drugs' manufacturing.

I'm in favor of letting industry compete with itself in a market as a way to keep things efficient - except this only works if things really resemble a market. The use of exclusive drug IP to extract money resembles a monopoly even more than regional hospital oligopolies, as need/choice of drug is not typically up to the user. If there were no private IP, nobody would develop new drugs, so why not just eliminate IP and pay for development with the money that taxpayers were going to be spending on R&D anyway?

My premise is that drugs are expensive because it costs a lot of money to get a drug developed, not because IP enables companies to collect value they didn't create. IP is a mechanism that incentivizes investment into a field that is publicly valuable. And it's not that great of an incentive because even with IP most drug r&d is not a great investment

But most importantly, nationalizing drug research would probably make healthcare more expensive, not less. It's a red herring in the healthcare cost debate. Honestly my tinfoil hat theory is that hospitals, which have a ton of political clout (AHA lobby spends about as much as Phrma lobby, but hospitals are top employers in most areas so have a ton of soft political power), drive the drug pricing narrative to distract from the bad stuff they get away with. Tinfoil theory but I don't think it's too crazy

That aside, US spends like $320B on rx drugs. Let's say that goes to zero with your plan. Then we increase NIH budget by $150-200B -- assuming government is just as efficient as private industry. That just covers R&D. You still need infrastructure covering prescription processing, drug manufacturing, distribution, quality control, etc. you'd need to set all that up from scratch, because you wouldn't have a private infrastructure. Could that be $100B? Maybe. So you're breaking even

And if government is half as efficient as private industry? If it's an order of magnitude less efficient? Ouch

My reasoning may be off bc it's Friday night but I think it's directionally correct.

But more importantly: why are we focusing on this in the first place? Do we actually think we can pass legislation to quintuple the NIH budget even if we should (And I don't think we should)

Wouldn't our efforts be better spent addressing the largest source of healthcare spend and biggest source of rent seeking behavior?

Your theory seems good at first blush. However, we all know the US is the only major industrialized country without socialized medicine, correct? So doesn’t that mean that other countries should have succeeded in developing new medicines according to your theory? It appears the vast majority of effective drugs are coming out of the USA. This is a difficult problem.

The amount of innovation and capital at risk in private biotech companies is similar to that for the tech industry.

If we got rid of the tech industry and had the govt do all of it, do you believe we’d be where we are today?

I’d argue we wouldn’t be.

One of the big reasons why small biotech’s outperform big pharmaceutical companies is the lack of bureaucracy and high level of risk taking. Two things the govt is bad at.

As well, one reason why we have so many drugs is there are thousands of companies placing different bets on an idea. If that was all pulled under a centralized committee that made decisions on what to pursue, we’d be missing out on a ton of long-shots that every “smart” person said would never work.

Thank you for your opinion! :)

You make it sound like there is a hard barrier between these two options but like most things in reality it is a continuum. You can have mainstream R&D be publicly funded all the way and not necessarily restrict private companies from competing.

I personally believe that there is a good chance that a centralized publicly funded and nonprofit pharmaceutical organization could outperform most for profits on various important metrics. At least something that should be investigated and not dismissed outright.

Regarding long-shots, I think you fall victim to the survivorship bias here. Even if some good things came out of it, the question is at what cost? If many tries fail you really need some big wins to cover those costs. Thus, it’s really something that you should look into on an empirical level before making strong judgements.

Out of curiosity, do you have any specific proposals thoughts about what this centrally funded / non profit approach would look like, and why it would work?

My contention is that drugs are expensive because developing drugs is expensive. Developing drugs is expensive because biology is hard. Public vs private funding would not change that

Hey, sorry for getting back to you so late but I had a full weekend :)

I am not an expert in the pharmaceutical space so take everything I say with a big grain of salt. I would think it could be possible to have some agency like NSF or FDA be tasked with financing studies to develop medicines and do medical trials, etc. I don’t think it would need to look much different what there is now, maybe higher and more long-term grants for applied R&D. Manufacturing could then be outsourced, Apple style. I guess the main challenge would be to have reporting and grants be distributed effectively and fairly. There should be some level of friendly competition/ cooperation to ensure that progress is being made. But I think, in principle this already works pretty well through peer review and on some level metric tracking for individual researchers (although I would argue we still often track the wrong metrics). So it’s all about designing the right incentives work work to get done, profit is but one of the possible metrics to achieve that.

This of course does not change that the work itself is incredibly hard. The benefit of doing it in a more „structured“ and nonprofit way is that it is possible to create a more specific/ tailored/ guided set of outcomes given the ability to align the incentives with societal goals. Everything you see going on in blockchain is work in that direction. How can we design economic systems where incentives are aligned to create an overall desireable outcome for individuals, the community and society at large?

The notion ghat “the government” is ‘bad’ at spurring innovation in high-risk scenarios is both common and flawed. It was NASA that sent men to the moon and, more pertinently, it was ARPA that shouldered the risks upon which the predecessor of the Internet (and packet-routing networks generally) was built, as well as (to a lesser degree) the microprocessor. I’m not quite sure why this is such a persistent impression, parroted by folks who, if they thought it through properly themselves, would reach the opposite (correct) conclusion.

I think the concern is not that the government can't spur r&d, but publicly funded r&d would be less efficient than private capital

Back in the 1960s no other organization but the government had enough money to fund something as ambitious as the space program. And the government spends a ton of defense research and always has. Sheer volume of capital can get things done, but that doesn't mean it is efficient

The belief is that private markets incentives more efficient research than public funding. So if there is enough private capital to support some r&d goal, it is preferred to fund it privately vs publicly

I'm sure there's research on this but as someone who has worked on r&d at small companies, large companies and with government funded grants, there's little doubt in my mind what groups are more efficient. If you look at r&d productivity at big pharma companies vs small, small companies are almost an order of magnitude better.

And out of 47 new drugs approved last year, 40% were developed by small companies, 30-35% by big companies, and 1 from a public private partnership (the rest were mid sized companies). That's despite small companies getting an order of magnitude less funding than big ones, and half as much funding as NIH

Does that 40% figure refer to taking drugs all the way through clinical trials and FDA approval, or does it also include e.g. drugs that small companies brought through earlier stages of the pipeline before well-capitalized BigCorp acquired/partnered to finish approval? My impression is that drug development costs are heavily weighted toward the later phase clinical trials, and that it’s rare for a startup to complete them without help/acquisition from one of the big incumbents. I could be wrong about this. My lay perspective is that of someone who used to be a (non-pharma) chemist and who enjoys reading Derek Lowe.

But if I’m right, and small companies usually can’t finish fully independently, that suggests a role for government drug development: funding the clinical trials and completing approval. Whether a government agency or GSK provides that funding doesn’t seem to much affect innovation of small companies in earlier stages.

Here is Derek’s blog post and reference to the original paper. They were quite explicit on what counts as “discovering” a new drug. It’s whoever first created the drug and identified it as having potential to treat a disease.[1]


Thanks, I actually hadn't seen that. The data I was referring to is from my own analysis of 2017 new drug approvals on FDA's website

That paper covers 1998 to 2010, roughly coinciding with the end of the booming era of cardiovascular and psychiatric small molecules (prozac, lipitor etc) and ending right before the patent cliff in 2012, which saw the pharma industry's revenue shrink for the first time ever

Since then, R&D has shifted strongly to smaller companies from big ones, as the data reflects.

I'll have to check my data. You are right re late stage studies being most expensive component of drug dev cost in terms of direct costs, but when you account for cost of failure, early stage dev is actually more expensive. Phase 2 failure (drugs that work in the lab and animals not working in people) is the single biggest cost driver. That cost is linked highly to the difficulty of biology and biochemistry (the stuff Derek Lowe often talks about :) and it isn't clear to me how more public funding would address this

Your proposal of having govt fund later stage r&d makes more sense to me that replacing IP altogether but i still think the current situation would be better at getting new drugs approved more cheaply

Reason being is that early stage innovation is tightly linked to what assets pharma companies want. Allocation of venture capital by therapeutic area is very close to allocation of approved drugs by therapeutic area and to big pharma acquisitions of small biotechs by therapeutic area

If government chose which drugs to fund at later stages, that would probably resemble the current NIH grant approval procedures which are fraught with politics and bureaucracy. There are some NIH / govt initiatives now to fund clinical studies (companies I've worked with have applied to two, CIRM and an NIH funded diabetes research group) and the application processes were brutal and took years. And I don't think those initiatives have yielded much in the way of approved drugs

I don’t think that government taking drugs through clinical trials would significantly reduce development costs. I think it could reduce all-in costs for drug buyers if some new drugs were “born generic” in terms of IP restrictions. Everybody’s revenue is somebody else’s cost. The idea is to shrink the cost/revenue for new drugs that government takes over the finish line, whereas private investment toward the same goal needs to recover R&D costs plus make a profit.

I don’t think that lower drug prices is a panacea for health care costs in the US! Drug spending is a small slice of an oversized pie. But that pie is so big that even small improvements at the margin could save patients billions - mostly unnoticeable at the individual level, but worthwhile considered at the macro scale.

I think that having the government take drugs through clinical studies would increase development costs, and the increase in development costs (funded by taxpayer dollars) plus the fact that you have to replace the entire commercial infrastructure (since no private company will take part in this) would be larger than any savings you'd get from eliminating IP. People would end up paying way way more in new taxes than they save in insurance premiums and copays (people spend roughly $30 a month on rx drugs today, govt run drug dev and distribution would probably cost $60-hundreds+ extra a month, unless you're ok getting 10% of the life saving new drugs our society gets today)

The profits in pharma accrue to the top 15 or so companies by revenue, because they have invested in this commercial infrastructure over decades. You could argue that having large scale clin reg and commercial infrastructure is actually more valuable than IP. Especially in the new era of large molecules and cell / gene therapy, where IP doesn't matter nearly as much as in small molecules. Regualtory and manufacturing issues are a bigger barrier to competition in those areas than IP is. Look at biosimilar development as an example -- patents gone, no new competing drugs in most areas. An exec at a top antibody developer told me they know competitors can work around patents, they just need a 6 month head start and then their best in industry antibody dev capabilities will get them the edge they need. Avexis, Kite and Juno were acquired for ~$10B each not because of their products, but because they had the largest scale manufacturing and clinical logistics set up in gene and cell therapy

I differ from most people on this forum as I fundamentally attribute the high price of drugs to the high cost of developing drugs, not to IP granting monopolies. IP does not exist to grant rent-seeking powers, it exists to incentive publicly useful research that otherwise would not get done. I think that if you look critically at the cost of drug development and the economics of the industry, that's the only conclusion you reach

There's a lot of emotional and biased information about drug pricing out there. It is one of the top political issues of the day, one of the few with bipartisan supprt, it has become an emotional punching bag for a lot of people who have been really poorly treated by an opaque and impersonal healthcare system, and i can understand the frustration people feel. But if you look at the facts and take an objective standpoint, and invest the time into understanding the industry, the public dialogue becomes quite concerning

edit: apologies if this comes off as aggressive, i just feel strongly about this :)

I fundamentally attribute the high price of drugs to the high cost of developing drugs, not to IP granting monopolies.

I agree with you more on this than I disagree. Biology is hard. It is getting harder to find new pharmaceutical interventions that treat currently untreatable conditions, or that are enough better than old ones to repay developing them.

I don't think that government involvement can change the shape of the cost curve for new drug development. I think that government involvement may be able to reduce costs of completing drug development, essentially because it doesn't need profit on top of R&D costs. (Not reducing the big-O cost of drug development, but improving constant factors, if you'll permit the mixed metaphor.)

You seem to think that the costs of reproducing private development infrastructure would be prohibitive, and that no private company will let the government pay for use of its infrastructure toward the development of drugs that are born patent-free. You may be right about the costs of infrastructure. As for the latter, a government agency could offer quite a bit of money to become that partner with institutional knowledge and existing infrastructure. (If you think that private drug companies are in a prisoner's dilemma regarding cooperation with a government looking to undermine their long term profitability, you might substitute "defector" for "partner.")

This has to be my last post of the day but I've enjoyed your responses and perspective.

9 of the 21 drugs I referred to as developed by small companies were owned by big companies at time of approval. Some of the drugs were acquired earlier in clinical dev, some were acquired after NDA was already filed

Thanks. I would credit "acquired after NDA was already filed" new drugs to small companies even if they were owned by big companies at time of approval. Either way, if 12 out of 21 small-company drugs were developed all the way to the way to approval without bigger companies, my earlier guess that the majority required big company help to finish was incorrect.


Don’t get me wrong, I think the gov’t should still play a role in funding “big ideas” that the market won’t. Antibiotic development is a good one.

The other thing to keep in mind are all the failures. By pushing R&D to private companies, the tens of billions spent on Alzheimer’s drugs, of which every single one has failed, didn’t come from the pockets of tax payers, rather they came from private investors.

>If we got rid of the tech industry and had the govt do all of it, do you believe we’d be where we are today?

Aren't a lot of core inventions/breakthroughs in most of our current technology (at least in USA) made by Military?


The centralized model you refer to in the last paragraph is akin to how a lot of big pharma r&d groups work. And they get about 10x less innovation per dollar spent than small companies (innovation measured as drugs approved)

Imagine how much worse that would be if it was govt rather than a big company

The argument would be much easier to make if the US had single payer healthcare as well. "We the people" already have to pay, it's just that the costs are hidden from us so the majority of the population gets to ignore that they're really paying even though it might not look like it.

we're primarily paying for early stage basic science, which is the desired purpose of public funding. The huge investments in biotech and pharma (>$50M to bring a drug through clinical trials) are privately funded

I've wondered the same thing.

I suspect it was argued that people betting their own money will be better at choosing winners from the pool of results coming out of publicly funded labs. I doubt that this effect is large compared to the rent-seeking it enables, though.

Good point. Could the fda just run the trials? That would be interesting.

Doesn't stop the hospital from turning around and gouging their patients and leaving them a ridiculous hospital bill which seems to be the norm in this country[1].

[1]: https://www.forbes.com/sites/robertpearl/2017/09/05/3-ways-h...

It's the norm because our entire healthcare system is broken. Hospitals have to gouge people with insurance in order to cover the costs of people without going to hospitals. Combined with the bureaucratic and paperwork nightmare that is figuring out who pays what and who negotiates costs down it's all bloat and highway robbery designed to enrich as many parasites along the way.

It's a system designed to help only the wealthy with costs to match.

You're partially right. When you see someone be charged an outrageous amount for something that should be fractionally cheaper, that's a different reason. You see, hospitals mark up prices astronomically so that when they make deals with insurance companies, they can say that they saved xx% of the cost. Which looks good to them, and the hospitals don't loose that much making deep discounts. Then goes in a poor sucker with no insurance who has to pay full price.


Hospital price for a bandaid: $100

Blue Cross says they want 80% discount

Hospital says ok

Blue Cross looks good because of how much money they saved

Hospital still makes good profit

As someone who works in the industry, this is absolutely correct.

I’ve talked to hospital administrators about what price they think is fair for a new drug. They say “$100”. I asked what about a higher price and a discount ($200 and a 50% discount). They tell me “Even better! I can go to my boss and tell him I got a lower price which is great since that’s a big component of my bonus!”

They don’t want to lower the price to you. They simply don’t want to pay the middle man.

Incidentally, one of the health systems (Intermountain) leading the initiative is itself also non-profit.

Non profit hospitals overcharge just like for profit hospitals [1].

[1]: https://www.washingtonpost.com/news/to-your-health/wp/2015/1...

Hospital funding is a mess in the US. The US government flat out gives money to for profit hospitals because of how messed up the system is. EX: https://www.hrsa.gov/rural-health/index.html

Non profit's still need to play the game to stay in business because their costs are no lower.

Non-profit does not mean non-corrupt. In particular, non-profits respond to having extra money not by returning money to donors/payers (because why would you do that??!) or paying shareholders (not possible) but by creating bloat and expanding exec/administrative compensation

The overwhelming majority of hospitals in the US are either state owned or non-profit.

Cry me a river. The more I've learned about it, the more it seems like hospitals are the ones making the majority of the profit in the US's strange and byzantine healthcare system. The cost of their services are generally absurd, and not adequately balanced by customers and competition because 'insurance will pay for it'.

Yes, a friend of mine, a doctor at our local hospital, has shared his pessimism about the hospital's pricing and profit stance with me. In his mind they capitalize on our rural economy and only an idiot would get treated locally rather than drive to the bay area where the pricing is much more reasonable (!).

Even worse (in my mind), the hospital bears the name of a major religion. As if God needed this kind of PR...

It’s estimated that 50% of hospitals in the US are currently owned by Catholic organizations. For some this is thought to be good because as religious organizations they can run as non-profits and non-taxable. But this comes with other problems such as being denied care like abortions or end of life care that conflicts with church beliefs.


Christian Science hospitals would be pretty cheap.

The overwhelming majority of hospitals in the US are non-profits. You can look at their financial disclosures.

Spoilers: you won't find big profit margins.

You can keep your profit margins arbitrarily low by paying yourselves exorbitant salaries.

hospitals are simply the PoS of many other overpriced goods and services, so that’s where you notice the bloat

There's also a weird dynamic where they deal with increasingly complex medicine. As the medical system has grown, care has moved out of hospitals, leaving them with the more complicated (and more expensive) cases.

I don't know about the other groups involved, but Intermountain Healthcare is non-profit.

I can’t recommend the book Overcharged enough if you really want to understand what is wrong with American healthcare. The answer is basically everything, but the fee-per-service billing model and third-party billing that obfuscates prices are the essential causes.


David A. Hyman is an adjunct scholar at the Cato Institute

Yes, if you are paid to argue against price caps you argue against price caps.

Yes, it’s from Cato, but really it’s a whirlwind tour of what’s wrong with the system from a group that has no dog in the fight. But the democrats and republicans are very, very invested. If you are skeptical, read the book, and then make your decision. It has thousands of citations, it is more academic than opinion.

It's the Cato Institute, it's supported by the Koch Foundation, and the Koch Brothers are supporters of economic and individual liberty. Whoever is supported by someone's money is not going to argue against their dearly held viewpoints.

An interesting question that a scientist would ask: how does that book argue against price caps and monopsony buyers, considering that that approach works extremely well in the civilized world. Health expenditures in all other OECD countries are about 1/4 of what they are in the US.

One model suggested is we let people take the money they put into health insurance and instead put it into a health savings account. Given that family plus employer pays about $20k per year for a family of 4, the value adds up quite quickly. Then you let the family take as income any amount they don’t spend. This encourages frugality and price shopping for routine procedures.

Additionally, the government should backstop everything with catastrophic insurance as is done in Switzerland, so if cancer hits you don’t go destitute.

Also, we should drastically expand retail medical care, with advertised prices, as it has routinely been shown to reduce costs through competition and price shopping (LASIK, Botox, vasectomies, etc. all prove this out).

They go in great detail about pharmaceuticals and the suggestion that a prize based system would be better than the current system of the government paying for all the research and then letting a private company gouge the consumers who paid for it with tax dollars.

The book is very detailed, if you are interested in this subject I highly recommend it. Keep an open mind, clearly neither the American left or right has solved this issue and this book is very refreshing.

When it comes to health insurance you want to spread the risk over a group of people. Health savings accounts are very nice, except when you have a chronic illness and need continuous medication and frequent physician visits. Price shopping doesn't work - when you need medical care you need it, and it's the big-ticket items that drive the cost. When you take the kids to the doctor because they have a fever, that kind of visit is a few hundred dollars at most.

> Health savings accounts are very nice, except when you have a chronic illness and need continuous medication and frequent physician visits

That's covered by the parent's catastrophic scenario, which would be backstopped by the Federal Government. If you have a diagnosed chronic illness, you are no longer operating under any semblance of normal health terms, it's catastrophic.

The US could easily segment itself into these two systems (Federal catastrophic program, eliminating most bankruptcies; and a market system, for routine and trivial healthcare items), and it would be a drastic improvement over how the healthcare system works today.

Medicaid is 22% of all health coverage today, expand that to 25-30%. Medicare is 15% of the population, expand that to 20%. Use that 50% leverage to aggressively deflate pricing in healthcare (which is a stick the government largely refuses to use). Create a Federal catastrophic program for the other 50% of people.

Now to implement this obvious, dramatic improvement, all you have to do is change everything about US politics and remove nearly every politician.

I think you should just read the book. It has a solution for chronic illnesses. Essentially, you have a relatively small group of people with huge one-off bills or longterm chronic illnesses, and the government can help those people.

But the problem with American healthcare isn’t those situations - it’s when a hospital charges $500 for a couple Tylenol, because they can.

There is no need to moral grandstand. The situation is so beyond messed up and corrupted that we really need to change the entire system from top to bottom.

> Then you let the family take as income any amount they don’t spend. This encourages frugality and price shopping for routine procedures.

We had this, sort of, with HSA legislation in the mid 2000s. But... you still need some sort of guarantee or insurance to deal with catastrophic issues. This is essentially what a high-deducticle insurance instrument provided. I had a $5k deductible and... $240/month premium for 2. Now.. 9 years later, it's a $10k deductible and $1300/month.

> Additionally, the government should backstop everything with catastrophic insurance

Agreed, whatever it looks like, yes, something like this. It doesn't matter how 'frual' I am or how much 'comparison shopping' I do, when I'm still on the hook for $25k out of pocket before the insurance company steps in. It is only useful for the direst of emergencies at this point, but is costing $15k/year just to have that catastrophe safety net.

And, no one does price shopping or engages in frugality when they're in any type of accident.

Yes, thank you for restating exactly what I said. Catastrophic health insurance is actually the only insurance we should want.

The concept of health “insurance” is a misnomer when it’s used to pay for routine, expected care. That’s just pre-paying for services that you must use or you are wasting money. We don’t sell home insurance that pays out for painting your house or mowing your lawn. Home insurance covers you if a fire destroys your house, pools risk, and is pretty cheap.

Health insurance should cover disaster. Routine care should have a robust free market, where I can shop around for my allergy shot and MRI. This already happens for some big ticket procedures such as knee and hip replacements, where foreign hospitals compete directly with US hospitals, and even domestic competition between states.

So you discard a book before reading it, relying on etiquettes? How tribal.

Would you trust a study on the effects of smoking commissioned by the tobacco industry? Competing interests cause bias, that's why you throw out papers on the health effects of wine when they are sponsored by alcohol producers.

Would I trust it? No. However, I'm also not going to dismiss it out of hand just because of where it comes from or who is funding it. That is anti-intellectual tribalism.

All researchers have bias, some much more severe than others. The existence of bias does not invalidate their research. Rather, the manifestation of it does, and that is determined by critically analyzing it and exposing where it has warped the research.

When Big Tobacco funded its studies they were never interested in the long-term consequences of smoking for health, their goal was to continue in business as always, and the public health folks were bad for business. It was never an honest engagement, the pro-tobacco side engaged in obfuscation. This is now a well-known, documented historical fact: https://www.industrydocumentslibrary.ucsf.edu/tobacco/

In the realm of politics it's foolish not to take someone's motivation into account and assume they are interested in an honest debate. Pointing this out isn't "anti-intellectual tribalism".

Cato is not a health insurer. They are not advocating a product that they themselves sell, like the tobacco and alcohol industries. They have a libertarian viewpoint but overall they just recommend a pro-market viewpoint. In the situation of American healthcare we should be willing to listen to a variety of viewpoints considering the situation is the worst in the entire developed world by a large margin.

The fact that hospitals are launching the drug company is irrelevant. The argument here seems to be that there aren't enough generics companies out there to compete for existing demand, leading to spotty supply (untapped demand) and high prices.

Besides, generics aren't the "expensive drugs" most people think of when they talk pharmaceuticals. Hospitals will do nothing to fight those high prices because they can't -- pharma companies need to recoup their R&D. The alternative is having less R&D, which I believe nobody to be in favor of.

Why not publicly funded R&D?

Do you trust the government to spend money wisely (read efficiently) more than you trust investors?

Yes. Very much so.

Profit, while useful in the market, has an upper limit before it can be considered a lack of efficiency, IMO. In some sense, it is the stripping of productive economic value, which is then given to shareholders. It is basically a tax that produces wealth rather than wellbeing.

When shareholders have this money, do they use it wisely in the economy? I don't think that this is an absolute truth. Can the government do better? Yes, if we abandon the conceptual thought that government is always the problem, or by default inefficient, when in fact it can be demonstrated that governments around the world, and here, do many things very well.

are you familiar with risk

> Profit, while useful in the market, has an upper limit before it can be considered a lack of efficiency, IMO.


The thing about finance is that facts trump opinion. No amount of handwaving will untie reward from risk.

Standard economic theory predicts that the market will underfund public goods - goods where one person's consumption doesn't diminish another person's capacity to consume. R&D is a public good: https://www.asm.org/index.php/ceo-blog/item/5727-the-public-...

Goldman Sachs published a paper not too long ago about the unsuitability of pharma to deliver returns on investment. Do you trust Goldman Sachs? Public R&D is the only way forward.

I trust capitalism. I'm not saying we shouldn't have any Public R&D -- by all means, feel free to invest. Just don't make me pay more taxes than I already do, please.

What an absurd complaint. I would be more than happy to pay more in taxes if it meant the byzantine and life-destroying system that is healthcare in America was completely overturned.

It's silly how much we pay for basic services, but it's OK because the government isn't attached. It's taxes in all but name only, with worse services and less guarantees. Where we pay much more than the wealthy.

>I would be more than happy to pay more in taxes if it meant the byzantine and life-destroying system that is healthcare in America was completely overturned.

Plus it would rid of the monthly premium 'tax', the out of pocket costs, and the giant deductibles. You get all of that money back in your pocket, but have to pay an automatically deducted tax instead. I'm all for it.

The cost of healthcare in the US is not only driven by pharma prices.

Then let's invest in obsoleting the other problems, too.

The government can afford to invest in things with no immediate commercial benefit, but which over time can pay off in huge ways.

Nuclear power. Highways. Satellite communication. The internet itself. These are all products of long-term thinking, not short term profit.

If you want lower taxes there's one thing you can do to cut them by half: Dramatically shrink the US military and stop building new nuclear weapons.

The amount of money put into programs like pharma is a drop in the bucket.

We can also just increase capital gains tax (introduce higher brackets), reform tax loss harvesting, and add some sort of annual CPI discount to capital gains so that people stop using that as an excuse to not raise capital gains

They’re the largest insurer aren’t they? Medicare + Medicaid + the VA.

So if a hospital doing it is good, why isn’t having the largest insurer plus a huge hospital/care center/doctor group doing it better?

Another method is to declare at a nation-state level that you're going to ignore patents on certain pricey medicines, such as in India.


India is big enough that it can push back against big pharma.

This only works if you can get private businesses in other parts of the world to do your R&D for you. Not a viable strategy for all of the world, tragedy of the commons, etc.

> This only works if you can get private businesses in other parts of the world to do your R&D for you. Not a viable strategy for all of the world, tragedy of the commons, etc.

That's assuming the prices set by those drug R&D organizations are fair and reasonable given the work they're doing. However, if they're engaging in predatory pricing in pursuit of maximum profit (which is almost certain), the world could probably get along just fine with all medical R&D being performed by nonprofits at-cost.

This is why the USSR created the Polio vaccine, Venezuela created the MMR vaccine, and India leads the world in drug resistant antibiotics.


> This is why the USSR created the Polio vaccine, Venezuela created the MMR vaccine, and India leads the world in drug resistant antibiotics.


The USSR actually did a lot of interesting work developing phage therapies which could become increasingly important as current antibiotics become more and more ineffective due to antibiotic resistant bacteria.


And it's not like any of the vaccines you listed were developed by corporations following capitalist profit-motives. The ones I checked were developed by researchers focusing on contributing to the public good, for instance:

> Salk [developer of the first successful polio vaccine] campaigned for mandatory vaccination, claiming that public health should be considered a "moral commitment."[7] His sole focus had been to develop a safe and effective vaccine as rapidly as possible, with no interest in personal profit. When asked who owned the patent to it, Salk said, "Well, the people I would say. There is no patent. Could you patent the sun?" (https://en.wikipedia.org/wiki/Jonas_Salk)

But of course, you probably didn't know that. People who write comments like yours usually don't know much beyond certain ignorant dogmas.

I knew Salk refused the patent, not about the USSR's pioneering work in barely feeding their people (sorry, phage therapies).

But if Salk had made 100M dollars, would that have been bad? Lebron is worth way more than that. He plays basketball.

We as a society should be recognizing and paying for talent, not pretending workers co-ops and non-profits are effective or that capitalism hasn't produced all of the good things we enjoy.

> I knew Salk refused the patent, not about the USSR's pioneering work in barely feeding their people (sorry, phage therapies).

That's pretty stupid snark, by the way. More evidence of unthinking dogmatism and rather limited understanding.

No one sensible seriously claims the Soviet Union had a model worthy of emulation. However, it's foolish to think it was totally flawed or that its flaws somehow prove "capitalism is best, the more the better."

> But if Salk had made 100M dollars, would that have been bad? Lebron is worth way more than that. He plays basketball.

> We as a society should be recognizing and paying for talent, not pretending workers co-ops and non-profits are effective or that capitalism hasn't produced all of the good things we enjoy.

Some segments of society need to stop pretending that capitalism is a suitable replacement for literally every other kind of human motivation. The main strength of capitalism is that it sometimes incentivizes the already greedy according to their own logic to behave in ways that are socially beneficial (at least more than some other systems), but that's about it.

It's a serious error to want to corrupt the noble people who raise above greed and want to do good for its own sake to the point they need to rely on capitalism to motivate them. It's also a serious error to think that capitalist motivations will accomplish all the good those people would have done for their more noble reasons.

> But if Salk had made 100M dollars, would that have been bad?

If it had come with the cost of fewer people being vaccinated, probably.

No, India is a country with a low enough income that drug companies weren’t going to make much money anyways.

Given that the raw materials are incredibly cheap compared to the resulting medications, charging often $10+ per pill for what costs a fraction of a cent with all costs included, patients ought to consider banding together and forming an employee- and customer-owned co-op generics pharmaceuticals co. that charges cost plus X%.

The expensive generics are the ones where there isn't much demand and few patients. Not much of a population to develop a co-op from.

I like this idea. If they only operated online (no brick-and-mortar), that'd cut costs even more.

Except they can't manufacture drugs if someone else owns the patents. Drug prices drop significantly after generics come into play, at least for those drugs that are very easy to produce.

smh. READ. Generics. There are overpriced generics which make absolutely no sense other than a lack of competition.

Yeah, but Joe Startup can address that as much as these hospitals -- and will potentially be better at it since manufacturing drugs isn't the core business of these hospitals.

Funny since US hospitals are just as guilty as the drug companies of gouging the public with abusive pricing ... I’m not sure consumers will see any of those cost reductions. More likely the hospitals will pocket the difference.

>Civica Rx will require hospitals to commit to long-term contracts to buy the medications at fixed prices, even if another generic company drops its prices lower. Liljenquist argues that the long-term stability will be more attractive than the short-term temptation of getting a deal.

Just a guess: existing high-priced generic pharma companies will react by offering similar long-term contracts. They'll try to do an end run around Civica Rx.

I will admit that I'm puzzled that the FDA has not reacted to the high prices and shortages by allowing more competitors to be licensed to create various drugs and to enter the market quickly and easily.

Being a renal patient, I take a whole bunch of medications. One of the medicines I take became generic 1 year ago and now it is only $5/month under my insurance. Meanwhile another one became generic 4 months ago but it is still $90/month under my insurance. I just cant wait till next year when hopefully my insurer renegotiates the second one down. I think when 3-4 generics manufacturers start selling a medicine, the prices go down a lot.

The first generic drug approved gets 6 months of exclusivity where no other generic drug can be approved by the FDA.

As such, the first generic is typically ~10-20% lower than the branded drug. Once the 6 months expire, other generic manufacturers pile in (assuming it's a big enough market) and the price drops 80-90%.

> The first generic drug approved gets 6 months of exclusivity where no other generic drug can be approved by the FDA.

Not quite. The first patent that files a lawsuit challenging a patent on the non-generic drug and wins said lawsuit gets 180 days exclusivity.

This rule was established to incentivize generic companies to challenge drug patents and get their products to market sooner.

In the case where the patents aren't being challenged, there's no exclusivity for generic drugs.

In practice, this 180 day exclusivity is a very big deal to generic companies, because typically the first to market among the generics will have a big edge in capturing the market (once a drug has a generic, pharmacies will typically automatically fill prescriptions for the brand name drug with the equivalent generic unless the doctor specifies not to).

You can get 180 exclusivity even if you don't challenge the validity of the patent.

From the FDA guidance[1 - page 6]:

When filing an ANDA, the sponsor can do one of the following 4 things to gain 180 exclusivity: (1) indicate no patent exists in the Orange Book (paragraph I cert), (2) that the patent has expired (paragraph II cert), (3) that the patent will expire on said date (paragraph III cert) or (4) that the patent is invalid, unenforceable or will not be infringed (paragraph IV cert)

But you are correct in that it's the status of the patent and how it relates to the filing that drives the 180 day exclusivity. My comment was a simplification, since I can't think of anyone who would file and not do that.


In the state of California pharmacies are legally required to fill the generic unless the doctor specifies otherwise.

> Just a guess: existing high-priced generic pharma companies will react by offering similar long-term contracts. They'll try to do an end run around Civica Rx.

If they do this then won't Civica Rx have done exactly what they wanted to do?

yes, probably.

but the situation makes me think about the way OPEC nations tried to fight back against Texas shale oil production: lower the price per barrel for a while and squeeze highly leveraged shale producers and their financiers -- make it more risky for them.

I wonder about the longer term equilibrium.

This was announced in January. Previous discussion:


How far they can succeed is a big question mark. It's not easy to compete with the mafias of the pharma industry


Can we just get universal income and be done this?? Capitalism has to become obsolete at some point.

In what way would universal income eliminate shortages of generic drugs?

We can, but I'm afraid I've misplaced my magic wand.

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