Category Archives: Economics

Sovaldi: a near-perfect example of price discrimination

The controversy over the pricing of Gilead’s Sovaldi for Hepatitis C is a textbook example of price discrimination in action. I hope that my quick review of some of the principles involved will help explain what’s going on.

Gilead sells Sovaldi for high prices in the US: up to $85,000 or so for a course of treatment. The price is a little lower in Europe, substantially lower still in middle income countries and less than  $1000, or 1 percent of the US price in poor countries such as India. Such stark differentials set up major financial incentives for people in richer countries to obtain the product in poorer countries. With more than $80,000 per patient at stake, grey marketers could easily make millions of dollars and even an individual patient from a rich or middle income country would find it financially worthwhile to go to a low income country to procure the medicine.

This isn’t just theoretical. I was approached by a consultant representing large US employers who were exploring pharmacy tourism that would send patients abroad for their drugs.

Gilead has responded by taking steps to limit diversion of product. Patients must present IDs showing they are residents of the country to be eligible for the low-income country price. Patients can only get one bottle of medication at a time. Naturally some folks, including Doctors Without Borders, are complaining about the burden on patients and caregivers, and accusing Gilead of being greedy and maximizing profits.

Although the anti-Gilead people have a valid perspective, my sympathy is mainly with Gilead. The concept of price discrimination: charging different prices to different customers based on willingness or ability to pay, maximizes a monopolist’s profits but it also maximizes societal benefit. As the simplified chart below illustrates, Gilead makes the most money if it can sell the medication at different prices in different countries. That also leads it to sell the highest quantity of product, meaning more people can be treated.


Price discrim

If Gilead were required to charge the same price everywhere in the world –as shown below– it would result in a windfall for consumers in high income countries (“consumer surplus”) and lack of affordability in poorer countries (“deadweight loss”), because patients in poorer countries could not afford to be treated. Even assuming Gilead wanted to maximize its profits in that scenario fewer people would get the treatment.

No discrim


Because of the opportunity for price discrimination, Gilead was willing to introduce Sovaldi in rich and poor countries at the same time –something that doesn’t usually happen.

For price discrimination to work, the following conditions must hold:

  1. The firm (Gilead) must have some monopoly power. In this case the monopoly is based on patent rights. Gilead critics can try to undermine this power by encouraging governments to ignore patents.
  2. Markets must be able to be segmented and kept separate. Here that means segmentation by country, but theoretically it could be done down to the individual level so that rich people in poor countries pay the same or more than poor people in rich countries. (In rich countries there are other mechanisms to do this, such as patient assistance programs, but let’s not make this even more complex.)
  3. There can not be leakage between markets, otherwise the price is eroded in the expensive market. That’s why Gilead needs to confirm residency and why pharmacy tourism undermines societal benefit.

Price discrimination maximizes profits and maximizes societal benefits by increasing the number of people who can afford treatment, while rewarding the monopolist for bringing a valuable innovation to market. It’s not necessarily true that patients are harmed when Gilead maximizes its profit.

Allowing and even encouraging price discrimination is good global health policy. It encourages innovation and lessens global disparities.

By healthcare business consultant David E. Williams, president of Health Business Group.

Watch your back! Surprise medical bills may await

Show me where it hurts

Show me where it hurts


Dr. Richard Amerling, president of the Association of American Physicians and Surgeons, writing from New York, had this to say in yesterday’s Wall Street Journal:

A patient recently asked, “What would happen if there was no health insurance?” I responded, “The prices for all medical goods and services would immediately plummet.”

I would direct his attention to Sunday’s New York Times (After Surgery, Surprise $117,000 Medical Bill From Doctor He Didn’t Know), which presents a much more realistic view of what goes on in New York City and around the country. To wit:

  • A patient had a neck surgery he may or may not have needed. (There are 2x-5x as many spine surgeries in the US as elsewhere in the rich world. The multiples are particularly high in places where surgeons like to live)
  • The orthopedist charged $133,000 but was reimbursed (and willingly accepted) $6,200. That’s on top of $60,000 or so in other charges from the hospital and anesthesiologist
  • An out-of-network “assistant surgeon,” probably not needed, billed an additional $117,000, which the insurance company ended up paying in full. The orthopedist says he didn’t take a cut of the assistant’s fee. Whether it’s true in this case or not, it happens

So what does this tell us?

  • That the information Dr. Amerling provided to his patient is naive at best
  • That insurance companies need to find better ways to contain costs or that regulators need to change the rules to allow them to do so
  • That patients need to be more skeptical of recommendations for surgery (especially spinal surgery)
  • That a single payer system, for all its faults, looks superior to the current state of affairs

There are benefits managers like MedSolutions that help insurance companies and employers deal with this sort of nonsense. At the very least this news should be good for their business.

photo credit: Darcie via photopin cc

By healthcare business consultant David E. Williams of the Health Business Group

Take a deep breath: Marijuana product placement is on the way

Coming soon

Coming soon

Paid product placements for cigarettes are back on the big screen. The tobacco industry agreed in 1998 not to pay for product placement in movies. But electronic cigarettes weren’t around then and aren’t included in the ban. Some brands are now pushing the envelope, according to the Wall Street Journal:

Throughout the movie [Cymbeline], actress Milla Jovovich puffs away on an e-cigarette called a SmokeStik. In one scene, signs for the brand hang in a convenience store next to condoms and calling cards.

The product’s cameo appearance comes courtesy of Canada-based SmokeStik International Inc.—in just the kind of paid-product placement that has been off-limits to traditional tobacco companies in Hollywood for nearly two decades.

The cynicism of the cigarette (or nicotine) business is on full display:

“I don’t see a problem with glamorizing something that saves lives,” says SmokeStik’s chief executive, Bill Marangos. Like others in his business, he considers e-cigarettes to be a less-harmful alternative to traditional smokes…

Mr. Marangos wouldn’t say how much the company paid for the placements, but he does allow: “They know we pay well.”

This got me thinking, how long until we see paid product placement for recreational marijuana brands? The weed is now legal for recreational use in Colorado and Washington, and it seems a wave is building that will lead to legalization in other states and perhaps nationally. I think it’s a really bad idea for public health, but the tide is moving against me.

Once the business goes mainstream, I expect to see the development of national brands and the pursuit of a vigorous marketing push via whatever means are not declared illegal. Product placement in movies will be a no brainer to get some buzz for the brand and the film. And as with any sort of drug dealing, it’s a lucrative business that can pony up the cash.

It’s quite possible that we’ll see marijuana “edibles” promoted in films rather than smokes. Ironically that could take us back to the early days of product placement in the movies, to the famous Reese’s Pieces placement in ET. Candies for kids once again.

I hope we don’t see dope promoted with paid product placement, but I think we will.

photo credit: Cannabis Culture via photopin cc

By healthcare business consultant David E. Williams of the Health Business Group

China syndrome: Rich flee mainland for medical care abroad

Coming for radiation treatment in the US?

Coming for radiation treatment in the US?

I feel bad for the patients profiled in Desperate Chinese Seek Medical Care Abroad in the Wall Street Journal. I’ll note upfront that I’m no expert in the Chinese system. But from what I’ve read here and elsewhere it’s not uncommon for hospitals and physicians to push profitable, expensive services and products that are not in the patients’ best interests.

As a result, those with means are looking abroad for relief. Some are winging it to the US, and the article paints a flattering –albeit anecdotal portrait– of better diagnoses and effective treatments here.

In the comments section, several readers assert that the article provides proof about how great the US healthcare system is. That’s not the conclusion I draw.

The article mentions one patient who paid $70,000 out of pocket to UCSF, and another at MGH who’s out $270,000 so far after using up her savings, selling her apartment and borrowing money.

I’ll assume that the patients are getting first rate care, but I’ll also assume that they are being billed “charges,” the ridiculously high rack rates that are used to set fees for those who lack the protection of a big insurance company. Are patients really being treated better financially than in China? I doubt it.

And it’s not as though US providers always have their patients’ best interests in mind when recommending treatments. It might not be as overt or widespread as in China, but it’s still a problem.

On a separate point, the article mentions Chinese coming to the US to give birth, lumping that phenomenon into the same category as cancer patients. That’s a totally different situation. The typical reason for giving birth in the US is to gain US citizenship for the child.

photo credit: Profound Whatever via photopin cc

By healthcare business consultant David E. Williams of the Health Business Group


Is medical inflation coming back to bite us?

PWC made a pretty big splash yesterday with its projection that medical costs will rise at a faster rate next year than they have in the recent past. The story was picked up by major media and I was on TV last night to discuss it on Al Jazeera’s Real Money with Ali Velshi.

In truth, the story is not so dramatic. The PWC report focuses only on larger employers. Costs are expected to rise around 6.8 percent (versus 6.5 percent in 2014) and most employers are responding similarly to how they have for the past several years: shifting more costs to employees, implementing high deductible health plans, and spending money on wellness programs. These approaches are surprisingly unimaginative and not likely to be terribly effective.

High deductible plans cause patients to be conscious about the first couple or few thousand dollars of costs. After that, they don’t really care since they’ve reached their out-of-pocket max. And high deductible plans are harsh on lower income employees who have a hard time paying the first dollars out of pocket. Upper income employees barely notice the difference.

And wellness programs? PWC didn’t go so far as to endorse this strategy, which is a smart move to preserve their credibility. Some of these programs are nice benefits but it’s awfully hard to find one that is going to reduce medical costs.

What would work better? How about offering employees plans that reward them financially for choosing lower cost, high quality providers?

Even if employers are paying more, things are not necessarily so dire for those buying insurance in the individual market. Average premiums are likely to rise for 2015, and the plans with the biggest market share are raising premiums the most. But thanks to the Affordable Care Act consumers are now dealing with a competitive market in insurance. As long as they are willing to switch plans, in many cases they’ll actually be able to reduce premiums. We’ll see in a few months just how savvy exchange shoppers are.


By healthcare business consultant David E. Williams of the Health Business Group

The ACA and part-time employment

Is Lady Liberty coming to kill your job?

Is Lady Liberty coming to kill your job?

The Affordable Care Act requires employers to provide coverage for full-time employees but not part-timers. That sounds like a straightforward and reasonable provision, but as usual the devil is in the details. ACA opponents have taken up the argument that this provision is a “job killer” because it will cause employers to limit employees’ hours, thereby pushing people into part-time roles to deprive them of benefits. That view strikes me as simplistic, since in my experience companies are in business to make money, not to hammer their employees.

I had an opportunity recently to chat with some HR heads from big employers –retailers and restaurants—that employee many part timers as well as full timers. I asked them for their take on the controversy. Unsurprisingly they provided a pragmatic, non-political view of the situation.

Here are the main takeaways:

  • Prior to the ACA, each company had its own definition of full and part time. As a rule they knew who they intended to pay benefits to and who not
  • The ACA is causing them to track hours of part-timers closely, with the goal of not inadvertently having to pay benefits to someone they don’t consider full time
  • The result is that work hours are being spread around more evenly among part-time workers whereas in the past some part-time workers got a lot of hours while others had fewer
  • From the standpoint of corporate HR, this is a good result, because part-timers who are assigned more consistent hours are more likely to stay. This increase in retention is good for productivity and profits. In this case the ACA is reinforcing an HR best practice that companies have started to implement in any case
  • Companies have not been trying to take away benefits from those who had them prior to ACA implementation

It’s arguable that the losers here are the few part-time employees who used to get lots of hours because their managers preferred them. Some of those are likely to make the jump to full time. Others may seek opportunities elsewhere.

These discussions are about the short term. Longer term it’s possible that employers will take the ACA into account when designing the structure of their workforce. Still, it’s just one factor among many.

photo credit: dullhunk via photopin cc

By healthcare business consultant David E. Williams of the Health Business Group