Some blogs have cool names. Example: Wing of Zock, which hosts the latest Health Wonk Review blog carnival. You’ll want to check it out because it contains a rich trove of posts about healthcare policy.
Hospitals and other healthcare providers are struggling to collect out-of-pocket costs from patients. This has always been the case to some degree but with the growth of high-deductible plans and other forms of cost-sharing, patient payments have become a much more significant share of the pie.
This state of affairs can lead to some ugly publicity. Hospitals are more likely to collect if they do so upfront, but it can also strike patients as rude and even unethical.
The Pittsburgh Tribune-Review covered this topic, leading with an example of a breast cancer patient who was told her surgery would be canceled if she didn’t bring along her $900 co-pay.
I’m quoted in the story:
David E. Williams, a health care consultant in Boston, said patients are leery of hospital bills because they don’t understand the complexities of health insurance. He encouraged people to become more familiar with the plans.
“If hospitals wait to bill later, the patient, in addition to being generally less likely to pay, may not believe that they actually owe it because they’re not sure how the insurance works,” said Williams, co-founder of the Health Business Group.
With high-deductible plans, a patient who once was responsible for $50 might be on the hook for thousands of dollars, Williams said. Owing money for a health-related procedure is different from owing money for a car, he said.
“If you don’t make your (car) payment, somebody can repossess it. They are not going to undo your surgery or take your knee replacement,” he said.
The Wall Street Journal (Big Pharma’s Unfamiliar Biosimilar Threat) warns us that pharmaceutical companies are overvalued because investors have not realized that copy-cat versions of biotech drugs, aka “biosimilars” will hurt profits substantially. It’s not an unreasonable assertion.
And yet, the Journal follows with a common but false explanation of what biosimilars are:
“Biosimilars are analogous to generic versions of traditional small-molecule pharmaceuticals.”
Actually they are quite different. Generic versions of traditional drugs like Lipitor are meant to be exact copies of the original. That means pharmacists can –and generally must– automatically substitute generic atorvastatin for brand name Lipitor. There is no differentiation for generic makers of atorvastatin –you won’t see them advertising on TV or sending reps into doctors offices. Instead, they compete on price. When a traditional drug goes generic, sales of the branded product plummet, and once several generics hit the market they typically sell for less than 10 percent of the original price.
Biosimilars are not exact copies of the original biotech drug –that would be too difficult to achieve. Instead, they are “similar” products that have to be tested on patients before they can be approved. Once approved, they will have to be marketed to get physicians to prescribe them. A pharmacist can not simply substitute a biosimilar for the original product. The relatively high cost of biosimilar development means we can expect fewer competitors, more differentiation, and substantial sales and marketing efforts.
Those characteristics make biosimilars much more like the me-too versions of traditional drugs, where a variety of similar drugs appear in one class. Think statins: Lipitor itself was a me-too product, the fifth statin on the market after Mevacor, Zocor, Lescol and Pravachol. But Lipitor didn’t compete on price. Instead Pfizer leveraged superior marketing and clever clinical trial designs to differentiate itself.
I expect biosimilar makers to try the same kinds of tactics as the me-too drugs of yore. As I’ve written, Pfizer itself is getting into the act (see Pfizer and Hospira: It’s not about generics.) “Experts” expect biosimilars to cost 20-30 percent less than the original. Some more aggressive analysts say 40-50 percent less. We’ll see a range, but I’m willing to bet someone will try to price the same or higher based on a differentiated claim.
The market won’t play out exactly the same way as me-too drugs because:
- Health plans and pharmacy benefit managers are on to the drug industry’s games and will be more aggressive
- The market for biotech products is more specialized; drug companies can’t expand the number of patients so dramatically as they did by marketing products for common conditions
- The products are very pricey, leading to unsustainable increases in treatment costs. Consumers, policy makers and doctors understand this and have incentives to do something about it by pushing prices down
Image courtesy of Supertrooper at FreeDigitalPhotos.net
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.
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.
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:
- 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.
- 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.)
- 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.
Back in the good old days patients’ out-of-pocket responsibility for healthcare costs was negligible. Remember the $5 office visit co-pay, just as an example? As a result hospitals and physician offices set their billing and collection systems up to work with health plans and government payers. Consumer billing was an afterthought, bills were hard to understand and to reconcile with insurance company statements, and collection rates were low. No one really cared if the patient paid or not.
Out-of-pocket costs have gone up dramatically for most commercially insured patients, especially the increasing number who have high-deductible health plans. Providers have realized that this is an important revenue source but in general tools for billing and collection have lagged. Providers that have focused on this area have often used heavy-handed methods such as being forceful about demanding payment upfront and referring overdue accounts to collection.
A handful of startups have seen the opportunity and gotten into the space. They have made the process more consumer oriented, with the idea of improving collection rates, lowering administrative costs, and increasing patient satisfaction with the process. I’ve interviewed the CEOs of two such companies, Simplee and PatientPay.
This morning Simplee announced a significant milestone: the Simplee Pay platform is collecting over $1 million per day and the company expects to have collected a total of over $1 billion by the end of the year. Simplee makes a number of plausible claims: 80% of patients pay right away, 40% move to self-service, 15% use mobile for payments, and collection costs drop by more than 10%.
I’m glad to see Simplee succeeding.
Last week I posted about new research fingering artificial emulsifiers in food as a potential contributor to inflammatory bowel disease and metabolic syndrome. I suggested that food companies look into removing these emulsifiers as the next big health food business opportunity.
As a follow-up I started looking into emulsifiers in some of my favorite foods. Sure enough they are present. But purveyors of fine foods are uneasy about these ingredients and are actively looking for alternatives. One example is ice cream. There are some all-natural brands, but they are few and far between. There’s a real opportunity –not just with ice cream– and I hope someone will step up.
Meanwhile, here’s my email exchange with my favorite local ice cream chain (read from the bottom up):
Thank you for voicing your concerns. We’ve noticed concern about these ingredients and as a result we have been requesting a mix without these ingredients from our dairy. We are also keeping our eyes out for an alternative to our current mix.
It has been difficult for us to find a product that is consistently available in the volume we need to sustain production. There just aren’t that many options right now.
It’s certainly an issue we think is important, and we hope that if we, and our customers, continue to ask for products without these ingredients we will start to see more of them pop up on the market.
Thanks again for your email. I hope you have a great day.
As an ice cream lover I hate to be one of those pests who insists on making every treat a health food but there is new and fairly persuasive research indicating that synthetic emulsifiers like Polysorbate 80 could be harmful, especially to people who are susceptible to inflammatory bowel disease.
Here’s my blog post on the topic: http://healthbusinessblog.com/2015/03/10/emulsifier-free-food-a-big-business-opportunity/
I won’t bother you about carrageenan for now but there are some issues there as well!
David E. Williams
Thank you for emailing us. We buy an ice cream mix base that includes the following ingredients:
Cream, Milk, Sugar, Nonfat Milk, Corn Syrup, Whey, Mono & Diglycerides, Guar Gum, Polysorbate 80, Carrageenan
Please let me know if there is anything else I can help you with.
Date: 10 Mar 2015 21:30:56 -0400
To: JP Licks
This message comes from the Contact form at our web site
FIRST NAME: David
LAST NAME: Williams
STORE: Coolidge Corner
MESSAGE: Do your ice creams contain emulsifiers? If so, which ones?
The latest Health Wonk Review blog carnival is posted at Wright on Health. This is the Spring Forward edition, featuring several stories about the Supreme Court’s latest look at Obamacare, plus a smattering of posts on workers comp, health IT, Ebola, and class conflict.