Category Archives: Economics

Will Zika help or hurt health plans?

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Health insurers are starting to think about the impact of the Zika virus, which may arrive in force in the US over the coming months. Actuaries are looking for analogous examples for their models, such as other mosquito born illnesses including dengue fever.

Some insurers aren’t too concerned, according to Healthcare Finance News. Others are looking at reinsurance opportunities and considering premium increases.

Most Zika infections cause only mild illness, so the costs of treatment will be modest or zero much of the time. The real impact is likely to come from the cost of lifelong care for babies born with microcephaly or other problems, which could be millions of dollars per case.

But does that mean Zika will hurt health plans financially? Not necessarily.

For commercial health plans, maternal and newborn care is one of the largest categories of expenses. If a Zika epidemic looms, I would expect women to stop having babies, at least for a while. After all, in El Salvador the government has suggested women not become pregnant for the next two years.

If that happens, insurers will enjoy a windfall from avoided expenses that will show up right away. Meanwhile, the costs of Zika babies will be spread over many years and no doubt much of the cost will be shifted to Medicaid one way or the other.

Zika is a huge threat and we should be doing much more about it as a society. But health plans may not suffer as much as people assume.

Image courtesy of duntaro at FreeDigitalPhotos.net

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

 

Biosimilars are “me-too” drugs, not generics

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Time to take off the blinders

Generic drugs are the biggest success story in healthcare cost containment. This great success has fooled policymakers, journalists, health plans and others into thinking that the same model will tame spending on biologic drugs the way it has for traditional, chemical based products.

The latest example can be found in the Wall Street Journal (Knockoffs of Biotech Drugs Bring Paltry Savings). The article blames the lack of savings on price increases by makers of the original products in the run-up to the introduction of competing products. That is happening, but it doesn’t get to the root cause of the situation.

The traditional generic market is about as close as the healthcare industry gets to economists’ fantasy world of perfect competition where there is no differentiation among products, there are a large number of producers, and buyers understand that the products are all the same. As a result, prices trend toward marginal cost and it is not uncommon to see price reductions of 90 percent or more. Sometimes it’s 99 percent.

Biotech is very different. The “generic” products are not generic at all, rather they are close but not exact copies that cannot be freely substituted for one another. The number of producers will be small because they must go through the expense of clinical trials. And if the companies are smart (they are) they will do their best to make sure buyers realize there are differences among the products. One clue is that the products are referred to as biosimilars not biogenerics.

As I’ve been writing for ten years, this doesn’t sound like the market for generic drugs. Rather it’s much more like the “me-too” phenomenon we saw in the 90s with blockbuster categories such as statins. When Lipitor came in as the fifth statin on the market it didn’t advertise itself as cheaper and undifferentiated. Rather it used clever trial design and sales and marketing tactics to climb to the top of the pile.

Why wouldn’t a biosimilar try the same approach if possible? So far new entrants are pricing themselves a bit lower than the original product but if they can come up with better data from a trial why not make the price higher instead?

If we take off our generics blinders we can come up with ways to control costs while encouraging innovation. Since 2006 (A better idea than biogenerics) I’ve suggested regulating the price of biotech drugs once their patents expire. I still think it’s a good idea.

Image courtesy of iosphere at FreeDigitalPhotos.net

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

Due diligence in middle market healthcare investing

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Due diligence

Private equity firms investing in middle market healthcare deals face serious challenges in commercial due diligence. There are many companies that appear attractive, with $5M+ EBITDA, increasing revenues and enticing stories of how industry dynamics, customer relationships, technology differentiation and management excellence will take them to the next level. In the $3 trillion US healthcare industry, there are numerous billion dollar niches offering strong returns to companies that ride the wave of transformation.

Generalist investors and even healthcare specialists need support when performing due diligence in the middle market. The companies are large enough that their businesses are often complex, but small enough that there is little public information about them. Often the management team and prior investors may not have a good sense of customer demand and competitors. In addition, investors face information asymmetry, making it difficult to discern whether the management team is as confident as they seem or whether they have sensed a peak and are trying to bail out at the top.

The Affordable Care Act has set off a tremendous era of change in the industry, and diligence needs to reflect the latest understanding of how the ecosystem is changing. For example, the shift from fee-for-service to value based payments upends many business models but enables new ones. Provider consolidation can dramatically change buying dynamics as sales move to the enterprise level. The growth of public health insurance exchanges increases health plans’ appetites for cost-saving approaches.

Middle market investors have to be savvy about how they invest resources in diligence, so they often turn to boutique consulting firms that provide high value at a moderate price. In our consulting practice at Health Business Group, some of my favorite work is helping middle market private equity firms and strategic buyers test investment hypotheses and improve clarity about a company’s prospects through commercial due diligence. We interview the company’s customers and competitors, consult with industry analysts, and leverage our internal knowledge base and expert network.

Over the years we’ve worked with private equity firms and strategic acquirers, performing diligence on everything from wound care to medical benefits management to teleradiology to medical cost containment to pharma sales and marketing to healthcare information technology.  Many of these deals have been completed and have resulted in long-term success. But we are unafraid to speak up and advise when a deal does not make sense, even when that’s not what our client wants to hear. Our closest relationships are with clients that we’ve steered away from bad deals.

Want to learn more? Please contact us.

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

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

 

Urgent care billing: Eyebrows raised

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An unhealthy discount

My wife was sick a few weekends ago so I took her to the Beth Israel urgent care clinic in Chestnut Hill where they diagnosed her with the flu. Nice modern facility. In network. Convenient parking. You get the idea. Care was good, but slow.

Then a few days ago, I received an Explanation of Benefits (EoB) from my health plan.

One reason to go to urgent care is that it’s more cost effective than the emergency room. In this case BI sent Blue Cross a bill for $1328. Blue Cross marked it down to $365.81, subtracted our co-pay ($35) and deductible ($231.68) and sent BI payment for a whopping $99.13.

In looking at the bill I was most struck by a couple line items. Microbiology/lab was billed at $202.00 and reimbursed at $26.48, or 13%. And Technical Component (maybe for an ultrasound?) was billed at $427.00 and paid at $22.33, or 5%.

Although medical charges (i.e., what’s billed) are known to be detached from reality, I found this EoB particularly galling. How can I explain my visceral reaction, especially to the $427 charge being reimbursed at $22.33?

  • If something is billed for $427 but reimbursed at just $22, it seems that BI is overcharging or Blue Cross is underpaying. Or is it both?
  • What happens to the poor schlub who’s out of network, or worse, lacks insurance? Is the $427 from rare patients like that –who pay 20x what Blue Cross pays– accounting for more than 100% of the center’s profits?
  • Is what I see on the EoB actually the economic reality behind the transaction? Or is BI or my wife’s BI practice being paid a capitated amount for her care and is this bill only meaningful for calculating our cost?
  • What is a patient who’s interested in “transparency” and “cost effectiveness” supposed to think? Did we do the right thing by going to urgent care or not? I think it would have been a lot more useful to see a comparison between the actual urgent care visit cost and a hypothetical visit to the ER or physician office

Ok, I’m feeling a little better now.

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

How Martin Shkreli is driving down drug prices

Thanks Mr. Evil for helping build consensus

Thanks Mr. Evil for helping build consensus

Breaking news: Martin Shkreli has been arrested for securities fraud. Not surprising, but actually I was hoping this wouldn’t occur for a while –at least until some of his drug pricing schemes had played all the way out. I hope he gets out on bail and keeps going with his business plan.

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Turing Pharmaceuticals CEO Martin Shkreli made waves this year by boosting the price of generic drug daraprim from $13.50 to $750 per tablet. Now he’s angling for an FDA voucher worth hundreds of millions of dollars by abusing an incentive program intended to encourage development of new drugs for neglected diseases. He’ll be ratcheting up the price of another drug to boot. And finally his interview with HipHopDx reveals him to be a very nasty and unsavory character. (Jump straight to the last question if you don’t believe me.)

Yet ironically his well publicized price-jacking of a few specific products seems reasonably likely to lead to a slowdown in price increases for the pharma industry as a whole, if not outright price controls. You see, what Shkreli has done differs only in degree from standard industry practices.

The industry spends a lot of money and energy to explain that its pricing is directly related to the high cost of drug development. We know that’s not true, but even if it were true it would not explain why prices for medications rise so quickly, even for products that have been on the market a long time.

The Shkreli affair, along with shenanigans from Valeant, have awakened serious journalists, who have started to look into drug pricing more broadly. This Wall Street Journal article (How Pfizer set the cost of its new drug at $9,850 a month) is a good example.  Pfizer doesn’t set its price based on R&D costs, but it doesn’t charge the maximum it can get away with either. Pfizer is in this game for the long term and likes the status quo. It doesn’t want to generate a backlash. But Shkreli is generating a backlash, not just against him but against the whole industry. Politicians are seizing on him as an example, and rightly so.

Free markets unfettered by government interference are great, but as I have written (Why drug price regulation should not be ruled out) we have to remember that the government plays a very big role in enabling high and rising product prices: it grants monopolies and market exclusivity that keep out competitors. And, through Medicare, Medicaid and other programs the government is the biggest payer for many products. Shkreli’s actions present legislators and the president with an opportunity to re-examine drug pricing policies and consider changes that are in the country’s interest. The longer he keeps up his act, the higher the chance for significant reform.

Image courtesy of Sira Anamwong at FreeDigitalPhotos.net

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

 

Joslin Diabetes CEO faces ‘big challenges’ –I’m quoted

It's tough to win in the diabetes business

It’s tough to win in the diabetes business

Diabetes is a huge health problem, and Joslin Diabetes Center is a renowned, world-class institution. You’d think it would be a good moneymaker, or at least able to break even. But, as the Boston Globe explains in Big challenges ahead for new Joslin CEO, that’s not the case.

Here’s the part of the article where I’m quoted:

Diabetes typically doesn’t require the kinds of expensive treatments or surgeries used to fight illnesses such as eye diseases and cancers. That means Joslin doesn’t have the same opportunities to generate revenues as other specialty clinics in Boston, such as Dana-Farber Cancer Institute and Massachusetts Eye and Ear Infirmary.

“Diabetes is not as profitable a market as more procedure-oriented specialties,” said David E. Williams, a Boston health care consultant

Several years into health reform, it seems odd that we’re still rewarding expensive interventions rather than the type of coordinated, prevention-oriented care that Joslin provides. In some fields, prevention has an uncertain payoff, yet for diabetics proper care helps head off terrible and expensive downstream complications such as amputation, blindness, heart disease and kidney failure.

Joslin has a couple other things going against it:

  • Big healthcare systems have focused on keeping all care within their own systems, preventing “leakage” to other providers even when those providers are excellent
  • Joslin derives a fair amount of its revenue from research. Unfortunately for Joslin NIH rules such as salary caps and COLA freezes make research a loser from a purely financial standpoint. There’s also a lot of competition for grant dollars

Joslin has actually done a good job of recognizing these problems, and has built a substantial commercial business to license its knowhow and brand. But that hasn’t been enough to make up for all of the headwinds.

I am wishing new CEO Dr. Peter Amenta the best of success as he tries to turn this ship around.

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

What can we do about overuse of emergency rooms?

Come and get it!

Come and get it!

I’d expect an emergency physician with 35 years of experience to have some solid insights on why people come to the emergency room. Sure enough, Dr. Paul Auerbach delivers the goods in his Wall Street Journal opinion piece (Why ER Visits for Non-Emergencies Aren’t Going Away). In particular:

  • Patients can’t easily distinguish between true emergencies and non-emergencies
  • You can’t teach economics lessons to people when they are sick
  • Patients have learned they can get care in an emergency department more conveniently and quicker than in a community setting
  • Ambulatory physicians are culpable, because they encourage patients to go to the ER and don’t offer convenient hours
  • Emergency room use will continue to be heavy until key deficiencies in care delivery are addressed

So it was interesting that the Journal published five letters from people with different ideas. I disagree with four (all by doctors), and note that the fifth idea (by someone who may be a dentist) is already being implemented.

  • Dr. Ainslie thinks that “if ERs were forced to post prices, patients could decide what services they wanted to use.” That might work for an elective knee replacement, but doesn’t square at all with my experience in the ER. Am I really going to pick out what emergency services I want and exclude others? Who is going to have the time to discuss the costs and tradeoffs? Am I going to try my luck at a different ER if I don’t like the pricing at the first? Ridiculous
  • Dr. Dunn complains that primary care physicians like him spend half their time filling out documentation that offers no value add for the patient. He thinks docs should be paid “for the service they provide (without having to battle for reimbursement) and eliminate the non-value-added documentation.” This would boost the capacity of primary care physicians and reduce the need for emergency room use. I’m sympathetic to the paperwork complaint but I don’t think we can replace it with no questions asked fee for service. If Dr. Dunn is ready to take on global capitation for his population of patients then his idea might work. Even then there will be some paperwork
  • Dr. Geehr blames ObamCare. “ObamaCare, like its predecessor RomneyCare, promised fewer ER visits and more primary-care access. Government always fails to account for the unintended consequences of vast, new entitlement programs.” Actually, some proponents of ObamaCare (including me) did foresee the rise in ED utilization. Opponents didn’t think of this argument ahead of time, since they were so busy blaming the uninsured for clogging up the emergency department.
  • Dr. Brotherton writes, “the best way to reduce ER visits is for insurers to pay adequately for primary care.” Somehow –he doesn’t explain how– this will cause patients to go to their primary care doctors instead of the emergency room. I’ll give him the benefit of the doubt and suggest that he means higher payments will induce more physicians to practice primary care, but that would take quite a while to play out and still doesn’t address patient behavior.
  • David Lieberman wants hospitals to put urgent care clinics alongside emergency departments to keep the non-emergencies out. Not a bad idea and some hospitals are actually doing this. It works best when hospitals have a financial incentive to hold down costs

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

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