Category Archives: Economics

Justifying EpiPen pricing, once again

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Back with more

I enjoyed Medical hackers create $30 DIY EpiPen in defiance of corporate greed over at inhabitat. The Four Thieves Vinegar collective cobbled together an “EpiPencil” from an auto injector for insulin, a hypodermic needle, and epinepherine. It’s a pretty cool trick but it proves nothing about EpiPen pricing nor does it help real patients.

Actually, it unwittingly reinforces the points I made in my very unpopular EpiPen may still be too cheap post, which is that the pricing of EpiPen has almost nothing to do with the cost of its parts.

Consider these caveats about the DIY EpiPencil from the inhabitat post:

However, it is worth mentioning that many experts have voiced concern about the EpiPencil and warned that it’s not advisable to try to create a piece of medical equipment at home – it can be difficult to ensure the correct dose is being administered, the epinephrine inside is delicate and might lose its effectiveness if stored this way, and of course, if someone were to create the device without paying close attention to hygiene, it could become contaminated. A miscalibration of the device could even cause the medicine to be injected into a vein, which can have dangerous side effects.

To recap, here’s what you’re paying for when you buy a real EpiPen:

  • The ability to send your kids to school, playdates, summer camp, hikes, and restaurants with reasonable confidence that they’ll survive an allergic reaction
  • An auto-injector that works. Remember, Twinject was rejected by the market for being clumsy, Auvi-Q was recalled because it could administer the wrong dose, and Teva’s autoinjector was rejected by FDA for “major deficiencies”
  • A device that many, many people know how to use: school nurses, babysitters, passers-by. That means someone is likely to be there to help you if you need it. Good luck with getting someone to learn how to use your EpiPencil in an emergency, even if somehow it worked as advertised

EpiPen’s maker, Mylan has done a lot of sleazy things, which I don’t defend, and as a result they may well deserve the opprobrium that is being directed at them. But I stand by my argument that EpiPen is not $2 of epinephrine and a syringe. Instead its a differentiated solution that provides plenty of value to users.

If someone can come up with something better and cheaper, please do!

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

Surprise, surprise! Exchange customers are price sensitive

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Uh oh. Another big national health plan, Aetna has decided to pull back from the individual health insurance marketplaces (aka exchanges) deciding they can’t make money because customers are focusing on price, not brand name. The headlines give a sense of it:

Cost, Not Choice, Is Top Concern of Health Insurance CustomersNew York Times

Customers’ Laser-Like Focus on Plan Prices Is Causing Concerns in Health Insurance MarketKaiser Health News

The articles quote insurance executive and experts claiming that “price competition has turned out to be much more cutthroat than anyone expected” and that “people signing up for [broad network, big employer style coverage offered by the big name national health plans] are less healthy –and more expensive to treat– than anticipated.”

Hah!

As I have written before (Good riddance: United finally gives up on ACA marketplaces):

Health plans thinking of competing in the marketplaces should say this to themselves a few times before diving in: “Exchange business is price sensitive business. If we can’t compete on price we might as well stay home.”

The exchanges do have problems. For example, insurers are limited to charging older people 3x what they charge younger ones, whereas actuarially it should be more like 5x. The problems are eminently fixable, except that opponents of the law still want it to fail. As for Aetna, specifically, it seems they are retaliating against the feds after the government announced its opposition to Aetna’s merger plans.

Nonetheless, why would we measure the success of the exchanges by whether the big, fat brand name health insurers can make money? Exchanges allow customers to compare plans on an apples-to-apples basis and they are deciding that there’s no big reason to pay higher prices. Some health plans are thriving on the exchanges by negotiating hard with providers (Medicaid oriented plans like Centene and Molina) or by having local market knowledge and density (Blue Cross Blue Shield of Florida  –which has almost as many Obamacare customers in Florida as Aetna has in the whole country).

Here’s the real problem for health plans: they have largely failed to demonstrate that they add significant value. Aetna, United and their ilk don’t accomplish a lot compared with Joe’s health plan. And even when they do add value, they still add large administrative costs and inefficiencies to the system that may outweigh their benefits.

The Affordable Care Act has actually given health plans a new lease on life, by herding in new groups of individual customers and by imposing whole new sets of standards and rules. Health plans fear a so-called “public option” because it could reveal that commercial plans don’t bring much. And as unlikely as it seems now, it’s quite possible that the failure of commercial plans to demonstrate value could lead us eventually to a single-payer system.

Ideally, I’d rather not see single payer. If some of the plans were a little more ingenious and capable they could actually prosper in the exchange business, in ways that would boost their success in the commercial market as well. In particular, there are opportunities to better manage the way specialty care is delivered and paid for, by emulating the approaches used by the most efficient and innovative specialists. This would drive down the overall cost of insurance and improve care for patients.

Plans could also be more creative and resourceful in helping providers take risk or even full capitation.

Meanwhile, Aetna will struggle to grow. After all, the US is moving toward marketplaces and government coverage. Aetna, not Obamacare or the exchanges, may turn out to be the big loser here.

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

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

 

Dialysis and its discontents

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For the good of the patient, of course!

If you want to understand what ails the US healthcare system, look no farther than the dialysis industry. A recent New York Times article (UnitedHealthcare Sues Dialysis Chain Over Billing) provides a pre-made case study.

In brief, a chain of dialysis clinics (American Renal Associates), pushed poor people out of government coverage and into private insurance with UnitedHealthcare so that the clinics could bill $4000 per treatment rather than $200. A patient advocacy group (American Kidney Fund), paid the patients’ insurance premiums using funds donated by American Renal. United is suing American Renal for overbilling.

So who are the good guys and who are the bad guys here?

From what I can see in the article (and there’s always more to the story) it looks like both American Renal and American Kidney are to blame. But to understand the motivation for their behavior, we have to look at the politics and economics of dialysis.

Dialysis is a life-saving treatment for people with impaired kidney function, but it’s expensive. Medicare is mainly a program for the elderly, but it also covers the disabled and people with end stage renal disease (i.e., dialysis patients) regardless of age. That entitlement was added way back in 1972 to make sure patients didn’t drop dead for lack of funds for dialysis. Medicare coverage kicks in over time, so people with commercial insurance use their plans first before shifting over to Medicare. Once on Medicare they are still responsible for a portion of their costs unless they are poor enough to qualify for Medicaid.

So officially the government pays for dialysis, but does it really do so in practice? In fact what happens is that government reimbursements from Medicare and Medicaid are so low that clinics would go out of business if they had to rely solely on those payments. The clinics make up for the losses by charging high –or even extortionate– rates to private insurers, hence the 20x difference in reimbursement cited in the article. As a result, the clinics make more than 100 percent of their profits on their few commercial patients. From a financial standpoint, the commercial patients are the only patients the clinics cares about.

Meanwhile, the clinic business is essentially a duopoly between Fresenius and DaVita, which is why commercial rates can be so high. Interestingly, the few remaining independent players like American Renal are sometimes even more aggressive than the big boys. (There is an interesting analogy here with Martin Shkreli, who got into trouble for taking big pharma pricing tactics to their logical extreme.) Interestingly if you look at the American Renal website you can see that their real customer is the nephrologist; patient-centric they are not.

What about the American Kidney Fund? It seems like a good guy for paying the insurance premiums for ESRD patients. But its funding overwhelmingly comes from the two big dialysis companies who get a fantastic return on investment, since insurance premiums are much much lower than the reimbursement the companies get back for dialysis treatments. The two big boys basically split the market, so they are certain to benefit from their own contributions. More ESRD patients with commercial insurance means a lot more profit. In fact, if you want to understand just how closely American Kidney is tied to the dialysis business, it’s instructive to learn that patients who get kidney transplants and hence no longer need dialysis are not eligible for American Kidney subsidies!

For a small player like American Renal it’s a different story. They can’t just donate to American Kidney and expect to get a benefit, since most of the value will flow to their big competitors. American Renal’s strategy appears to have been to target specific patients for insurance coverage who would then become American Renal patients. That’s an obvious no no. But hey, they probably figured their own intent wasn’t really any different from what their big competitors were doing and they thought they could get away with it.

Incidentally, analogues to American Kidney operate in other disease areas, particularly for diseases where there are just one or two expensive drugs available. The drug companies pay the premiums and more than recoup their investments via reimbursed drug sales.

So I say good for United for taking on American Renal and American Kidney. But I also note that they –and the other health plans– are still too scared of retaliation to go after the industry heavyweights.

Image courtesy of Sira Anamwong at FreeDigitalPhotos.net

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

 

In the future, will every job be a healthcare job?

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I’m here for your job

The US added 38,000 jobs in May, including 46,000 in healthcare. In other words, healthcare added more than 100 percent of the new jobs in the economy. That won’t happen every month, but it’s a pretty striking statistic.

What’s going on here?

I recently read The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies, which basically argues that almost all jobs –including highly skilled ones– will be wiped out by automation, robots and artificial intelligence. Case in point: truck drivers and taxi drivers, who will be replaced by self-driving vehicles.

Job destruction is happening today on a large scale. Manual laborers have been vulnerable for a long time, but professionals are now under threat as well. There’s little opportunity in previously safe jobs like bookkeeper and paralegal. I firmly believe that a big driver of Donald Trump’s popularity is the alienation felt by many workers –including skilled ones– whom the economy no longer really needs or won’t need soon. It’s easy to blame free trade pacts, Chinese, Mexicans, and our feckless political leadership, but technology is actually the root cause.

The two big exceptions to job loss are healthcare and education, sectors that have been very slow to match the innovation pace established by the rest of the economy. That’s kept costs high and rising. As a result, Americans are getting killed by healthcare and education expenses at a time that incomes are stagnant.

Healthcare is always 10-20 years behind the rest of the economy (I’ll let someone else speak for education) so we can expect continued robust healthcare hiring for some time.

If the jobless future described in The Second Machine Age really comes to pass, society will be in serious trouble. I really don’t like the author’s idea of addressing joblessness by paying everyone a guaranteed minimum income. Sure people need an income, but they also need purpose in life, which often comes from having something productive to do on the job.

As I’ve been saying for years –for example Welcoming immigrants and robots to fill the nursing shortage and Robots are coming and they plan to treat you like a moron –I do think healthcare will eventually catch up with the rest of the economy and healthcare jobs will go by the wayside. But maybe there will be enough lag time that we will in fact preserve and invent meaningful jobs in healthcare, and that the healthcare field will lead the next wave for the re-humanization of the economy.

Image courtesy of Geerati at FreeDigitalPhotos.net

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

 

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.