Into the drug-industry pricing fryer

April 11, 2018 11:11 PM

Which firms profit most from America's health-care system - "Surprisingly, the worst offenders are not pharmaceutical firms but an army of corporate health-care middlemen."

In crude terms, the health-care labyrinth comprises six layers, each involving the state, mutual organisations and private firms. People and employers pay insurance companies, which pay opaque aggregators known as pharmacy-benefit managers and preferred provider organisers. They in turn pay doctors, hospitals and pharmacies, which in turn pay wholesalers, who pay the manufacturers of equipment and drugs. Some conglomerates span several layers. For example on March 8th Cigna, an insurance firm, bid $67bn for Express Scripts, a benefit manager. A system of rebates means money flows in both directions so that the real price of products and services (net of rebates) is obscured...

The excess profits of the health-care firms are equivalent to $200 per American per year, compared with $69 for the telecoms and cable TV industry and $25 captured by the airline oligopoly. Only the five big tech “platform” firms, with a figure of $250, are more brazen gougers... the returns of the 46 middlemen on the list have soared. Fifteen years ago they accounted for a fifth of industry profits; now their share is 41%. Health-insurance companies generate abnormally high returns, but so do the wholesalers, the benefit managers and the pharmacies. In total middlemen capture $126 of excess profits a year per American, or about two-thirds of the whole industry’s excess profits. Express Scripts earns billions while having less than $1bn of physical plants and no disclosed investment in R&D...

The dark view is that pockets of rent-seeking have become endemic in America’s economy. Wherever products are too complex for customers to understand, and where subsidies and complex regulation add to the muddle, huge profits can opaquely be made... consolidation has probably made things worse by muting competition. There are now five big insurance companies, three big wholesalers, three large pharmacy chains and three big benefit managers. The current vogue is for “vertical mergers” in which firms expand into different layers. As well as Cigna and Express Scripts, Aetna, another insurer, and CVS, a pharmacy and benefits manager, are merging. All these firms insist competition will be boosted. But they are also projecting the deals will boost their combined profits by $1.4bn.

Yet perhaps capitalism is not broken and new contenders will eventually be tempted in. Amazon has acquired wholesale pharmacy licences in multiple states. It is also teaming up with JPMorgan Chase and Berkshire Hathaway to create a new health system for their staff. These initiatives are at an early stage, but investors are sufficiently worried that they value the intermediaries on abnormally low multiples of profits, suggesting earnings may fall. People often get upset when conventional industries are hit by digital competition. Few would lament it in the case of health-care middlemen.

-Why doesn't price transparency drive competition and lower prices in healthcare?
-Healthcare: not a market. Frustratingly so

Death of Texas teacher highlights true cost of US drugs - "Flu victim should have paid much less for her medication, data show."

-Drug prices are still going through the roof
-The hidden reasons your health-care costs are skyrocketing

These New Pharma Bros Are Wreaking Havoc on Prescription Drug Prices - "A Chicago-based duo is selling a simple strategy — and companies they've worked with have raised prices on drugs as much as 4,116%."

Smith and Bove’s business strategy illustrates a drug-pricing ecosystem that many agree is deeply flawed. President Donald Trump has accused drug companies of “getting away with murder,” and his Health and Human Services Secretary, Alex Azar, has vowed to bring drug prices down. Yet the system is averse to change because so many of its key players continue to profit from its complexity and lack of transparency. Patients, meanwhile, are faced with fewer choices and higher deductibles and insurance premiums.

The Billionaire Whisperer Who United Bezos, Buffett and Dimon - "Todd Combs was crucial in getting their health-care deal off the ground. Up next: Find a CEO to run the venture."

posted by kliuless (29 comments total)

You know how a bunch of people have been saying that single payer is just more efficient, as well as more humane? That it's the middle men and administrators creaming off a whole bunch of profit should not be surprising.
posted by Dysk at 11:17 PM on April 11, 2018 [18 favorites]

You know how a bunch of people have been saying that single payer is just more efficient, as well as more humane? That it's the middle men and administrators creaming off a whole bunch of profit should not be surprising.

It’s perhaps worth noting that the first linked article is to The Economist, which is not exactly Jacobin. (As of last year, it thought America should look to Europe for a fix.)
posted by Going To Maine at 11:38 PM on April 11, 2018 [4 favorites]

So instead of rationalizing middlemen and insurers, why not eliminate the need for them altogether? Singapore subsidizes healthcare enough that insurance isn't super necessary. (I could give you numbers, but you'd probably just get very jealous.)
posted by ahundredjarsofsky at 12:41 AM on April 12, 2018 [7 favorites]

I've read the article twice, and I'm still having trouble completely understanding it (should have taken those economics courses after all). The first time through, I did have to stop and take a few cleansing breaths before proceeding past "patients wolfing down too many pills."

If you're trying to write a to-be-taken-seriously article about health care costs, and you want to discuss overprescribing as one of the contributing factors, that's fine. But find a damn tone and stick with it.
posted by The Underpants Monster at 12:56 AM on April 12, 2018 [10 favorites]

Why would this be surprising? see also: the financial products boom and the charter school pandemic
posted by eustatic at 1:21 AM on April 12, 2018 [7 favorites]

Every other health system has to deal with pharmaceutical companies. Of course it's the unique layers and layers of private 'enterprise' that create such terrible outcomes.
posted by pompomtom at 1:23 AM on April 12, 2018 [5 favorites]

This. I wheezed in rage for years at this question.

No really I wheezed. Asthma. In these great United States Ventolin costs $58.44 plus a doctor consultation to get a prescription because of repantenting based on blatantly false concern-trolling about the ozone and it's hardly the only asthma drug to cost stupid amounts because of repantenting.

So how much do I save by not living there now? Well! 25 RMB ($3.98), 98k IDR ($7.98), looks like 190-250 THB ($8.02)... I think the only places you actually need a prescription I've been are Hong Kong and Japan. And the Thailand one isn't a link to an actual online retailer that delivers because I don't speak enough Thai to search that. And usually if you buy in bulk, you get discounts and free shipping, which is why I have a fresh shipment of 20 in the closet. I pay the pharmacy who pays the maker of the meds and that's all it is. I have insurance but I don't even use it for this because why bother? I'd have to go to the hospital and there's a copay and rebates and paperwork, meanwhile I can just order this online and pay and have it the next day. Even if I'm in Hong Kong I can just walk across the border and get it in Shenzhen.

Tell the common person in China, Indonesia, or Thailand that he/she have to choose dinner or their child choking because a foreign company repantented something and the ozone and you will have people in the streets if not a riot on your hands. These people remember colonialism and they will kick. your. ass.

Amazon's best-selling pitchfork costs less than half an American Ventolin, or about 5 Chinese albuterol generics, and is eligible for Amazon Prime. Torches, I don't know...but posterboard for a protest sign is even cheaper, and certainly cheaper than your health insurance. If you and everyone you know protest the ever-living fuck out of everywhere until they give us a just healthcare system, consider the cost savings!
posted by saysthis at 1:34 AM on April 12, 2018 [26 favorites]

Why would this be surprising? see also: the financial products boom and the charter school pandemic

This is not a great metaphor, I think: charter schools are replacing an age-old American government institution. Health Insurance isn't provided by the government in the US, and the ACA isn't really old enough to be considered a foundational part of the country.
posted by Going To Maine at 1:35 AM on April 12, 2018

The Economist's analysis is odd, and I think explains why they came up with such a low number ($65bn in total, $126 per person) for waste in the middleman system. They don't compare to single-payer systems and try to analyze the revenue flowing to unnecessary middlemen, or calculate the hours wasted by doctors dealing with unnecessary middlemen.

Instead, they look for excessive profits - profits only, not revenue - in the middleman system and define that as waste. They're making two assumptions, which are the sort of assumptions you'd expect from The Economist: 1) If the free market created the middleman firms, then they must be doing something useful and necessary, and 2) the fix is more free market, since more competition will lower excess profits.

That's why the article comes to the rather odd (from my Canadian perspective) conclusion that Amazon might be the Great Free Market Hope that'll get rid of excessive profits in the American healthcare middleman sector.

The article's first line belies the rest of the analysis: Americans spend $5000 more per person per year on healthcare than the rest of the rich world. Following The Economist's analysis and advice - more free market! - will get you $126 per person per year of savings.

If I were the article's author, I would feel sad that the principles I believed in so fervently had such a paltry payoff compared to single-payer healthcare.
posted by clawsoon at 3:31 AM on April 12, 2018 [11 favorites]

Late correction to my comment: $200 per person per year in excess profits. Still paltry.
posted by clawsoon at 3:46 AM on April 12, 2018 [1 favorite]

The problem with using the free market to discover and manufacture pharmaceutical drugs is that rich people have all the money but poor people have all the diseases.
posted by clawsoon at 3:48 AM on April 12, 2018 [4 favorites]

$200 per person per year in excess profits. Still paltry.

Per capita, maybe. In aggregate, though...*cha-ching!*
posted by Thorzdad at 4:44 AM on April 12, 2018 [1 favorite]

Per capita, maybe. In aggregate, though...*cha-ching!*

Not when you're spending $5000 per person per year more than the rest of us. That's the real cha-ching.

...though maybe you were being sarcastic and I missed it... :-)
posted by clawsoon at 5:13 AM on April 12, 2018 [1 favorite]

(I could give you numbers, but you'd probably just get very jealous.)

I can give you a number. $746.00 per month. That's what I pay toward my health insurance for my family. And that's after my workplace has contributed $818.00 toward my health insurance. So yeah, $1564.00 per month for health insurance. This shit is insane.
posted by Fleebnork at 5:43 AM on April 12, 2018 [6 favorites]

Instead, they look for excessive profits - profits only, not revenue - in the middleman system and define that as waste.

Yeah, this just seems like a bizarre way to look at the problem. By the definitions put forth in the article, if the middlemen redirected the profits into salaries for unnecessary extra employees who sat in a room twiddling their thumbs, excessive profits (and thus waste) would be meaningfully reduced. Or, I dunno, maybe pay your own separate consulting company for services rendered, thus hiding more profits.

It's like The Economist is unaware of the accounting bullshit that can go on to reduce the appearance of "profits".
posted by tocts at 5:48 AM on April 12, 2018 [7 favorites]

The best thing I've ever read about US healthcare inefficiencies (and in fact the inefficiencies of privatisation in general) is Alex Harrowell considering this from the perspective of Ronald Coase's work on the advantages of an organisation, vs a mere networks of contracts, i.e. a privatised or outsourced model [my highlights]:

Ronald Coase observed that an organisation could be considered as a collection of contracts, and asked why, in that case, did organisations even exist. His answer was that contractual relationships have transactions costs. When these transactions costs outweighed the expense of organisation, organisation would predominate. Also, there were limits to transaction; it might be actually impossible to specify what was wanted in a contract, or equivalently, it might cost too much to write it.

...

Since the 1980s, there has been a global trend towards replacing organisations with networks of contracts. The idea that a firm could be considered as a network of contracts was taken up by the management consulting industry, and strengthened from a positive observation to a normative statement that firms should become more so.

...

First of all, the claims-management process was itself costly. This is Coase’s basic argument. Second, because the prices of services exchanged between the component firms were often determined after the event, through the claims process, they were no longer informative about the marginal costs involved, but rather about the contract-management process. As a result, costs overall rose substantially although nobody could put their finger on who was coining it. Thirdly, it simply became enormously complex. A contract, after all, is executed between parties. The number of pairwise interactions within an organisation rapidly becomes very large – in fact, it [scales with the square of the size of the organisation].

...

Americans, notoriously, spend much more than any other nation, have worse results, and leave lots of people uncovered. People blame, variously, insurance companies, doctors, drug companies, intermediary organisations, public policy, and patients themselves for getting ill. But none of this has ever solved anything. Everyone who has tried to nail down exactly what costs so much money has ended up concluding that the whole system is weirdly expensive and wasteful. That is, of course, the point. Its awfulness is an aspect of the system, not any one component or group of components.

He's written several posts on this, but the first two are probably the most relevant to a US / general audience:

In The Eternal Inferno, Fiends Torment Ronald Coase With The Fate Of His Ideas

A bit more on Coasian hells
posted by chappell, ambrose at 6:26 AM on April 12, 2018 [7 favorites]

Yeah I'm a fan of The Economist but not this particular article and analysis. It sort of misses the mark. I like that they highlight yet another inefficient and stupid part of the American health market, but I'm not sure I believe it's the biggest problem.

But speaking of health middlemen, my life changed significantly when I discovered GoodRX (see also Blink Health). It's pitched as "coupons for prescription drugs". What it really is is yet another PBM, but this one untied to your insurance or your pharmacist. I take a couple of medications daily, nothing too exotic, but each month my prescriptions cost between $20 and $200 depending on the month and the random whim of my insurer and their invisible PBM. So now every month I laboriously also go to GoodRX and see if it's cheaper. Sometimes it's cheaper to buy with my insurance, sometimes with GoodRX, sometimes full retail. (See also Why Your Pharmacist Can’t Tell You That $20 Prescription Could Cost Only $8.)

American pharmacies are like a parody of a free market. They pretend like there's market pricing and competition, but then the pricing is entirely irrational and opaque. And because consumers have so little choice in whether to buy things and are so disintermediated, there's no meaningful pressure on prices. It is the opposite of a working marketplace and the result is a huge amount of waste. Not to mention bad health outcomes for people who can't afford the medicine they need.
posted by Nelson at 6:30 AM on April 12, 2018 [10 favorites]

PS I was curious so I had a look at what MeFi had to say about Coase. There are some interesting posts on organisational structure (corporations vs cooperatives) but the most relevant thing I found in terms of "Coasian Hells" was this comment by gauche, from a ~500 comment mostly consisting of rants about airline seating [again, my highlight]:

FWIW, the Coase theorem doesn't prove that it doesn't matter who is initially given a property right; it proves that transaction costs affect the efficient distribution of rights in surprising ways.

Coase's whole career was about looking at transaction costs; his point was that an economics that didn't take them into account was like a physics that didn't bother to model friction. The article makes that point further on, a bit, but I thought it worth bringing up here.

If you ignore transaction costs, you're doing the economics equivalent of considering a perfectly spherical cow - it shouldn't be surprising that your dairy business doesn't work in quite the way expected...
posted by chappell, ambrose at 6:48 AM on April 12, 2018 [3 favorites]

At every level there's profit, sometimes/ often hefty profit. Capitalism and health care are a bad mix.
posted by theora55 at 7:05 AM on April 12, 2018 [2 favorites]

If I were the article's author, I would feel sad that the principles I believed in so fervently had such a paltry payoff compared to single-payer healthcare.

No you wouldn't, because if you were the article's author you'd have the Invisible Hand pressed firmly over both eyes at all times.
posted by flabdablet at 7:28 AM on April 12, 2018 [4 favorites]

......it's not their eyes that mr invisihandy is touching
posted by lalochezia at 7:47 AM on April 12, 2018 [2 favorites]

Why would this be surprising? see also: the financial products boom and the charter school pandemic

This is not a great metaphor, I think: charter schools are replacing an age-old American government institution. Health Insurance isn't provided by the government in the US, and the ACA isn't really old enough to be considered a foundational part of the country.

I’m not sure what eustatic’s point exactly is, but the original article’s comparison to mortgage backed securities is particularly apt and probably understates the situation with health care. When economic details of a system are too opaque for consumers to understand and too complex for legislators to effectively regulate, the free market fails to deliver the service that we all agree we want. After about 10 years, I still have no idea what Express Scripts actually does. Add to the mix that at every layer there are thousands (hundreds of thousands?) of executives and employees trying to make a living, lobbying Congress, luring investors and the whole thing is just so dysfunctionally entrenched it’s just really hard for me to see how this thing gets incrementally regulated or made more efficient by the magic of free market capitalism without redesigning the whole thing from the ground up.

Keep in mind that pharmacy benefit managers and preferred provider organizers are now also a big part of Medicare, so the solution “Medicare for all” isn’t likely to fix this by itself either.

I’ve been interested in and following this stuff for more than 25 years now and I’m currently applying to grad school to get a Health administration degree just so I can speak the language to advocate for my patients with the administrators *in my own organization* who are too caught up in playing this 4-dimensional chess game to care about what quality health care even looks like.
posted by Slarty Bartfast at 7:57 AM on April 12, 2018 [7 favorites]

Oh, how completely unsurprised I was to see that the dudes in the new pharma bros article honed their craft (scam) at Horizon Pharma. My kid takes the most expensive medication ever approved by the FDA. Why is it the most expensive drug? Because Horizon acquired it from a company called Hyperion, which put the drug to market with the aim of selling it to the highest bidder. When it was originally FDA-approved, the proposed cost was a mere $250,000 per year for an adult dosage. Horizon then jacked it up to $793,000 per year. They also bought the rights to the predecessor drug and jacked the price up on that, so now they control the entire pipeline of available medication for people with a specific genetic disorder. My theory is that they are jacking the price up not just because they can, but because they know this is a short-term market opportunity. Gene therapy will eventually eliminate the need for these specific medications, so they are maximizing profits now.

And don’t get me started on how Horizon (and the previous company) controls the distribution pipeline for these medications. When my son was diagnosed as a newborn I naively assumed I could take his prescriptions to my local neighborhood pharmacy and get them filled! Ha! I have spent years battling insurance companies (gotta get prior authorizations for these drugs that have no alternatives and my child may die without), pharmacy benefit managers (oh, this drug is not on your formulary? Gotta get a formulary exemption. But now you tell me that your contracted specialty pharmacies don’t carry these medications because the pharma bros only contract with their two favorite specialty pharmacies? Gotta get a specialty pharmacy exemption), and the fucking mail order medication delivery system involving tens of thousands of dollars worth of temperature-sensitive meds in tiny 25ml glass bottles that may or may not be delivered whenever the fuck UPS shows up.

So thanks no thanks, Economist article, I’m quite sure Horizon Pharma is making plenty of bank. It’s just that everyone else is, too.
posted by Maarika at 9:19 AM on April 12, 2018 [11 favorites]

so the bloated industry is....bloated?

Seriously, while not surprising in the abstract, it's very good to see some break down of how this works in the medical industrial complex. Helps one to see the parallels with campaign finance, the music industry, law, defense, investment banking...etc. I understand the argument that says a lot of these hobgoblins are features/not bugs. But eventually the 'features' outweigh in the useful industry.

I'm reminded of the character in Godbless you Mr. Rosewater who's sole motivation in life is to find an instance of a large amount of money changing hands and attach himself to the process in some useless way.
posted by es_de_bah at 1:01 PM on April 12, 2018

I'm starting to wonder if this is what Calvin Coolidge really meant when he said "the business of America is business."
posted by invitapriore at 4:33 PM on April 12, 2018 [1 favorite]

My daughter has been taking a medication that's $13k/month. I have great insurance, so the cost to me was "only" $500/month. Except there's a co-pay card, which I've learned is a thing that pharmaceutical companies do to extract maximum revenue from insurance companies. They say the medicine is some really high number so the insurance pays their 80% or whatever, then provide me with a "co-pay card" that pays $495 of the $500 I owe. So my actual cost is $5/month. The insurance company, as far as I know, is paying another $12,500. Or maybe much less, who knows?

All of this is arranged and pushed for very heavily by ExpressScripts, one of those "Pharmacy Benefit Manager" middle-men mentioned. So I'm _guessing_ they don't actually pay $12,500, but still manage to somehow pocket the $495/month from the co-pay card.

In the meantime, my daughter claims the medicine isn't helping her skin condition at all, so she wants to stop taking it. I can only imagine ExpressScripts is going to lose their mind, and start calling me even more often once I stop re-ordering.
posted by pwinn at 10:20 AM on April 13, 2018 [1 favorite]

The share of U.S. health-care spending devoted to administrative costs is roughly three times what it is in other affluent countries (Epic)
posted by kliuless at 1:56 PM on April 13, 2018 [1 favorite]

Thank goodness, then, that billing is largely in the hands of Efficient Private Enterprise™. Imagine how expensive it would be if the Government did it!
posted by flabdablet at 8:33 PM on April 15, 2018 [2 favorites]

-Capitalist institution makes strong case for socialised medicine
-Majority of Americans—Including 74% of Democrats—Now Support Single-Payer
-The True, Accurate, and Only Answer to "How *Exactly* Will We Pay for Medicare for All?"
posted by kliuless at 9:14 PM on April 17, 2018 [3 favorites]