Achieving Wal-Mart efficiencies in healthcare

Everyone agrees that ACA (Obamacare) is going to fundamentally transform the US healthcare system. That was, after all, its intention — the legacy that Hillary and Bill Clinton sought 16 years earlier and failed to achieve. At the same time, the US system — from pharma companies to providers to insurance to clinicians — was facing its own multi-faceted crisis. The crises were used as a justification for ACA, but for some problems, ACA may have no impact or make things worse.

The “US Health Care Outlook” panel today at KGI examined the likely culmination of this coming storm. The panel featured Pete Clagett (CEO of Express Scripts), Jeff Mason of United Healthcare, Don Jones of Qualcomm and consultant Linda Cullen.

Pullen highlighted the nominal impact of ACA is that the government will be buying more healthcare and thus have more control over supply, demand and pricing. Mason reviewed the dying throes of the traditional US fee-for-service, to be replaced by bundled payment plans (such as capitation — commonly used in California).

Pullin recited the depressing statistics of declining R&D productivity. A simple ratio of gross R&D expenditure to new therapeutics ranges from $3.7b per drug (Amgen) to $12b per drug (AstraZeneca). The industry has $200b of revenues disappearing from expiring patents of 2012-2018.

Their provocative openings spawned an interesting discussion: there will be winners over the next few years whether or not the ACA takes hold. Both public and private payers want cost reductions, so innovators who deliver efficiency improvements have lucrative business opportunities.

Kathy Webster, dean of KGI’s new School of Biopharmacy, asked about the costs of the very sickest. The panelists noted the high burden produced by the sickest of the sick (perhaps top 2-3%) — where the severe (and largely incurable illnesses) require a societal resource allocation discussion. However, the next 3-5% are those with chronic disease, who today are very expensive but offer tremendous opportunities for improved efficiency (and thus attractive margins for the right solution).

My question picked up on one of Pullen’s factoids: that 80% of the global pharmacy profits come from the US. I asked the panel: "what would happen to pharma profits if the US reimbursements were cut to Canada’s levels?” (An increasingly single payer system is a textbook increase in buyer power and thus the ability of the government to force industry to cut prices).

The audience groaned at the question and the flip answer that the profits would go down. However, Clagett noted that while the reimbursement levels for branded drugs are lower than the US, generic drugs are higher. (NB: Canadian provinces pressured generic suppliers earlier this month to take a sizable price cut). Even if reduced reimbursements destroyed current business models, there was a suggesting that new business models might emerge (whether through increased generics or by opportunities for lower cost solutions).

Overall, the general tone — consistent with KGI’s mission — was that market forces, private innovation and competition (to the degree it’s allowed) is most likely to provide sizable improvements in efficiency and efficacy. One example was cited by KGI advisory council member Jamie Danenberg (of Takeda), who noted an NPR report comparing a bargain basement MRI machine to a local hospital: the discount clinic was both cheaper and better.
But perhaps the most inspirational example came from Don Jones. Noting the recent rumor that Wal-Mart was getting into health insurance by setting up a health insurance exchange, he took that scenario to its logical conclusions:

• With their retail locations, they could open in-store clinics (as CVS has MinuteClinic in its locations).
• Their locations (and other services) would offer convenience and efficiency to shoppers that would attract business (cf. MinuteClinic).
• Unlike traditional healthcare companies, they would be consumer-focused rather than patient focused. (Most consumers would rather not be patients — they just want the healthy outcomes)
• They would bring their now operational efficiencies and buying power to the operational of any such business. Their buying power alone could cut capital equipment costs by 50%. (Would you like an MRI scan when you’re done shopping?)

Jones predicted that other pressures to do things better would come from Fortune 500 companies that are bringing healthcare onsite to improve worker productivity. Tech companies are well situated to effect such changes, because they understand the potential of the technology to improve the efficiency of service delivery, such as through mobile apps (on Qualcomm-enabled phones) that do for pharmacy what Amazon (or Pandora) have done to simplify purchasing of other goods.

Overall, it was an encouraging — in fact exciting — prognosis for the US healthcare system. Instead of going down the path of increasing bureaucratization and rationing, we could get improved outcomes at a lower cost. Perhaps if we’re lucky it will even turn out to be true.

Regulation, free speech and health care innovation

Over the centuries, much of the progress in health care has come through experimentation by doctors. The creation of the FDA regulated new therapies, but at least in the US, doctors have been able to try new applications through “off label” prescribing of existing therapies.

Such off-label uses today play an important role in fueling improvements in health care. The father of user innovation, Eric von Hippel, co-authored a paper (Monaco, Ali and von Hippel, 2006) that studied the new applications of therapies approved by the FDA in 1998. They concluded that “Eighty-two (57%) of the 143 drug therapy innovations in our sample were discovered by practicing clinicians through field discovery.” In other words, the majority of new approvals were the result of doctors (not the drug companies) doing experiments.

Recognizing the potential for abuse, doctors still see such off-label prescription as an important treatment option. The American Academy of Orthopaedic Surgeons states:

The American Academy of Orthopaedic Surgeons (AAOS) believes that surgeons may prescribe or administer any legally marketed product for an off-label use within the authorized practice of medicine in the exercise of appropriate medical judgment for the best interest of the patient.

Similarly, the AMA provides this example

An example is a congenital condition known as Kidney Reflux Disease, which mostly affects infants and young children. This disease is caused by improper development of the ureters which leads to a back flow of contaminated urine into the kidneys resulting in an infection. No medications have been approved to meet the needs for effective management of this condition. However, the off-label usage of multiple antibiotics has been shown to be the most effective course of treatment. Left untreated, Kidney Reflux Disease can lead to permanent damage and failure of the kidneys.4

Nonetheless, the FDA has worked to prosecute some cases of doctors or drug companies recommending off-label uses. One famous example involves the drug Xyrem, which was sold by Orphan Medical (a company acquired by Jazz Pharmaceutical in July 2005).

The government successfully prosecuted Orphan sales rep Alfred Caronia for making truthful but unapproved statements. Last month, Caronia got his conviction reversed on appeal — recognizing his free speech rights — with help from amicus curiae briefs by the Washington Legal Foundation and the Medical Information Working Group.

However, the victory came too late for Peter Gleason, M.D., a doctor who was arrested, prosecuted and had his assets seized (preventing him from paying for private counsel). Author Harvey Silverglate wrote about Gleason in a Dec 26 op-ed column in the WSJ:

The ordeal of fighting a federal indictment, a daunting process even for the wealthy, exhausted Gleason, with whom I corresponded when I included his case in a book I was writing about how federal bureaucrats and prosecutors go after innocent defendants for innocuous behavior. He grew increasingly dispirited and finally decided to accept an offer that he felt he could not refuse. He pleaded guilty to a misdemeanor alleging his conspiracy with Orphan Medical and was sentenced to one year of probation and a $25 fine.

But Gleason's career was ruined and his pride decimated. He had difficulty holding a hospital or clinic job, and his medical license was placed into question. He was despondent the last time I spoke with him, and he subsequently took his life by hanging himself.

Friday’s paper brought three letters about the article. One, from a 501(c)3 used this to attack FDA attempts to control physicians:

In recent years Food and Drug Administration officials have engaged in a campaign to control every detail of the practice of medicine by individual physicians. They prosecuted a physician for taking stem cells from a patient on the basis that the cells are a chemical they have the power to regulate—even though they are reinjected in the same patient. Neither you nor your physicians may use your cells in your own body without government permission. Another physician is hounded by the FDA for the use of venal catheters that the FDA has approved without FDA approval of every individual use. Now, when you visit your physician, the FDA always wants to be in the room with you.

A second lamented the use of asset seizure (against Dr. Gleason and others) as a violation of unreasonable seizure. Meanwhile, the third letter defended the FDA’s prosecution of Gleason:

The government was right to prosecute Gleason because he violated the law and people's health and lives were at stake. Xyrem can have serious side effects, and when improperly used can induce comas and cause death, which is why it has a "black-box" warning. Orphan also was prosecuted for promoting Xyrem for dangerous, unapproved uses and pleaded guilty. Jazz Pharmaceuticals, which acquired Orphan, paid $20 million to settle civil and criminal charges.

The third author did not note that she was a partner in a DC law firm, but her Friday op-ed in Forbes (predicting such prosecutions will continue) concluded with this disclaimer:

Disclosure note: My firm represented whistleblowers whose cases were part of several of the settlements mentioned. In addition to the Orphan Medical/Jazz Pharmaceuticals settlement, we had “qui tam” cases that were part of the settlements by Amgen, Glaxo and Pfizer.

When they win, such plaintiff attorneys are paid sizable legal fees. Plaintiff attorney rates typically range from 25-33% but it’s hard to tell since terms tend to confidential. The legal fees for one “whistleblower” case were divulged by a tax case as being 40%, while a dispute in another case revealed as being 43.5% plus expenses.

Forty percent of $20 million is $8 million, and the $20 million settlement is a relatively small settlement for such cases. That’s a lot of reasons for plaintiff attorneys to continue to sue doctors and pharma companies in hopes of punishing them for off-label uses, no matter what the FDA does.


References
Harold J. DeMonaco, Ayfer Ali, Eric von Hippel, “The Major Role of Clinicians in the Discovery of Off-Label Drug Therapies,” Pharmacotherapy Volume 26, Issue 3, (March 2006), pages 323–332, DOI: 10.1592/phco.26.3.323 (or free working paper)