< Corporate Players in Health Care try to Prevent a Real Market
by Daniel R. Hoffman, Ph.D., President, Pharmaceutical Business Research Associates on March 17, 2014

Corporate Players in Health Care try to Prevent a Real Market

A survey of 595 employers, each with 1,000 or more employees, by consultancy Towers-Watson (see here) showed that: (1) employers are shifting more costs to workers in the form of higher premiums and more out-of-pocket payments, (2) fewer and fewer employer plans will cover spouses/families, (3) subsidized health insurance to retired workers is ending and, (3) most employers (76%) say they won’t even cover their workers by 2024.

Even as the employment basis for health insurance in the United States is eroding, the costs for health care services, medications and devices keep rising substantially.  The sectors most responsible for these escalating prices are providers (e.g., physicians, hospitals, diagnostic and therapeutic centers) and manufacturers.

Take pharmaceutical manufacturers as an example. In April 2012 the pharmacy benefits management company, Express Scrips, showed that $55.8 billion was spent unnecessarily on higher-priced medications when more affordable, similar drugs could have been used. 

Medical devices represent another area of ballooning costs.  Documents from the class action lawsuits filed against Johnson & Johnson in connection with their pelvic mesh device provide some explanation for why device prices continue to rise.  The J&J product was used to prop up collapsed internal organs such as the bladder and uterus, a condition known as pelvic organ prolapse.  According to Shirley Wang's story in the Wall Street Journal (see here), a high profile physician who was acting as a consultant to J&J influenced language in a research paper that evaluated the mesh insertion procedure.  The research was conducted under auspices of the American College of Obstetricians and Gynecologists which had originally referred to the mesh procedure as "experimental."  Apparently J&J and its agent felt that term would deter many gynecologists from using it, so they exerted influence for the term to be dropped.  Wang claims that "financial relationships between the medical community and device makers are commonplace," often resulting in top specialists receiving "tens of thousands of dollars or more."  Documents from the mesh lawsuits, however, suggest "that potential influence over medical practice also can be more subtle."

In addition to acting as agents for manufacturers and taking a piece of the profits for themselves, physicians and other providers drive up health care costs in a larger and more direct way.  A consultant who attended the National Business Group on Health meeting two weeks ago said that large employers feel at a loss to restrain rising prices because the hospital-based networks keep demanding exorbitant, ever-increasing fees in contract negotiations with payers.  The acquisition of private medical practices by these networks over the past few years means that in many geographic areas, all the practitioners in certain specialties are tied to one or another network.  This leaves payers without any leverage in the effort to contain costs.

One of the important charms of capitalism lies in the fact that it is supposed to encourage entrepreneurs to develop a new product or service that can address needs.  The health care system in the U.S., which will soon account for 20% of this country’s GDP, has a huge need posed by unscrupulous, profit-over-all-else providers and manufacturers.  As an example of the way private enterprise is supposed to work, a startup called RxRevu emerged last year in Denver.  The new company offers a way of helping patients and payers avoid getting overcharged for prescriptions by using a massive drug database to make sure the prescribing physician isn't writing a more expensive drug when a less expensive one will suffice.  RxRevu will make itself available to prescribers electronically, hoping in its own way to become the Google of e-prescribing. 

While ventures such as RxRevu may help around the margins, the likelihood is that the best the private payers can do in the foreseeable future will involve forcing some modest price competition in those few classes of specialty drugs where there are multiple, clinically similar entities.  The anti-TNFs such as Humira, Enbrel, Remicade, Cimzia, and Simponi are one such therapeutic category.  Unfortunately in the areas where pricing is the most abusive, such as oncology and the “ultra-orphan” products, the chances remain slim that private payers will be able to force any significant price restraint. 

Although private markets sometimes do drive down prices (think of personal computers), too often they keep prices artificially high.  According to a recent description by Lynn Stuart Parramore (see here), "rather than delivering us the things we need, it’s often more profitable to cheat, raise prices, manipulate intellectual property protections, bribe doctors, choke distribution, and engage all manner of other shenanigans that make our healthcare the most expensive in the world [see here], and yet subpar in quality."

The major corporate players in health care seek to prevent an honestly functioning market.  Integrated hospital networks offer a prime example.  Until citizens and the government can shift substantially more of the financial risk for health care cost to provider groups—presumably via ACOs and more bundled/prospective payment—the problems of rising costs and their negative effects on access and quality don’t really have a chance of getting better.