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Is medical practice as clinical trial the tonic for the FDA and drug recalls?

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Libertarians argue that the FDA prevents helpful drugs getting to market.  Pro-regulation types tend to argue that the FDA rushes drugs through too quickly allowing too many dangerous drugs on the market.  In the past few years, Phen-Fen, Rezulin and Baycol are just three drugs that have been pulled from the market because of adverse effects discovered well after Phase III trials were completed and the drugs approved for sale.

Besides the hidden human costs of restricting potentially helpful drugs from the market and the very visible human costs of not stopping potentially dangerous drugs getting to the market, there are real financial costs for the industry in not getting this right.  Bayer has already paid out over $450 million for damages caused by Baycol and is looking at something between $1bn and $5bn more to come–not to mention the loss of more than $1 billion in annual sales.  Just yesterday news started to surface that Avandia and Actos, both drugs for type-II diabetics may cause heart failure in some patients. There have also been serious suggestions that the other statins, Lipitor, Provachol and Zocor, don’t work and also have nasty side effects like Baycol. You can be sure that the attack-dog lawyers are just hoping that they can get their teeth into Pfizer, Merck, GSK and the rest over those issues. Yet we will see many, many more drugs coming to market over the next few years even before the flood of products from the genome revolution heads our way.

So what can we do to get out of this bind in which everyone loses but the lawyers?  One of the keys to this issue is that drugs work differently for different people. Clinical trials, even the big ones required for phase III, often exclude too many types of people who end up taking the drugs in the real world, or are not long enough to discover some of the long-term effects (the Baycol example). Phase IV clinical trials (those that happen after the drug is on the market) are expensive and really only used when the FDA demands them.

Some of the brighter people in the industry have been talking about a combination of silicon and genomics eventually solving this problem.  For one view, that of Kim Slocum at AstraZeneca, look at slides 75-95 of this long talk. I summarize Kim’s concept here (hopefully accurately!):

in the future we will understand the impacts of drugs on patients by recording their information electronically, matching it with their genetics, their treatment and their outcomes, and doing consistent long term monitoring and reporting of all of this information. Aggregated information from real care will then be collected, analyzed and delivered back to clinicians. This will eventually create a massive feedback loop that should show which drugs work best for which people over the long term. Inevitably this information will be incorporated into the drug development process, and the medical care process.

In other words drugs and their uses on different types of patients in the real world will become another facet of clinical trial research and of course another venue for FDA attention. In a meeting last year in direct response to my question Kim told me that he believed most of the pharma industry was on board with this new view of how pharmaceuticals should be used and monitored, despite its potential for showing up warts. Much like the related controversy over mistake-reporting, it would surely be better if we could see these types of systems in place, and find out the effects of pharmaceuticals before more drugs have to be pulled off the market in the face of human tragedies with only lawyers benefiting from the 20-20 hindsight.

Quickie on Premiums

Kaiser Family Foundation and AHA’s HRET have just released their annual employer benefits survey.  Premiums paid by employers are up nearly 14% and employers are shifting costs onto workers. Employers are also more and more interested in providing employees with high deductible plans — the kind the employees in the survey in my previous post say that they don’t want! 9% of employees have them now and a further 11% are "very likely" to end up with them soon. You can get to the full report index here (if you’re a real wonk!).  But the message is, as Bob Leitman at Harris has been saying for years; "pay more, get less!"

Jeanne Scott looks at Single payer, MSAs and what employees want: I editorialize back

I’m a little late in getting to this because I didn’t get my email over labor day weekend while my site was down.  Enough excuses.  If you haven’t been getting theJeanneScottletter, which I’ve told you to sign up for before, then you are missing out on the best analysis of health care politics in America at a very, very reasonable price (i.e. free). In her pre-labor day issue (PDF is here) Jeanne has three fascinating articles that are revealing a little more editorial comment than usual (and it makes her newsletter all the better for it).

She argues against single-payer Canadian style, which has reared its head as the Democratic primary process approaches, and then convincingly explains why Medical Savings Accounts (MSAs) would destroy conventional health insurance if they were allowed to flourish. And she ends with an amazing piece of analysis about employees’ attitudes to health insurance, from a survey from Stony Brook University’s Health Pulse of America .

I’m gong to editorialize myself a little here. Before I do that let me tell you what I think the likelihood is of single payer passing in the next decade in the USA.

Zero. 

My work for clients is about what’s likely to happen (read: if you’re a health plan who wants help you’ll be getting a rational analyst telling you what’s likely to happen not a foaming-at-the-mouth socialist if you hire me!). However, there are some times when something approaching the truth needs to be told about American health care and this is one of them.

Jeanne opposes single-payer Canadian style because the Canadian system is relatively expensive compared to most other of what she calls multi-payer universal health-care systems, and because Canadians wait relatively long times for access to specialty care and hi-tech machines.  She argues that more competition amongst insurers and hospitals would produce higher administrative costs for Canada but a better outcome for Canadians, in terms of improving that access. But, there are lots of problems with this cursory argument.  For example the British system is very like the Canadian system and spends much much less money (6% of GDP versus 11%). So you can do single payer very cheaply (albeit with even less access).  More importantly in the US context, those multi-payer systems (e.g. Germany and Japan) do not have competing insurers as we’d understand them here–you join the one from your employer or city–and more importantly the providers only deal with one insurance system, which (surprise, surprise) has a fee schedule set by the government.  That looks essentially the same as "single-payer" to me,  Yet those two countries (Germany and Japan) manage to have much greater access to specialist care and hi-technology even than the US.  And of course in none of these countries are there any "uninsured".

Jeanne’s argument about MSA’s underscores why "universal insurance" by definition means "universal compulsory insurance" means "essentially single payer".  If you allow people to withdraw money from an insurance pool it eventually only insures the sick and therefore collapses under its own weight.  That’s more or less what’s happened to the individual insurance system in this country over the last 20 years and is what the Democrats are afraid will happen to Medicare if the "healthy" seniors are allowed to leave. (I’m not sure they are right to be that concerned about that happening given the record of Medicare Risk HMOs, but that’s another discussion.) So lets connect that back to health insurance as we know it in America. As Jeanne says 10% of patients account for 50% of the costs, and 50% account for 10%. So if you allow insurers to choose risks via medical underwriting based on what they know about their potential insurees, they are bound by the laws of economics to try to figure out a way to insure the healthy (the 50%) and reject the sick (the 10%). 

So if you sincerely want sustainable universal coverage you must make insurance coverage mandatory, and put everyone in the same pool (community or nationally rated) or else you will end up with an insurance market that cannot function for the sick.  Oh, and this risk-selection all gets turbo-charged by genetic testing, of course!  Japan Germany, Canada and the UK all do this in their slightly different ways. But the key difference between their systems (and where most of the guff that’s talked about single-payers misses the point) is not about single payer but about single provider.  In Canada and the UK the providers (more or less) all work for one provider organization–the government.  In the Japan and Germany they are  (more or less) independent and private.  The Ladas and Skodas that Jeanne is worried are the result of single payer actually come from nationalized single providers (and anyway those are the worst examples–want to compare and contrast, say, the BBC and Fox News on quality of journalism?). 

No one is seriously suggesting that we make all health care providers in the US work as employees of the government; the true analogy is how the defense industry works.  We have one payer (the DOD) and several private contractors, all of whom bid to build the best tank/bomb/plane. So (suspend disbelief here for a second if you know anything about Defense procurement) the Defense Department gets a better cheaper tank/bomb/plane because of the competition between the contractors than if it made the tank/bomb/plane itself. Well if that’s a good enough system for the US military why wouldn’t it work for the US health care system? No real reason that I can see (and it will get there anyway as Medicare bears the weight of the baby boomers over the next 25 years, but I digress).

And there’s one other point.  If you already had a single payer system, you could use that payer and regulatory leverage to encourage competition amongst providers and even insurers by setting the rules of the game the way you wanted.  This is the theory behind Alain Enthoven’s Managed Competition.  It is no coincidence that the only country where it has come anywhere close to being implemented is in the UK. Although the Brits clearly didn’t get it right (but yet may with their "primary care groups") it’s easier to introduce competition once you’ve set the universal single-payer ground rules, than to get "there" from the American "here" of a mess of insurers and providers competing over the wrong things — like avoiding risk and looking for the best insured patient.

End of editorial . Back to why we won’t get there from here and all of our private sector jobs are safe, or safe from nationalization at any rate. Jeanne points out that when offered the choice in the Stony Brook survey 71% of employees wanted a combination of "health coverage & lower salary" compared to only 24% wanting a "higher salary & no health coverage". On the employer side Kucinich, Gephart, Kerry and others are talking about a payroll tax on employers to fund health care.  Now rationally all employees know that some of their salary is being diverted to pay for health insurance, and employers (or at least the ones who do offer insurance) know that they might end up paying less in tax than they are currently paying for insurance, and at least it might not go up 15% a year. 

So why the objections? 50% of those asked thought that they couldn’t afford private insurance if they lost their benefits.  In other words they either understand how bad the deals are in the individual health insurance market, or they don’t trust their employers to actually fork over the money that the employer is currently using to buy them insurance (in wonk terms, they prefer defined benefit to defined contribution).  Presumably the average employer is concerned that they’ll end up having to pay more in tax and still top up the health insurance benefits for their employees, and they would rather retain full control of that process.  In any event, Americans are scared of moving away from what they’ve got in health insurance, and as more have got something and less than 20% have got nothing, we’re not going anywhere far from the present system soon.

Premiums keep on going up

And in news just in….health care premiums will be going up by 13% in 2004, according to a Corporate Research Group survey.  The "good news" is that the increase will be slightly lower than the last two years.  The real news is that as premiums go up, business will force more costs onto employees, or simply drop coverage, and no new model is in sight to deal with this. Even the big purchasing "thugs" of the mid-1990’s seem unable to halt these increases. And some are losing their clout, like CalPERS. Of course the worse this continues to get, the greater the political and market reaction will be down the road. When it will happen I don’t know, but personally I’m looking forward to a replay of 1991-5.  But not everyone reading this might share that opinion.

The perils of being mid-market big Pharma

When I first got into health care a little over a decade ago, the first lesson I learned about big drug companies was that they were very profitable. The second lesson was that a huge company might have only one or two profitable drugs. When I first looked at the Fortune 500 I found that Merck, then the big Kahuna of big pharma, had a market cap the same size as companies with ten times its sales, reflecting that profitability. Pfizer, which is now the big Kahuna, has a market cap of over $250 billion (here’s a list of the top pharmas) with net income of $9 billion on sales of $32 billion.  For comparison GE has net income of $14 billion on revenues of $131 billion.  (GE’s market cap is around $315 billion).

However, behind the numbers, the pharma industry, despite all its dalliances with PBMs, care management, and genomics, over the years still operated by simple rules.  So what a big pharma company did was to somehow develop a profitable drug and market it to doctors (and more recently patients). But there wasn’t a concentration in the industry like there is in automobiles, or steel, because the products were company-specific and of course patent-protected.

So the rules of the game are, if you’re a pharma company and you can’t develop a profitable drug, then license one in.  If you can’t license one in then buy the company that makes it — even if it’s  a huge company.  Pfizer’s purchase of Pharmacia was $60 billion spent largely to get hold of one drug — Celebrex. Since the early 1990’s Pfizer had successfully played a strategy of marketing drugs when others (especially Merck) were distracted by managed care, buying PBMs and generally cutting back on their sales forces. That gave Pfizer the marketing clout to license in other drugs, even from big companies.  For instance, they were already co-marketing Celebrex before they bought Pharmacia. And eventually it gave them the scope to have a full portfolio of drugs by acquiring other companies. Other big pharmas, notably GlaxoSmithKline — the combination of Glaxo, Burroughs-Wellcome, Smithkline-Beckman, Beecham (and a few I’ve probably missed), which were all largely "one-drug" companies at the start of the 1990s — followed suit by getting bigger to get both marketing clout and more comprehensive portfolios.

The other side of this coin is what happens when you don’t have the first part of the equation; the blockbuster drug. Schering-Plough’s new CEO Fred Hassan (ex-Pharmacia by the way) gave a talk this morning about the problems of his company.  Schering has been hit by the loss — more like the evaporation — of its main allergy products Claritin and Nasonex, as well as in the Hepatitis C market.  Schering has been unable to replace these losses with new brands, and also has had manufacturing and regulatory problems. It has been therefore unable to jump from being a one (or two)-drug company to being a serious heavyweight. Astra-Zeneca, a mid-size player that became big on one drug, Prilosec, looks like it is making that jump with Crestor — its new statin.

Usually the companies in that situation sell out/merge with others around the same size, rationalize their sales forces, and wait for new blockbusters to emerge.  However, its been more than a year since we saw the end of the last round of pharmaceutical mergers — last one was Pfizer-Pharmacia — and it may be that the really big guys don’t need the medium size guys any more. In that case we might see the slow withering of the medium-sized pharmas, especially those without strong pipelines.  And as I mentioned in last week’s post about biotech, there’ll be more continued interest from the big guys in cutting deals with interesting small research companies to keep that pipeline stocked.

Cigna settles — The end of “Managed Care” in sight?

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Cigna has now joined Aetna in settling with the physicians who have sued it for downcoding. Essentially the suit promises that no longer will Cigna automatically downcode claims from providers, and will go as far as to allow "questions of medical necessity for services…be decided by doctors" and  "to jointly decide (with the doctors) how to handle experimental and investigational treatments". Cigna’s "system for processing doctors’ claims will become more transparent by allowing doctors to e-mail Cigna, using the Internet to spread news about policy changes, limiting changes in reimbursement rates to once a year instead of monthly and creating a method for independent claims appeals". In many ways this is the corollary of Tenet, Columbia/HCA and others upcoding on their Medicare billing, and then settling with the government.

When I learned about managed care at the feet of Alain Enthoven, he correctly explained that all this gaming back and forth was an inevitable result of having payers and providers in conflict in a fee-for-service system.  His solution was to give them shared incentives to deliver population-based cost-effective medicine, such as he saw in the Kaiser system, within a framework of "managed competition".  Of course for the rest of the world outside Kaiser, "managed care" was never about that.  Instead US Healthcare (later Aetna) and others used managed care as a battering ram to a) risk select against unhealthy individuals and groups, b) exclude high-cost providers, and c) operate as what Ian Morrison calls "virtual single payers" to cram down on providers’ fees.

But America’s doctors and hospitals were only going to take that for so long. The hospitals merged like crazy to increase their market power.  Physicians couldn’t successfully do that, so they started a campaign in every examining room in America–my doctor used to call Prucare "Zoocare"–that reached its height in the scene in the movie As Good As It Gets when Helen Hunt slagged off HMOs for stopping her son going to the emergency room. As HMOs don’t actually have much say about what goes on in ERs, this was a great case of Hollywood getting the mood of the nation right while getting the facts of the matter wrong.  The backlash against managed care as measured by Harris grew steadily until about 2000, when even Al Gore noticed and tried to incorporate it in his campaign. Humphrey Taylor’s quip was that "it doesn’t manage and it doesn’t care". The net result was that health plans threw out any attempt to do real care management along with the removal of any serious attempt at cost control.  Double digit premium increases have been the result. 

Now Cigna and Aetna have settled these provider law suits, and made their subsequent mea culpas, it puts pressure on the rest of the managed care pack to follow along. The  others still being sued are Anthem, Coventry, Foundation, Humana, PacifiCare, Prudential, United and Wellpoint. 

Enthoven would correctly argue that we haven’t tried managed care or managed competition in the way that he meant it. He also used to argue, although he backed off this position in the mid-1990s, that you couldn’t have managed competition without universal insurance. Bob Evans and Maurice Barer (with a little help from me) have forever argued that you can only cut costs effectively if you have a unified budget (which tends to mean a single national insurance system, although not necessarily as it doesn’t in Germany or Japan)  and that, by necessity, means covering everyone with some type of community rating. But in the US we are not going–there barring Dennis Kucinich winning the Presidency and pigs flying.

So if the suit settlement is the last act of a play that we’ve been watching for a long while, the question becomes, what comes next after 1990’s style managed care? The overriding issue is that while costs go up, things haven’t been as bad for employers or the government while the economy was good, and their revenues have gone up as fast as their health costs.  Now things are not so good.  We have a growing Federal deficit, states cutting their health spending desperately and employers moving costs onto employees.  And still health care cost growth is only matching pace with the overall economy. The challenge of delivering cost-effective health care looks to be well beyond any of the constructs being put forward by the private sector. So do we just end up paying more? And how long before the payers squeal again as they did in the early 1990’s, which created "managed care" as we knew it?

Drug companies political contributions in the limelight

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The New York Times has a long and generally factual article about the impact of contributions from drug companies in the 2000 and 2002 elections, and it’s relation to the Medicare prescription drug coverage bills that are now in conference between the House and Senate. The industry, via its trade association PhRMA and in direct lobbying/contributions from individual companies, contributed $50 million in campaign contributions– almost all to Republicans–following the "Flo" TV commercials in 1999, which starred an old lady asking to "keep Big Government out of my medicine cabinet".

So with that anti-government stance, how come we have a prescription drug bill almost ready to be passed?  Well the answer is that, like the AMA and AHA in the 1960’s, the industry has cut a medium term deal with the government.  Given the costs of drugs to consumers, especially the elderly–and the near elderly "aging in" to Medicare by 2010–a government Rx program is inevitable at some stage.  So PhRMA figured better one that has no price controls now, rather than one that comes with them immediately.  Eventually, any government program that buys drugs will develop some type of budget restraint.  But that can be left for future Congresses to pass and for future senior executive teams in the pharma industry to suffer through.  After all, Medicare was introduced in 1965, and it took until 1983 before DRGs were introduced in a first attempt to restrain hospital costs.  19 years of an unrestrained government program with millions of new price-unconscious consumers probably looks good to the industry right now. OK, they won’t be that lucky, but you understand their position!

WebMD – An old nugget gives indigestion

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WebMD was and remains the most remarkable company of the eHealth era.  It was remarkable for the incredible feeding frenzy it set off in the eHealth world when Healtheon bought the then privately held WebMD in 1999, making Jeff Arnold a very rich young man, and getting Jim Clark out of the business of competing with Microsoft (who were about to come after Healtheon using WebMD as a vehicle).  The original concept of the end-to-end eHealth company that could do all the varied gazillions of transactions in health care by putting them all into the Internet "cloud" was a very seductive concept.  However, as the bubble grew larger and larger, the decision to jump start the process by buying traditional health care IT companies like Medical Manager and Envoy (using the absurdly inflated stock of 1999 values) proved too tempting. Here’s a list of some of the companies they bought.

As soon as the acquisition spree took place, the old idea (catalogued by Michael Lewis who’s now off writing about baseball) of creating a "New, New" company was dead.  Furthermore, all the internal machinations ended up costing way too much in organizational terms.  When I was at i-Beacon we negotiated with 5 separate sets of WebMD/Healtheon employees to sell them a version of our consumer health record. It was a clusterf**k every time. This may be sour grapes but WebMD never got it together on those negotiations and instead 18 months later (after we were out of business) they ended paying $18m in 2002 cash for Wellmed and their health record.  Nothing wrong with Wellmed’s but they could have had ours (or all of us) for much less in Yr2000 stock, methinks, and it would have been a tremendous product well before they paid to get Wellmed. (Wellmed had raised about $40m in Venture capital in 2000, and its investors were lucky to get some of their money back, given what happened to most eHealth companies).

WebMD meanwhile ended up being  "reverse" taken-over by Marty Wygod of Medco fame — he was the one who’d originally bought Medical Manager.  By the time he started running the show for real in 2001, Wygod essentially stripped it down to the three parts of claims processing (Envoy, MedEAmerica & Kinetra), medical software (Medical Manager) and consumer and doctor online (WebMD, Medscape, Wellmed & everything else).  The first two parts made money, the last one never has (well it eked out a small profit last year but it lost $75m the year before). (WebMD also has a medical plastics business via Wygod’s old plastics company Synetics which it’s never got rid of). Revenue size-wise WebMD at Year end 2002 looks like this:
a) Transactions $466m
b) Medical software & services $275m
c) Portals $80m
d) Plastics $120m

Meanwhile the PE ratio–as of two days ago–is around 23 whereas those of other diversified medical technology and services companies like Cardinal Health (CAH) are closer to 18. So the web technology spin is still helping WebMD’s stock price even if it hasn’t really been helping transform health care the way we were promised by Jim Clark back in 1997.

The recent news is that something was fishy in the accounting at Medical Manager before Synetics bought it.  Medical Manager itself was a merger of several regional medical office software companies, and had to restate its earnings (and nearly went under) in 1999.  So yesterday (Sept 4) the FBI went into raid mode, and trading in WebMD stock was halted, opening today about 15% lower.

Is the raid and subpoenas a fuss about nothing, as the company says?  More than likely as it’s about old news. But a serious restatement of earnings for just that sector of the business could be a big drag on the stock, and if it’s PE was at parity with Cardinal’s, the stock price should be closer to 8 rather than 10. This of course all serves to take WebMD even further away from being the dominant health care company technology of the 21st century that never was.  And boy do we need one (or two or three….).

Caremark/AdvancePCS Follow up

Today’s New York Times confirms what I said yesterday.  Caremark is paying a bit too much for AdvancePCS, but is doing so to get into the Medicare scrum as in the NYT’s words  "large drug benefit managers jockey for position in hopes of handling the potentially huge Medicare drug program that a House-Senate conference in Congress is drafting for 40 million elderly and disabled Americans." Meanwhile, Express Scripts shares have headed down to meet the percentage loss in Caremark’s since yesterday (Sept 3) morning’s deal, although there’s no clear reason why and ESRX already has a lower PE ratio than the other two. Caremark has gone down because a) they are paying too much (especially as they are debt-free and Advance still has $400m debt left over from its purchase of PCS a while ago) and b) they were growing revenues at 30% per year (and profits more so) and won’t be able to do that if they merge with as big a player as AdvancePCS — unless of course:

a) they convert many of Advance’s customers onto their mail-order pharmacy sooner than you’d expect, and/or

b) all PBMs get an amazing deal out of the Medicare Rx coverage negotiations.  I’d say that’s unlikely unless the entire bill is held up and we get an even more Republican-leaning Senate in 2005 and they don’t notice that we have a eensy teensy problem with a thing called a deficit.

I’m back alive online

OK.  My site is up and hopefully you are reading this by getting here via matthewholt.net or via thehealthcareblog.com, (or via .org and .net both of which get you here. (I describe the experience later when I’ve calmed down a bit). I have also fixed a way via bloglet of having you give your email address to get new postings emailed to you.  I’m still figuring out whether it’s most useful for you to get, via email, the whole post, just the  first few words as a teaser, or just the fact that there is a post.  I’m also figuring out RSS and comments (and am nearly there with those).  So please email me and let me know if you have any opinions about how you want to see this blog and what you want to see here.  Thanks and please keep coming back.  Matthew