Tag Archives: healthcare

Profit maximization in pharmaceuticals

From a microeconomics exam recently. The source article is “How a Drug Maker Tries to Outwit Generics” from the WSJ. (If that link doesn’t work, here is a PDF of the fulltext.)

Describe the nature of demand for Provigil. How much market power is there and why? If Cephalon raised the price of Provigil by 74%, with no apparent increase in production costs, does that mean that Cephalon was not initially pricing to maximize profits from Provigil? By raising the price, are they now profit-maximizing? Discuss. How would you expect the introduction of generics to affect the demand for Provigil? The price of Provigil has been raised before Nuvigil is launched. Discuss how the demand for Nuvigil would have been affected if the price of Provigil was not increased. Evaluate Cephalon’s strategy as a means of achieving its goal of corporate profit maximization.

Provigil is in extremely high demand; the trouble is that it is expensive, and it is almost never covered by people’s insurance. Right now, the average wholesale price (AWP) for 30 count of Provigil 200mg is $361. Provigil is also in an interesting place in terms of patent protection. It’s not a new drug, and through manipulating pharmaceutical patent law, Cephalon (who acquired the IP for the drug when they bought out Lafon) has been able to extend the life of the patent two or three times.

In healthcare, supply and demand do not function freely. In Provigil’s case, there is a distortion: one needs a prescription to buy it. In terms of price, there is another distortion: third party insurers will not pay for it. (9 out of 10 times it requires a prior authorization, which is almost always denied.) There are substitutes for Provigil. While it is the only drug of its kind, the stimulant ADHD medications promote wakefulness as well, though they often have other undesirable side effects, and are contraindicated in patients with anxiety and panic disorders and in patients with cardiac arrhythmias, hypertension, etc. Provigil, with its different mechanism of action, does not have these limitations because it does not function like drinking a cup of coffee. It simply removes fatigue and promotes wakefulness in the same way that it’s opposite, Benadryl, makes you sleepy and dopey. (Indeed, Benadryl is a messy antihistamine that works in the body and in the brain, and Provigil is a pro-histamine that works only in the brain.)

Because of the lack of competition within the pro-histamine drug class, Cephalon does have some market power. In my view, Cephalon was not profit maximizing for the long-term until these recent price hikes (more on that in a bit), because Provigil has always been expensive relative to its other patent-protected, cross-class competition (ADHD meds). Had they priced their medications right along at $100-150/month, they might have made up in volume what they would have lost in price. It’s not possible for me to know that, but I know that there is quite a bit of off-label demand from prescribers who would like to use Provigil, but cannot because it’s too expensive to buy out of pocket for most patients, and the majority of insurers will not cover it. The only way to know this for sure is to wait until the generic is released, and then see if there is a generic modafinil boom. I expect that there will be because it’s an excellent drug for many conditions that it’s not technically indicated for. (When I did graduate psychopharmacology, the one of the answers for many of our case studies was often modafinil, with the inside joke being “Just kidding, it won’t be covered so let’s not waste our time.”)

Now that Cephalon has raised the price by 74%, they are potentially sacrificing profits for the short-term, but maximizing them for the long-term. In the short-term, they are only potentially sacrificing profits because Provigil is never covered without a prior authorization to begin with. As patients not buying the drug out of pocket all have PAs in effect, that authorization does not expire just because there’s a price bump. Those prescribers who are successful in getting Provigil approved for their patients are unlikely to have a harder time getting it approved now that the price has gone up, because that’s not how the PA process works (even though I know that’s probably counter-intuitive).

What Cephalon will do is bump Provigil’s price while there’s still a brief amount of time left on its patent. Then they will release Nuvigil, while Provigil still has some patent life left. (Usually it’s a 6 to 9 month window on the patent for the old drug.) Nuvigil, priced in a more friendly fashion will almost immediately replace Provigil as the drug of choice. Cephalon will fund lots of studies that show that Nuvigil works great for those off-label things that prescribers have been using Provigil right along for, they will win FDA approval to use Nuvigil for these now-approved indications, and they’ll market the hell out of Nuvigil for these new uses.

In the meantime, the patent protection on Provigil will come to an end, just as Cephalon’s marketing campaign for Nuvigil is winding down, and most patients that were on Provigil will have been switched to Nuvigil (because it’s cheaper and ostensibly “better”), and then generic Provigil will hit.

For about two months, the prescription benefit managers (PBMs) will do nothing. People will fill their monthly Nuvigil scripts, and then the clinical pharmacists working for the PBM will have finished their research, made their recommendations, and the formularies will change. Nuvigil will suddenly require a prior authorization, and pharmacies will begin faxing doctors’ offices to change from Nuvigil to the newly-generic Provigil. And doctors will sign off on this switch back to the old drug because doing prior authorizations is a giant pain in the rear, and the opportunity costs associated with taking 15 extra minutes to fill out paperwork for each Nuvigil Rx is enormous.

Nonetheless, Cephalon is profit-maximizing in the long-run by doing this because despite the delayed shift from Nuvigil back to the generic Provigil, there will be some folks that remain on the Nuvigil. How many will depend on pricing. So long as Cephalon isn’t price-gouging on the new drug the way they are on the old one, PBMs may be more lax about requiring PAs or trials of other drugs before approving the Nuvigil. (Instituting a PA, after all, creates inefficiency and requires the hiring of more personnel to process the PAs, etc.) Gouging is, of course, a relative thing.

This kind of behavior happens all the time in the prescription drug industry. AstraZeneca did it with Prilosec. They jacked the price of 40mg Prilosec way up (AWP is currently $247, though it was over $300 just a few months ago), released 40mg Nexium at a lower price (AWP currently at $181), and then generic Prilosec hit the market, and took back a bunch of marketshare, but not all. Nexium remains a very profitable drug, despite there being the evidence that suggests that it is only marginally better than Prilosec, if that. (Most AstraZeneca-funded studies compared 20mg of Prilosec to 40mg of Nexium, and only published this detail in the fine print. I actually had a talk with an AstraZeneca sales manager about it a few years back after he moved to Forrest, and he admitted that Nexium was only created to perpetuate the revenue stream.) In the industry, we call this game of patent-extension “evergreening” and there are a huge number of drugs that bear this label: Lexapro (based on Celexa), Nexium (Prilosec), Nuvigil (Provigil), Clarinex (Claritin), Xyzal (Zyrtec), Pristiq (Effexor), Trexima (Imitrex+Naprosyn); the list goes on and on and costs the healthcare system billions every year.

An example of a company that didn’t do this, and is NOT profit-maximizing is Sanofi-Aventis with Xyzal, which I mentioned above, and they ended up with a drug that was dead in the water on arrival. Xyzal was supposed to replace Zyrtec which was losing its patent protection, but because SA didn’t take the necessary steps the way Cephalon is and AstraZeneca did, their drug went nowhere. It was released about a year ago, and I can count on one hand the number of prescriptions I have filled for it. Zyrtec, on the other hand, was one of our fastest movers. (And is now available over the counter which killed script volume for it.) On the other hand, Sanofi-Aventis is still making money from the over-the-counter sale of the old Zyrtec, so they are maximizing profits in the second best way. (Having a patent monopoly for an Rx-only drug is more lucrative because you can charge prices that you’d never make up for even with the oceans of relatively undistorted free-market OTC volume.)

In my 8 years in the pharmaceutical industry, Cephalon is a company that I simultaneously loathe and admire. I dislike them because their drugs are very expensive when common sense suggests that they probably shouldn’t be (Provigil was invented in the 1970s). On the other hand, I find myself admiring them because they are incredibly legally savvy. If this savvy is present in their pricing discussions — and I have no reason to think that it is not — there is a good possibility that they are indeed profit-maximizing within their legal constraints. I know that earlier I suggested earlier that they might make more money in volume if they lowered their prices, but most PAs will not be approved unless the indication is on-label or you are a specialist, and since Provigil only has one indication, they might indeed be profit maximizing inasmuch as they can realistically be in a heavily distorted market. The information asymmetry here means I can do no more than speculate.

Medical school inefficiency: women in medical school

I’m feeling provocative…

From a Freakonomics blog entry from yesterday:

My husband is K.C. and the kids are Jacob (10) and Jared (6). We live in Connecticut, and K.C. commutes into New York City to work as a portfolio manager. I am a stay-at-home mom with a medical degree.

Emphasis mine.

With the relative shortage of physicians, it would make more sense to give priority to those students who actually intend to practice medicine when they graduate from medical school:

“Due to population growth, aging and other factors, demand will outpace supply through at least 2025,” they wrote. “Simply educating and training more physicians will not be enough to address these shortages. Complex changes such as improving efficiency, reconfiguring the way some services are delivered, and making better use of our physicians will also be needed.”

The projected shortfall was attributed to a slowly expending physician workforce in the face of an expected 50% growth in the U.S, population and a doubling in patients older than 65.

Couple that with the demand we are probably about to manufacture, and this whole thing is going to crumble for at least 7-10 years, since that is the minimum built-in lag time for increasing the number of practicing physicians. (4 years of medical school, 3-6 years of residency depending on specialty.)

Giving slots to people who don’t practice medicine once they’re finished with school is wasteful in a profession already strapped for human capital. I have similar feelings about other professions like pharmacy and dentistry. While it is probably not possible to weed out those who will play traditional gender rolls from those that will work throughout their lifetimes, I wonder if asking a question like “If you get married, do you intend to continue practicing medicine?” would be allowed during the medical school interview process. I’m inclined to think it wouldn’t be. Should it be allowed?

How do you reconcile personal choice and personal freedom with real human capital shortages in important, life-saving industries? Can it be reconciled? Should it be reconciled?

Massachusetts: a less than perfect healthcare model

I will have a large writeup on real, honest-to-God ways we can reform healthcare in this country without resorting to re-distributionist tactics in the next couple of days. No hand-waving. No pie-in-the-sky. I promise. But until then…

By Frank Micciche from the New America Foundation/Providence Journal:

439,000 people have acquired health insurance since the reform became law — an astonishing 9 percent increase in coverage at a time when the national rate increased by one-half of 1 percent.

Nearly 200,000 of the newly insured acquired private, unsubsidized coverage, mostly through their employers.

Written another way: “More than half of the individuals are subsidized with taxpayer money.”

Libertarians will have a field day with the other piece of puzzle: many individuals would rather pay the fine associated with forgoing the mandatory medical insurance than pay the premiums. Why? The fine costs less. Many healthy people simply don’t want to buy health insurance. The original projections for the number of unsubsidized signups ended up being wildly optimistic:

Massachusetts’ financing challenge emerges from its success in covering the state’s neediest residents. Enrollment in the fully subsidized Commonwealth Care program has been higher than expected, while enrollment in the unsubsidized Commonwealth Choice plans has been lower than anticipated. Therefore, costs to the state have risen dramatically.

Micciche spins it another way:

The state’s success enrolling lower-income households in the subsidized “Commonwealth Care” program has driven overall costs above original projections, but the actual cost per person covered is lower than expected, as is the average premium.

From an economic standpoint, enrolling lots of lower-income households is not success unless it is offset by sufficient numbers of unsubsidized enrollees.

Obviously it follows that the average premium is lower than anticipated because the majority of enrollees are subsidized and therefore pay lower premiums.

This isn’t rocket science econometrics, folks.

In the fiscal year before passage of health-care reform, Massachusetts spent $710 million to reimburse hospitals and community health centers for unpaid bills. 81 percent of these costs were incurred by individuals without insurance.

Now we spend that money getting these people the insurance they need so when they go to the ED, they aren’t “uninsured”. Instead we buy these people insurance with taxpayer money so we don’t have to spend taxpayer money reimbursing hospitals directly.

What’s not mentioned is that this is good for the hospitals. A lot of “free care” ends up not being reimbursed at all, meaning hospitals have to eat the costs of treating those who cannot afford to pay. The upside for hospitals is that now that these folks have insurance — subsidized though it may be — hospitals can get reimbursed for services they provide that wouldn’t have been reimbursed in the past. It will be interesting to see if there’s an effect on the number of hospital closures and bankruptcies going forward from here.

Costs aside, all agree that sporadic treatment of the uninsured through emergency rooms and clinics is much less effective medically. The commonwealth took on the problem by diverting much of its uncompensated care pool dollars into subsidies to buy private insurance by lower-income individuals and families. Quarterly costs for free care have subsequently dropped 40 percent.

From one money hole to the next. Yes, that has “sustainability” written all over it. Payments to hospitals have dropped by 40%, and that’s a good thing. Except that that money went to the Commonwealth Care program instead. Instead of being red ink in one set of books, it’s red ink in another.

Clearly there’s a difference between red ink and politically-acceptable red ink. At the end of the day, though, the same people end up paying the piper:

The subsidized insurance program at the heart of the state’s healthcare initiative is expected to roughly double in size and expense over the next three years – an unexpected level of growth that could cost state taxpayers hundreds of millions of dollars or force the state to scale back its ambitions.

State projections obtained by the Globe show the program reaching 342,000 people and $1.35 billion in annual expenses by June 2011. Those figures would far outstrip the original plans for the Commonwealth Care program, largely because state officials underestimated the number of uninsured residents.

Back to Micciche:

And the individuals who acquired private insurance now receive coordinated, cost-effective care that will improve overall health outcomes and reduce the need for more expensive late-stage intervention.

An oversimplification. Many of the patients that are now insured — both subsidized and unsubsidized — cannot find primary care physicians because the program didn’t even attempt to solve one of the major problems with healthcare today: there aren’t enough practicing primary care physicians to handle the influx of new patients. Why? Because being a PCP isn’t a financially attractive proposition. Attempts to alter the landscape of our medical system are continually undercut by talk of reducing Medicare reimbursements to primary care physicians — the very people who will bear the brunt of that manufactured demand. This, in turn, sends the wrong signals to medical students weighing a career in primary care as opposed to a more lucrative specialty.

This dearth of PCPs isn’t unique to Massachusetts, either.

Look, I’m all for increased access to healthcare when it makes sense, and I don’t think ED overusage and overcrowding is sustainable or desirable. I know that health outcomes are worse when non-emergent cases are seen in the ED. ED care is also inherently more expensive. In short, you get less bang for more bucks — and it potentially endangers those who are at the ED for real emergencies by diverting the limited resources to non-urgent cases.

I would like to think that everyone in this country can have their own primary care doctor, but I know that our infrastructure cannot support it. I am not a Darwinian capitalist. I don’t hate poor people. But I do know what is sustainable and what isn’t.

It worries me that if the nation looks to Massachusetts as some kind of prototypical model to be copied, we’re going to be manufacturing big problems, because coverage is only a superficial issue.

Healthcare coverage is not the same thing as healthcare access, even though it is politically expedient to conflate the two concepts.

Universal health coverage will manufacture healthcare demand in dramatic fashion, and the existing healthcare infrastructure isn’t equipped to deal with the kind of patient influx that that kind of universal program would create. We don’t have the human capital to meet that demand. We need to work on our healthcare infrastructure before we dump millions of new patients into the system overnight.

The most interesting thing that strikes me when you look at these numbers is what they say about real demand. Demand for universal health coverage by those that can afford to pay for it is less than our models predict. Even by making health insurance mandatory and enforcing it with a fine, many people are still opting out; they find that their money is better spent in other ways.

Maybe we need to revisit our models and (certainly) our cost projections.

Thoughts on this citizen’s mind

The Obama transition team has a website up at change.gov, as many of you may know. Specifically, they have a section where you can share your thoughts with the transition team. I don’t know if they are actually reading these submissions, but I wrote one up anyway. I’m sharing it here…

I’m going to set aside my inner cynic that someone will actually read this, and talk about what has been worrying me as a concerned US citizen. I know that there is only so much an administration can do to solve the myriad problems we face, and that trying to tackle too much at once is a recipe for universal failure. Therefore prioritization is obviously key.

My primary overarching concern over this country has been any lack of a long-term strategy. I don’t mean for one specific area like the economy or healthcare, but I mean *any* kind of long-term strategy for *anything.* Thus far, it seems as though we’ve been shifting aimlessly from one priority to the next, dictated to us often by market prices of various commodities and shifting popular wants.

That’s no way to run a country.

This list is not in any kind of prioritized order because I think all are equally important at the end of the day:

1) Education: The US has been falling behind in the ability of our high school graduates to afford and go to college. This is happening even as the entry-level requirement for many jobs is having a college degree (even though the particular job may not actually warrant it).

Almost universally, my college professors have publicly lamented the fact that high school graduates are not prepared for the intensity of the material that they face as freshmen in college. As a smart, in-touch individual, I know for a fact that my math was not up to par, and I went to an excellent public high school and graduated in the top 10% of my class. Our state colleges and institutions do a spectacular job, and we should continue to invest in them, but if a student is incapable of succeeding there thanks to a poor secondary education, something is wrong. Accountability in secondary schools is very important. Maybe we need better ways to measure student performance, I do not know. Something must be done, however, because we are falling behind countries like India whose high school students are better prepared for college than ours.

The gap between boys and girls continues to widen. While we’ve done very well by our girls in the last 20 years, our boys have languished. Education should not be a zero-sum game wherein one sex succeeds at the expense of the other. We have neglected boys and focused all of our efforts on girls, and this is neither fair nor desirable. Both sexes can succeed together, and our educators need to remember this, and not just recommend a visit to a pediatrician or psychiatrist for our boys because stimulant ADHD medication isn’t the universal diagnosis and answer.

2) Healthcare: The US lacks any kind of long-term healthcare strategy or vision. While I believe that some form of universal healthcare coverage is both necessary and desirable, President-Elect Obama should stop saying that every person will be able to get health coverage like members of Congress have because this is not possible, nor is it desirable. When and if universal coverage happens, there will still be two tiers of healthcare. A basic, public tier, and a second private tier that citizens may opt to use if they desire to pay more. Please keep in mind that I say this with no malice toward the currently uninsured. My dad had a heart attack this past spring and waited 36 hours before going to the ER — because he knew that he would end up $50-80K in debt. (And he did.)

Secondly, politicians need to stop conflating the idea of universal health coverage with universal health access. The two are not the same. Just because you are covered doesn’t mean you can see a doctor. We don’t have enough doctors and physician extenders (Nurse Practitioners, Physician Assistants) in this country to see everyone, and going to the ER is not the answer either: they’re already overcrowded.

Massachusetts is experiencing this now. While we are often looked to as some kind of model for the rest of the country, the reality is that our system is far from perfect. It’s costing the taxpayers boatloads of money because healthy people that can afford to pay are NOT signing up at nearly the rates that the unhealthy poor are. After all, if you’re healthy, you don’t need preventative care, the colloquial thinking goes, and even if you do, it’s cheaper to pay out-of-pocket to see a doc than it is to pay a high monthly premium. In Massachusetts, the accounting math isn’t working out as expected because of this particular adverse selection catch-22. Complicating the financial problem, there are not enough primary care physicians in this state to see the massive influx of new patients which highlights the second point I made: coverage does not guarantee access. That means they go to the ER, which is inherently more expensive than an ambulatory office visit.

To reform healthcare meaningfully, you need to do it in a multi-phase manner:

  1. Attract the best and brightest back into medicine. That means making the idea of practice attractive which means real, honest-to-God tort reform, not lipservice. When a physician is paying more to medmal companies than s/he is taking home, there is a very serious problem. Talk about a disincentive to practice.
  2. Along those lines, we need more primary care physicians. That means paying them more. Right now, the RVRBS is stacked in favor of specialists, and members of the committee are appointed for life (stupid idea). PCPs do more patient visits than specialists on the order of 8:1, but they are not represented in anywhere near this ratio in the RVRBS committee. That means that procedures are over-valued and cognitive specialties (primary care, rheumatology, endocrinology, etc., etc.) are undervalued because it is difficult to measure the relative value of a cognitive visit. As a result, medical students are gravitating towards specialties which pay more, and the free market is not allowed to compensate for the relative lack of PCPs because the way reimbursement is calculated is fundamentally flawed. In the long-run, this means more expensive healthcare because patients will be seeing specialists instead of PCPs, simply due to lack of PCP supply.

Senator Obama has advocated investing in technology, which is very necessary, but electronic medical records and other efficiency concerns are not a panacea, either. The entire system is broken from top to bottom and improving efficiency in a superficial fashion will NOT solve the huge, underlying problems. A study recently published estimated that only 50 cents of every dollar spent in the name of healthcare is spent on patient care. That’s a bigger problem than mere technological inefficiency.

3) Energy independence: Senator Obama has promised energy independence, and his message has not changed since his 2004 DNC keynote speech. Right now, our government is listing from priority to priority. Gas prices go up, and all of a sudden the public is clamoring for the government to “do something.” Prices go down, and people stop caring, but we know that petroleum supplies are fixed and demand is effectively infinite. That means that eventually prices will go back up, and we need a long-term solution. Keeping the country’s eye on the ball is the government’s job, because it’s clear that most private citizens cannot or will not.

Command and control government regulation is sexy and it makes it look as though government is “doing something” about our dependence on foreign oil, but a more progressive Pigovian tax is probably a better way to accomplish the goal of getting our automakers on-board with the next generation of propulsion than is mandating fuel efficiency and carbon emissions standards. Even if the money is returned in the form of an income subsidy, modifying demand is more effective than trying to legislate supply.

We need government intervention because energy independence and a healthy environment cannot be achieved by individuals acting by themselves — bless their hearts. It needs to be broad and bold in scale and impact. Replacing the light bulbs in your house and planting a few trees might be part of A solution, but it’s obvious that it’s not the ENTIRE solution.

4) Iraq: Iraq is the only US priority that seems to have a strategy under the Bush administration. While I believe firmly that the Iraq war was “dumb,” like Senator Obama, we cannot simply leave and end up with a power vacuum in that nation. We messed it up, and now we should be on the hook to fix it. I am reminded of the lessons from the 70s in Afghanistan which allowed us to defeat the Soviets covertly, but ultimately paved the way for the Taliban because the US “wasn’t in the business of nation-building”. Money for war, but not for education and infrastructure-building. We can see the disastrous long-term consequences of these policy choices that we are dealing with even today.

5) Outsourcing and Globalization: O&G will continue under any administration, and we should not try to stop it. In the long run, it is good for our economy anyway. However we cannot forget the workers that have lost their jobs. Suggestions run the gamut for re-training builders and makers for the healthcare and technology sectors, but we cannot ignore the fact that people are not cattle to be herded in one direction or another. Many of these individuals don’t want these jobs because building and making things is part of who their identity. They don’t want to be nurses, phlebotomists and IT technicians. And they shouldn’t have to be.

Instead we should gently nudge them in the direction of infrastructure repair (which needs to be a priority in the new administration) and the new renewable energy economy. With a focus on renewables and infrastructure repair, President-Elect Obama can employ the tens of thousands who have been laid off in fields that are not dissimilar to where they came from, which will keep them happier and more productive.

(Of course, if these people want to change careers completely, they should have these educational opportunities available as well, which ties into my thoughts about education.)

6) Public Service: The best and the brightest need to see government as a worthwhile place to spend their energies. The politics of the last decade has been toxic for self-actualized smart people, and they haven’t wanted to go into public service. I know Senator Obama knows this, and simply by being open-minded and obviously intellectual, he has done a lot to change the stereotype of politicians and public service. For that, I am grateful, and I can honestly say that I am considering public service as a long-term career whereas under the Bush administration, such an idea would have been laughable. I know that there are many other smart people in my generation who feel the same way. For that, I am thankful.