Category Archives: Economics

Coming Soon to Medicare: Drug Reimbursements linked to Patient Outcomes

Proposing sweeping changes to Medicare Part B drug reimbursement without thoughtful consideration and stakeholder input is not the right approach and puts Medicare patients who rely on these medicines at risk.” – Pharmaceutical Research and Manufacturers of America spokeswoman Allyson Funk.

Ms. Funk was responding to an announcement by the Obama administration indicating that it would pursue “value-based” pricing strategies for certain drugs covered by Medicare. This strategy would, in effect, reward manufacturers whose drugs produce better patient outcomes. The strategy has already seen some success with large pharmacy benefit managers who negotiate with drug makers for the pharmacy plans they administer, and it’s expected to expand as payers evaluate drugs competing for limited space in health plan drug formularies.

How will this be a better strategy than the status quo? Well, for much of the past century, drugs have been marketed through providers, with prescriptions driving growth. In this way, it was quite possible for new drugs that might be ineffective – or no more effective than already available medicines – to gain market share and distribution, in spite of higher costs. In the Random Spotter’s opinion, evidence-based pricing strategies in this area are long overdue.

Ms. Funk’s comments in representation of the industry sound like more of what we’ve been hearing for a long time from drug makers.  The industry bemoans the high costs of regulation and research that somehow justify astronomical prices for new drugs, even those that may not be most effective. They spend hundreds of millions of dollars annually to lobby government regulators. And, when all else fails, they frighten Grandma with threats that the medication she relies on will no longer be available to her. Theirs is a well-rehearsed playbook whose success is irrefutable.

And, yet, this is a difficult issue for the Random Spotter. I’m not one who supports a Robin Hood approach, in spite of the immense profitability of this segment. The fact that drugs are profitable is not necessarily a reason to interfere here. I am, after all, a believer in free markets and a staunch supporter of limited government regulation and capitalist principles. So, who am I to question the profit-maximizing behaviors of organizations that answer to their profit-seeking shareholders?

The answer is that I am a flawed, principled individual. I try to examine myself, my actions, and my values frequently. And, I think that’s the right way to live. I also don’t whine about my woeful circumstances while secretly benefiting handsomely from the illusion I help to sustain. That’s pharma, and that sickens me. I’m not saying that my values rule here. I’m only saying that, in the long run, people should matter more than profits, and truth should trump lies.

Sure, regulation sucks. I’d definitely rather see free forces address these problems. But, in the absence of values driven transformation, regulation will prevail. The sweeping changes cited by Ms. Funk are coming to Medicare Part B and the broader insurance marketplace because they are in the best interests of patients and payers. She and her colleagues would do well to limit their distorted posturing and to escalate their cooperation.

The President thinks we should all be safe, educated, and successful. Duh.

RandomSpotter is somewhat amused by the President’s State of the Union address this evening.  Perhaps amused is the wrong word.  It’s more like I am like a child who knows a secret and finds it comical to be in the presence of those who don’t know it.  What is this secret?  I’m afraid it’s only a secret to those who choose emotion over intellect, and by now you should know that I make every effort to NOT do that.

Here it is:  When someone makes emotional appeals for anything from quality, early childhood education, to revitalization of cities hit hard by manufacturing movement offshore, to not hurting those who need federal entitlement programs, there is no real opposition to the statements.  All of these were made tonight by Mr. Obama.  It’s like saying America should be the home of the free and the brave.  Only a fool would take an opposing position to statements that espouse positive values and human prosperity.  And, if you’ll forgive some honesty here, there is no courage in these statements.

Courage is found in those who don’t just form attractive ideas in their mouths but who actually do the difficult work of identifying the painful sacrifices that must be made.  At a time like this, with another sequester threat looming, the President chose to continue to present mostly hollow, emotional pleas, as usual.  We again heard that Mr. Obama has many big ideas that will solve all of our problems.  But those of us who need a little more meat with our potatoes can’t just agree robotically and sing Yankee Doodle.  First of all, as offensive as the logic of this statement may be to the weak thinkers among us, Mr. Obama had four years to create the harmony that he promises will soon be upon us.  However, I give his first four years failing grades, and the logical conclusion – again, our emotion-driven counterparts will object – is that we will get plenty more of the same in this next term.  Secondly, if he is to be an activist President, I would expect to hear a deeper commitment to compromise and even a little bit of acceptance of responsibility for certain failings from Mr. Obama.  A strong sense of mission and humanity can spur great admiration in a people.  Instead, we got the same threats that, if we don’t do what he wants us to do, he’ll continue to issue Executive Orders to get his way.

So, Mr. President, I say that you were a coward this evening.  Not the kind that runs from a fight, but a coward, nonetheless.  Tonight you elected to expound cheaply and to lead weakly.  No collaborative cost-reduction strategies that could accomplish real economic change.  Instead, you dug in your heels and said that any cuts would be unacceptable and that flat spending is good enough.  Where’s the brilliance, sacrifice or leadership in that?   But, I’m still grinning.  Unlike so many who fall victim to the empty poetry of your emotional appeals, I can see right through you.

Charitable Giving: Taxes and philanthropy go hand in hand, but not the way you think

RandomSpotter had the opportunity to participate in a charitable event yesterday.  A community church held a three-peat drive for 3 different organizations that distribute supplies to the needy.  This got me thinking about charitable giving in the US, especially in light of what I view as forced giving through government entitlements.  I wanted to answer for myself whether it doesn’t make more sense for Americans to just increase charitable giving to save the significant taxes that will continue to be funneled to government “causes.”

One report from Sparxoo indicates that 65% of American households give to charity, with an average household contribution of $2,213 (2008-2011).  Of those who give, the top-earning ten percent contribute over 25% of the funds donated, and 98% of high income individuals contribute to charities.  75% of the estimated $300 billion donated each year comes from individuals, 13% from foundations, 8% from bequests, and 4% from corporations.  The US has the highest rate of giving among all countries, donating 1.65% of GDP to charitable causes (Forbes).  Let that all sink in and you see that we are a giving nation already, even if we could and should grow the number of Americans who give.

Observing the above, it’s puzzling that a country with the third highest government revenues from personal income taxes (38%) and relatively high effective corporate tax rates (around 13%) should need to continue to push ever-harder for government programs to solve social problems.  It seems to me that a fallacy we’ve embraced is the belief that government should solve every major problem of our citizens.  One undeniable fact of life is that it comes with hardship.  Government can’t make us happy any more than it can make us pain-free or healthy.  There is an ocean of evidence to prove that government programs are wasteful and inefficient in comparison with not-for-profit organizations serving the same goals.  To burden our government and tax structure with a philanthropic mission is lunacy.  Although I’ve not seen them, I’m sure there are studies that indicate an inverse relationship between growth in charitable giving and growth in government social programs.  That’s got to be the most reasonable answer.  Of course, volunteerism goes hand in hand with giving.  It costs relatively little in comparison to donations, is available to most everyone, and is a tool that expands the value of charitable contributions exponentially.

Therefore, it would fall upon us, individually and collectively, outside of government to do the heavy lifting of philanthropy and charitable support.  And doesn’t it make a lot more sense for each of us to decide who gets the benefit of our time and dollars?  It does to me.

The rich need to pay their fair share. So make them pay .00023!

In an October report, Adam Looney of The Tax Policy Center helped clarify some of the major debate issues in the fiscal cliff discussion.  In contradiction to common perceptions, the Administration’s current proposals would continue to extend certain tax cuts to the top 2% of US taxpayers, but at a rate of about 30% of the cost of extending cuts in their current form.  In the top 1% of taxpayers, there are essentially 3 tiers of revised tax cuts in the President’s proposal, and these differ significantly in tax break percentage.

The dollar impact?  From the TPC’s analysis, “the heated debate over whether to extend all of the tax cuts or whether to extend merely the vast majority largely concerns whether to extend an extra $310,000 in tax relief to the wealthiest 120,000 taxpayers or whether we should instead make a relatively small down payment toward fiscal sustainability.”  That’s right.  The math works out like this:  $310,000 x 120,000 highest income taxpayers = $37.2 billion dollars a year.   That’s an impact to the federal deficit of a whopping 2.3 100ths of 1%.  Tough to imagine?  Picture 16,250 balls in a pool.  Now, remove 4.  Ta-dah!  But, surely it must impact annual government spending in a profound way.  A whopping 1%, and that’s a bit over 3 days’ expenses for Uncle Sam.

Am I a protector of 1 percenters?  No.  I’m not a single agenda person.  I try to share verifiable information that clarifies issues in ways that rhetoric can’t.  And, I smell a Hawaiian rat.  If the goal is debt and deficit reduction why is the message always “the rich need to pay their fair share”?  It turns out the Administration’s idea of that is a pimple on the…well, you get the idea.  On the other hand, the President’s political foes reject tax-based proposals and push for tougher spending cuts that have the potential to advance short and long term fiscal responsibility.  This round goes to the opposition.

The Myth of Pharmaceutical R&D: Why are drug makers so rich?

Last Thursday, Canada’s Supreme Court invalidated Pfizer’s patent for Viagra in that country.  The reason:  Pfizer’s failure to comply with patent rules in Canada that require disclosure of the mechanisms of action for drugs.  In a country that typically allows patents for a mere 5 years, Viagra had enjoyed patent protection since 1998.  But generic drug makers sued to begin generic production, and the Supreme Court determined that Pfizer gamed the patent system to unfair advantage.

While I am a free market supporter in general, Pfizer’s secrecy in this case earned it what it deserves.  If sildenafil were disclosed clearly as the active agent – instead of the 260 quintillion different chemical compounds addressed in the 7 part patent (that’s right, 260 quintillion!) – Pfizer would have enjoyed another 2 years of protection.  Now, generic producers like Teva will race to bring generic Viagra to market, and Pfizer’s estimated $50+ million market for the drug in Canada will be significantly eroded.  When you include online drug sales to American consumers, the loss to Pfizer is not an insignificant one, although global sales for the drug are in the range of $2 billion.

This story reminded me of the pharmaceutical industry’s claims that R&D costs to bring drugs to market are so prohibitive that long-term patent protection is a necessity.  So, I dug a little into the realities of the industry, and I can’t help but conclude that the onerous cost of drug R&D is nothing more than an urban legend.

Fortune Magazine’s 2012 Industry Rankings list shows Pfizer returning 28.7% to shareholders in 2011.  In fact, 9 of the 12 giants listed returned healthy double digits to shareholders during a year in which shareholder returns were single digit or negative across a majority of  industries.  Only petroleum producers compared in profits generated, but they certainly don’t share the positive reputations enjoyed by U.S. drug manufacturers.

Pharma profitability has been exceptional, and the dollars have been huge for a very long time.  From 1995 to 2002, the pharmaceutical industry was the MOST profitable industry in the US, delivering profits of between 3 to 5 times the average of all other industries combined (KFF).  Since 2002, big pharma has retained superstar profitability, landing no lower than 5th on the Fortune 500 list of most profitable industries (Fortune).

Wow.  Those poor drug developers.  So, we need to provide government-funded research – think NIH, FDA, HHS supports of all kinds – and preferential tax credits because these folks have a long product life cycle with which to contend?   I would suggest that healthcare reform overseers consider boxing gloves when negotiating with pharmaceutical manufacturers.  We’ve seen nothing suggesting meaningful drug cost controls in the pre-PPACA guidance, and insiders have argued that pharma got a huge pass in the process.  Whether this is true or not, drug costs are as important a factor as any other in the healthcare debate, and the pharmaceutical industry can afford to bring a few concessions to the table.

Let’s not punish an industry that has figured out how to make money, even if it lies to us about it in the process.  The only factor here is the transparency of the expenses driving the so-called healthcare crisis.  If we have a crisis, then pharma is front and center.  So, in the spirit of problem-solving, I recommend an acceleration of drug patent expiration by 5 years.  How does that sound, Pfizer?