Is Fixing Health Care Delivery Rocket Science? Elon Musk Wouldn’t Touch it

President Trump announced infamously in early 2017 “Nobody knew health care could be so complicated.” Yet, it shouldn’t take a rocket scientist to understand how complex a health care delivery system (and this nation’s in particular) can be. This is a stew of health plans, insurers, pharmacy benefit managers, physicians, other clinicians, hospitals, health systems (public and private), drug and device manufacturers, and other suppliers that don’t always mesh well. Their incentives are extremely different, and their relationship to patient outcomes and public or population health in general, are well, let’s say it—complicated.

Think of it in the following way. Elon Musk’s brainchild, SpaceX, went through extensive development before coming up with a rocket that could lift off from the launch pad. It took numerous attempts to actually reach Earth orbit and complete the overall goal of returning the booster stage to a recovery site intact for reuse. Many have seen the brilliant, colorful explosions of NASA’s attempts in the late 1950s and early 1960s to prepare one of the military’s missiles as a launch vehicle.

A different example is Mr. Musk’s current troubles in mass producing his Tesla Model 3 electric cars. Tesla has been dealing with numerous obstacles and glitches. Production is currently a fraction of what Mr. Musk predicted and investors expected. However, given time and capital (which is not a given), few doubt that he will succeed.

Are We Confident We Can Fix Health Care? 

People often say, “It’s rocket science” when describing something that is incredibly difficult to understand, manage, and/or overcome. But rocket science, like car manufacturing, is based on engineering problems, mechanistic solutions, and the laws of nature. In fact, rocket manufacture, operation, and mission success has been achieved repeatedly because although individual problems do arise, they are eventually overcome.

We have confidence that eventually, the production of electric cars, orbital and interplanetary vehicles, and even efficient use of renewable energy will occur. These are scientific and engineering problems; it may take a while but collectively, we believe the problems will be conquered.

How many of us can say the same thing about our muddied, muddled health care system? Health care is a messy business that is confounded by human behavior, access issues tied to socioeconomic factors, unpredictable flaws in human physiologic function, and our own self-inflicted constructions (e.g., health plans, pharmacy benefit managers, and odd benefit designs) to address them all. Although we may have some confidence in the ability to reach limited and incremental goals, cost-effective, high-quality health care for all our citizens remains a distant, uncertain dream.

We have been trying to fix the US health care delivery system since the HMO Act was signed in 1973. Numerous attempts have been made to address increasing costs (with very limited success) and improve quality. A rocket scientist wouldn’t want to touch this problem (nor would a brain surgeon—Ben Carson is attempting to lead the Department of Housing and Urban Development, not Health and Human Services).

Good Bets, Bad Bets, Sad Bets

We have made significant gains in increasing care access and reducing the number of uninsured. This has largely been achieved through the Affordable Care Act and Medicaid expansion. Yet, political efforts to strip away the ACA threatens to add millions of Americans back onto the rolls of the uninsured.

Nonetheless, we’ve place various bets in several areas over the decades. For example:

•        Value-based care (/value-based insurance design/value-based purchasing)
•        Capitation
•        Primary care gatekeepers
•        Implementation of electronic medical records
•        Greater use of technology (including “big data” and diagnostic testing)
•        Emphasis on quality reporting (NCQA, MIPS/MACRA)
•        Access to biosimilars
•        Direct contracting with providers

Perhaps we should have bet more heavily in some of these areas, and others, like biosimilars, are not nearly fully evolved. Yet, the problem remains. Medical expenditures continue to rise at multiples of the consumer price index. True competition does not exist at the practice or hospital level. Nor does sufficient competition exist in most parts of the country at the health plan level. The concept of value-based care has been around since at least 1995. In 2018, we’re still struggling mightily to prove the value of the care we purchase, as well as institute broad-based value-based purchasing of care.

Mediocrity at High Cost 

The US health system has not distinguished itself as the best in the world, only the most expensive. Our quality metrics in many important areas are mediocre compared with those of other advanced countries. Further attempts to measure quality have resulted in push back from providers on data reporting (witness the recent MedPAC recommendations to stop MIPS in its tracks). Pharmaceutical scientists have made great strides in effectively treating life-threatening diseases, but the costs of these therapies challenge the system’s ability to afford them for patients in need.

Forty-five years after attempting to “fix” the health care system, our cost problems have only deepened. The system has become so complex that no ordinary system can understand it (much less rocket scientists). Further engineering a broken system, which rarely responds as intended to repair efforts, should no longer be considered a reasonable response. Drastically simplifying the system, with consumers choosing among competing doctors and hospitals for their routine and urgent care, is.

Is It That Trump Fails Again to Understand the Problem?

The new budget proposal by the Trump White House attempts to attack the problem of high drug costs, but the battle tactics do not appear to be a winning strategy.

President Trump promised in several rallying speeches as well as in the State of the Union address to lower drug prices for people across the country. However, what is the benefit of lowering drug prices if the costs paid by Americans will balloon elsewhere?

In the White House budget framework sent to Congress earlier this week, the Trump Administration sought to pass through to Medicare recipients the large rebates given to pharmacy benefit managers (PBMs) and Medicare Advantage plans. The rebates, often 15% or more of the price of the drug, are given by manufacturers in exchange for coverage by the Medicare Advantage or Part D plan. There is an unmet need in this country for greater pharmaceutical cost transparency. Today, health plans, insurers, and PBMs depend on millions of dollars in rebates as a distinct revenue stream. Getting those rebate savings into the hands of the consumer is important. Yet, the reaction by payers will be as dependable as medical costs going up—they will make up for the rebate revenue shortfall by raising Medicare premiums. In other words, the balloon squeezed on one side will pop out at the other side. And the Medicare beneficiary will have to pay somehow for the revenue shortfall.

Health plans say that the rebate revenues help fund other services and medical needs, and may actually help put a lid on premium increases. That would be very difficult to prove or disprove. The inference is that the money is used for some purpose, and should it go away, funds would have to be sought elsewhere—most likely not the federal government. There is only one place to turn—the beneficiaries.

Yes, drug prices are very high, but controlling them will require a lot more than managing rebates. Better price transparency is needed throughout the system, including how the manufacturers of innovative pharmaceuticals decide on starting wholesale price at launch and interim price increases. That can only be achieved in two ways: (1) with strict regulations, such as used in other advanced countries, or (2) by exerting more control over demand, which could have damaging effects on drug industry innovation.

Medicaid plans commonly used closed formularies, which although they accept steep rebates from the pharmaceutical industry, they generally are the beneficiary of steep drug price discounts as well. Many expensive drugs are simply not covered, and the result can be frustration from patients; sometimes, they cannot receive the medication prescribed by their doctor. Remember though, patients in Medicaid have very limited (if any) cost sharing.

It seems that there is little in-depth understanding behind such an initiative by the White House, and one has to assume that it is merely done to satisfy the populist promise to lower drug costs. It is a superficial idea that does not address any unintended consequences.

If the President is serious about utilizing these tactics, he won't win this battle much less the war. Perhaps, that is precisely the intention--a show for his base. 

Is There an Escape From the Rebate Trap?

The rebates given to pharmacy benefit managers to secure a drug’s place on the formulary have become a difficult barrier to coverage for new products. The rebate income for these PBMs is sometimes passed on to health plans, insurers, and employer purchasers, but more often it is not.

A big issue is that managed care organizations tend to become addicted to millions of dollars in rebate “income,” and this mindset prevents serious consideration of new medications at competitive costs. 

For biosimilars, Pfizer and Merck have had a difficult time dislodging Janssen, maker of Remicade^®, from its preferred formulary position, despite lower prices based on wholesale acquisition cost (WAC). Janssen has simply matched the net cost (through increasing rebates), while keeping its WAC costs high—tempting plans with ever-increasing rebate revenue. The health plans don’t see the benefit of incurring the administrative costs of moving masses of patients from the preferred product to a new one, or seeing this revenue stream interrupted, without an overall further improvement in net costs.

Managed care plans have long said that discounts of 25% or more will be necessary to release the rebate stranglehold of preferred products. In the case of infliximab, this has not yet occurred, based on recent minor inroads made by Merck’s Renflexis^® biosimilar, despite larger discounts. Until greater competition is available, which drives down the WAC prices (and then average sales prices [ASPs]), barriers to accessing new medications will remain. In fact, when competition does increase, makers of the originator products, like Janssen, can simply ratchet up their rebates to maintain a hold on sales (and a billion-dollar plus profit).

Perhaps the best way around this is to force a change in the marketbasket. This can be accomplished in a couple of ways. The first, by instituting separate tiers for biosimilars and reference agents, takes the biosimilars out of the 1 of 2 preferred drug contracting restrictions, and allows patients to access biosimilars as well as preferred brands.

A second way is to reconsider biologic agents according to indication-based contracts or mechanism-of-action (MOA) based differences. Therefore, the marketbasket is modified to consider anti-TNFs separate from interleukins, allowing preferred agents in each separate category. This would allow, for instance, for more effective psoriasis agents to be well covered, and maintain the preferred position of Humira^® and Enbrel^® for appropriate patients.

A third way is to work out some innovative value-based contract, in which the manufacturer and health plan/insurer reaches an agreement on (usually) the expected outcomes of drug use and additional rebates or performance guarantees if the medication fails to deliver on this performance. The most important consideration in this agreement is the practicality of measuring an outcome of interest or ensuring adherence.

The rebate trap seems to be ensnaring more manufacturers of new biologics and biosimilars. Without greater consideration of the overall good, this trap can cause systematic problems for the pharmaceutical industry and discourage drug innovation and accessibility. 

Controversy Over the Cost to Bring Pharmaceuticals to Market

This is one of the prickliest topics in the health care industry, and it has been as long as I can remember. One of the publications I worked with was called Product Management Today. Long defunct, this periodical followed the pharmaceutical industry quite closely. As a result, we were familiar with Tufts University’s Center for the Study of Drug Development. This was the first organization to publish what was considered credible figures as to what it cost to bring a drug to market.

In the early 1990s, that number was published in the Journal of Medical Economics to be about $231 million. Remember, these were generally small molecules, and the drug industry consisted of dozens of big manufacturers identifying their molecular targets, characterizing them, and cultivating them through the clinical trial process. In 2003, this number was revised upward to somewhere north of $800 million. In 2016, the Tufts team recalculated the numbers, and it found essentially a 10-fold difference (not accounting for the inflationary change in the value of the dollar between 1991 and 2016). They indicated that it costs $2.7 billion to bring a product to the market today, which also considers the cost of failed drug development. In other words, they added the opportunity cost to a pharma company for a drug that was withdrawn or failed clinical trials (any stage). In their 2016 analysis, they took as their drug sample, 106 investigational drugs, 87 being small-molecule compounds and the remaining 19 biologics. I’m guessing that if biologics represented more than 18% of the sample, the total average estimate could have been even greater.

The cost to produce a biosimilar is considerably less. This is partly the result of the lesser clinical trial requirements compared with new chemical entities. Although this figure has not been convincingly calculated, I’ve heard it cited to be anywhere up to $250 million. This seems to be reasonable, based on the development requirements. Unfortunately, several biosimilar manufacturers have to wait to market their agents because of patent litigation, and that in itself represents a cost.

Today, the results of another study was released, which offers a very different number. Published in JAMA Internal Medicine, authors from Oregon Health and Sciences University and Memorial Sloan Kettering Medical Center found that the cost to produce 10 cancer medications was really $648 million (range, $204 million to $2.602 billion)—add another $110 million or so for opportunity costs. This included 5 drugs that received fast-track approval. Not only did the researchers use US Securities and Exchange filings that cited manufacturer-reported costs, but they limited the analysis to only manufacturers without a previous approved drug on the market. The drugs evaluated included several monoclonal antibodies, so it was reflective of complex molecule development.

I’d like to point out another question that perhaps skews the calculation. Rarely these days does “big pharma” get involved with new drug identification and characterization. True, they are often involved in the expensive clinical trial phase, but do we read in the paper weekly that a drug discovery company has licensed or sold the product to a big pharma entity (or even sold the company itself)? And what is the guarantee that they are not overpaying for the price of the drug or the company?

The upshot of this is that the 10 companies evaluated in the more recent study had cumulative revenues resulting from their new agents of $67 billion from the time of approval (until December 2016 or the time it sold or licensed the product to another company). The range per product was ranged from $204.1 million to $22.3 billion. It sounds overall, that they were good buys for the big pharma companies but not necessarily for the health care system.

In other words, whether it cost $648 million, $800 million, or $2.7 billion, the research and development costs for these new agents are made back in a year or less. It is hard for us to listen seriously to pharma companies who use the cost to develop the agents, or their having to eat the cost of failed agents, as credible justification for the prices being charged.

The Premium Pricing Problem for New Products

It is quite common for pharmaceutical manufacturers’ brand directors to approach new product launches with the mindset that rebates will offset payers’ concerns over premium pricing. This is certainly true for highly utilized products (or brand new drug categories that represent a major advance over the state-of-the-art). And what pharmaceutical executive doesn’t believe his or her product is worthy of premium pricing? Well, if you don’t, you’ll probably be looking for a new career soon.

In discussing specialty products—where all the action seems to be nowadays—premium pricing as little as 10% of the competitors’ wholesale acquisition cost (WAC), may be the real barrier to formulary acceptance, preferred positioning, or both, because the rebate is not important to the plan at launch.

Does that mean if your product is priced at a 10% premium but your company is offering even an extremely generous rebate, payers won’t run to it? Well, that depends.

The rebate is based solely on utilization. At launch and for the first several months, utilization of your product, ABC self-injectable for rheumatoid arthritis, is very limited. Some docs may prescribe it, but payers’ prior authorization programs will often limit or prohibit use of ABC, until the preferred agents are tried first.

For the autoimmune category, Abbvie’s adalimumab (Humira^®) dominates marketshare. The plan’s chief financial officer will have the head of the pharmacy executive who risks losing millions in rebates from Abbvie in favor of ABC, without unquestionable, world-beating superiority to Humira in efficacy and safety (not to mention spread of indications). What is the value of your 40% or even 60% rebate on a product that has very low utilization on day 30? The plan may well argue that the value is less than zero. If utilization is zero, the value of your 60% rebate to the plan is zero, and the loss of established rebates from an existing 1 of 2 contract, for example, could be millions. Also, instead of receiving those rebates, the plan would be paying 10% more for the limited product used.

That seems to be a Catch-22. And it is, based on today’s marketbasket. It may be that the marketbasket needs to be redefined so that a particular indication no longer affects the market leader’s contract. This could also happen with the introduction of a biosimilar that offers competitive pricing to a market leader.  

This illustrates one of the leading reasons why plans considering new products want to see upfront savings—that is, in WAC pricing, before getting involved in the rebating wars. At least, they will know that they’re saving something at the front end of a product launch. Furthermore, if the price is lower from the start, the need for the deep rebate dissipates. 

Risk-Adjustment Payments May Come at the Expense of the GOP

The health care follies continue on Capitol Hill, and the latest irony has little to do with the Uninsurance Guarantee Act (aka the American Health Care Act, TrumpCare, RyanCare). This one has to do with the only successful attempt by the Republican legislators to obstruct the Affordable Care Act (ACA), which may well come back and bite them.

The risk-adjustment payments included in the ACA were based on the assumption that, initially, health plans participating in the exchanges would be exposed financially with a surge of enrollment from Americans with chronic illnesses. Until the individual mandate (and its significant penalties) kicked in, the authors of the ACA understood that the healthy would need encouragement to join an exchange plan and stabilize the market. These payments were supposed to be made to insurers over the first 3 years of implementation of the ACA.

However, the Republican Party, led by Senator Marco Rubio and House Speaker John Boehner, pushed for a measure in the federal budget in 2014 that was largely successful in stunting the individual market that was being cultivated by ObamaCare. This budgetary provision required the risk-corridor payments to not have a negative effect on total spending. In other words, the Centers for Medicare and Medicaid Services (CMS) could not pay out more than it took in. The result: in 2015, CMS released just under 13% of the risk-corridor payments it owed to insurers. This undercut the ability of several health plan cooperatives to survive, as well as played a role in driving up premiums on the exchanges. When the federal government could not make the retroactive and newly owed payments in 2016, even healthy insurers started exiting the market, feeling the effects on their bottom lines. An analysis by Modern Healthcare found, for instance, that Blue Cross Blue Shield of Texas was owed $917 million for losses incurred in 2014 and 2015. Health Republic Insurance of New York, a start-up co-operative that ceased operation in 2015, was owed $463 million. Ten insurers were owed at least $173 million apiece for 2014 and 2015.

In 2017, these insurers want to get paid. In total, they are owed $8.3 billion in risk-corridor payments for the first 2 years of exchange operations. In February, a federal judge ruled that the government owed Moda Health $214 million in risk- corridor payments. That conflicted with the ruling of another judge, who said that CMS never guaranteed these payments. Blues plans from Tennessee, Alabama, Idaho, and North Carolina, have sued, as well as Highmark Inc, and the defunct co-ops Health Republic of Oregon and Land of Lincoln Mutual Health.

The irony, of course, is that it is no longer the Obama Administration that is responsible for this litigation. The Republicans are now in charge, and may have to decide how to settle or pay out these claims. Eight billion dollars is not a huge by federal government standards, but it would be a bitter pill for the GOP to swallow. 

The Value Mirage: Will Allowing Health Insurers to Sell Across State Lines Mean Lower Premiums?

If an annual premium for a silver-level health insurance premium is $3,000 (in 2016) in Minnesota, wouldn’t it be appealing to offer that same plan and coverage to those people paying $5,400 in New York City? This is the concept behind a key component of the Trump Administration’s current replacement (or “fix”) for ObamaCare.

This post will not cite the myriad complex problems associated with this idea. We’ll describe just one—the one that will render the concept almost of no value.

That plan in Minnesota contracts with local providers (physicians and hospitals) for a certain level of payment. Generally, it is what the market will bear in, say, St. Paul, Minnesota versus what the market will bear in White Plains, New York. Historically, health costs and premiums have always been lower in metropolitan Minnesota than in southeastern New York State. Hospitals charge less for hip replacements, doctors are reimbursed less for office visits, and yes, health plans in Minnesota may even be a bit better at leveraging the market, because of their market penetration. If you transport that Minnesota plan to Westchester County, New York, you leave its advantages behind. Gopher Health Plan will have to build a brand new provider network in one of New York’s most expensive counties. Unless it also transports Minnesota providers to New York, it will pay New York prices. It is conceivable that the greater competition for providers may actually push reimbursements up—a new plan entering a market has to entice physicians to sign with their plan (regardless of a narrow or broad network). What does that mean for physicians or hospitals? They are in the driver’s seat, and have a bit more leverage with which to negotiate rates. Remember, that rate negotiation will not start at St. Paul levels. It will begin at New York metro area figures. This could have an inflationary effect.

The basic idea of bringing more competition into high-cost markets is a good one. If 2 or 3 well-run out-of-state insurers were to begin to operate in many such areas, the additional competition should have a beneficial effect on rates. But so would encouraging the birth and growth of organically grown local plans and insurers that were given the financing and resources needed to be successful.

In other words, if you see the shimmering image of a Minnesota health insurer offering great value to New York residents, it is likely a mirage in the hot, dry health reform air. And finally, this mirage evaporates quickly, as Minnesota granted average premium increases of over 50% to exchange plans for 2017, resulting in annual premiums that are closing in on $5,000.