Where will pharma land when US healthcare comes apart?

The Affordable Care Act has now successfully withstood the slanders and subversions of the reactionary-right to become a permanent part of the American health care system.  At the same time, recognition seems to be growing that it will do little if anything to correct the system's fundamental problem.  This so-called "American health care paradox," as policy analysts refer to it, concerns the fact that the U.S. pays far more per capita for health care than any other country and yet, the availability and quality of care here rank below those of other advanced nations. 

The reasons for this paradox are not difficult to discern.  In fact, Wendell Potter, formerly a vice-president of Cigna here in Philadelphia, recently wrote a concise overview of the situation.  Basically, it comes down to a simple case where health insurers, pharma companies and organized medicine have each rigged the political system to unduly enrich their own interests while sticking it to the American public. 

So for example, health insurers coaxed Congress into giving them a windfall with the creation of the Medicare Advantage program in 1997.  That situation involves Medicare paying private health insurers a fixed fee for every covered patient.  This spring the Center for Public Integrity reported that Medicare (i.e., taxpayers) pays insurers $160 billion to cover 16 million enrollees.  On top of that, the government got soaked for an additional $70 billion in unjustified payments to insurers in the five years between 2008 and 2013.

The practice of Medicare hiring private insurers to cover Medicare patients makes about as much sense as buying a Porsche or a Ferrari and then hiring a chauffeur to drive it.  A pharma consultant in West Chester offers an even better description of the government's decision to contract out Medicare coverage.  He describes it as comparable to a man hiring someone to have sex with his mistress. 

On the provider side, Potter claims Medicare gets taken to the cleaners by the American Medical Association, "which for more than two decades has largely determined how much doctors get paid...for the services they provide."

Then there are the costs for health care products, specifically pharmaceuticals.  In July a report from the Medicare Rights Center and Social Security Works showed how the government could save more than $14 billion a year by restoring a program that gave it a discount on purchasing drugs for people covered by both Medicaid and Medicare.  Pharma demanded the elimination of that discount as part of its price for not opposing the Medicare Modernization Act in 2003, the legislation that created the Medicare Part D program covering prescription drug benefits.  The pharmaceutical industry's profits rose by 34% in the first year after Medicare Part D was enacted, courtesy of the government's own corrupted generosity.

In short, commercial interests in health care currently corrupt the government for their own profit, the way railroads did in the 19th century and defense/homeland security contractors still do.  But this government brokered, crooked capitalism may have done a deal too many with the Affordable Care Act (ACA) of 2009.  American health care under the ACA will ultimately fall apart because, while the legislation does increase access to care for more than 30 million people, it strengthens the control of for-profit insurers and providers. 

As these profit-seeking entities continue to drive up prices, costs will become unaffordable and/or benefits will get skimpier.  Under the relentless pursuit of profit by private corporations, there is no other alternative.  The ACA bought another 15 years for profit-making health care, but its fundamental flaws will eventually lead to collapse and crisis. 

At that point, U.S. health will follow one of two paths.  Either there will be another deal of corrupt politics, where private entities bribe politicians to obtain taxpayer subsidies for their own profit, or the country will default to a single-payer financing system and a nonprofit provider arrangement.  Single-payer (i.e., Medicare for all) will exclude private insurers, while a nonprofit delivery system will consist of multispecialty medical groups where physicians receive salaries within a set budget.

The problem with going down the usual path, where the government develops a system to favor corporate profits, is that the costs required for another crooked deal are just too high.  Health care is already moving toward consuming 20% of America's GDP and the trend will make the government unable to afford its other bribe-driven deals in sectors such as defense, agriculture and fossil fuels.  If health care eats up a quarter of the American economy, the country will be unable to act as the global policeman/imperialist that intervenes in every war and insurrection around the world.  The major investment banks and corporate law firms that dominate the American political economy can't allow that sort of withdrawal to occur because imperialism is essential to modern capitalism in this country. 

A follow-up deal to fix the botched Affordable Care Act, one where taxpayers guarantee the profit margins of health care companies, will make the U.S. a second-tier country because it will not leave enough capital to invest in new growth sectors, maintain infrastructure and educate a workforce.

So within the next dozen years, the Wall Street fixers will tell health insurers to face reality and develop other lines of business.  At the same time, physicians will start getting the message that fewer of their number will earn seven-figure incomes.  More of them will have to content themselves as salaried employees with six-figure earnings. 

But where will pharma wind up in this single-payer system with nonprofit providers?  Will it still enjoy higher ratios of earnings-to-equity, earnings-to-sales and earnings-to-assets than any other sector, the way it once did? 

Although that remains an open question, the pharma companies that stay in business, albeit in altered form, will still earn healthy profits.  The issues that pharma must address concern who will need the industry and what it takes to be needed.  In this regard, there is a profitable business model for pharma that can also spare the country's economic budget while benefitting the health of more Americans.

Pharma's finance managers, the people responsible for much of what's currently wrong with the industry, have derided the fact that their companies spend between 13% (in the case of Pfizer) and 30% of sales (in the case of Bristol-Myers Squibb) on R&D.  They argue that R&D doesn't even cover the cost of capital. 

For several years a number of similar proposals have been circulating that can both satisfy these CFOs and, at the same time, help curtail the country's spending on medications.  Although specific details vary among the several plans, they share in common the idea that the federal government, working through the National Institutes of Health (NIH), would sponsor and oversee the early and middle stages of clinical development for most new drugs. 

Any number of organizations, from universities to startup pharmas, that choose to conduct preclinical bench science (the screening and synthesizing of compounds, as well as animal studies) could feel free to fund and do such work.  But the federal government would sponsor clinical trials that constitute the enormously more expensive part of R&D.

Under the various proposals, NIH would both conduct research in its own clinics and hire independent investigators to run trials, in much the way that pharmas and their CROs presently do.  The essential difference is that government research would advance the clinical research on compounds up through proof-of-concept, which typically includes Phase 1 and part of Phase 2.

After advancing a compound to that point, the government would then auction off to the high-bidding pharma company the rights for completing the development, filing for regulatory approval, and maintaining exclusive rights to market the product once it's registered.

For pharma companies this approach to R&D would relieve them of spending time and resources on the inherently risky activities of early and mid-stage development.  As part of the auction process, the government (and the American public) would get the opportunity to limit the winning bidder's pricing on the new drug.  That would end situations of the sort that occurred with Taxol, Bristol-Myers Squibb's multibillion dollar drug for breast cancer, where the government sponsored much of the research, but public hospitals were unable to afford it.

In the coming decade, all sectors of health care will need to help pick up the ball that the Affordable Care Act is sure to drop.  Pharma companies currently show no inclination of doing that.  This year, for example, Gilead priced its new breakthrough drug for hepatitis C, Sovaldi, at $84,000 in the U.S. for twelve weeks of therapy.  The fact that the company can make money by selling the same drug to India for $900 shows how the industry is gouging American taxpayers.  The U.S. can quit playing the patsy by starting a new approach to drug development and stop enacting legislation that gives windfall profits to private companies.

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