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Modern Day Scrooges Are Ruining Our Health Care System

Opinion

Xconomy Seattle — 

More than a 150 years ago Charles Dickens’ A Christmas Carol introduced the character Ebenezer Scrooge, who was the embodiment of greed, “tight-fisted…. a squeezing, wrenching, grasping, scraping, clutching, covetous, old sinner! Hard and sharp as flint, from which no steel had ever struck out generous fire.” If Dickens were alive today he’d recognize that Scrooge’s rapacious attitude has broadly infiltrated parts of our healthcare system. Let me share some examples of how this mindset has negatively impacted our ability to provide decent, affordable medical care to all.

Excessive Hospital Charges

I was reminded of Dickens’ well-drawn character while reading Bitter Pill: Why Medical Bills Are Killing Us, Stephen Brill’s detailed exposé of the outrageous price gouging that occurs in our out-of-whack medical system. Brill cites example after example of hospital billing practices that routinely charge $1.50 for pills that should only cost a few pennies, blood assays that are marked up from $14 to $200, and chest X-rays that wind up being charged at $283 to most of us, but are billed at only $20 for Medicare patients. Success in almost every industry brings in competitors who undercut your prices and try to steal market share from you. This is why most supermarkets operate on a near 1% profit margin and rely on volume to earn a profit. Would anyone shop at a supermarket that charged $22 for a pound of zucchini or $14 for a can of tomatoes? Of course not, yet these types of markups are rife throughout our medical system. Hospitals don’t compete on price because they keep their fees hidden. This prevents consumers from choosing their treatments on a cost basis and contributes to keeping prices high. Many foreign hospitals, however, do actively compete against American hospitals on a cost basis, leading to the phenomenon known as “medical tourism”.

Are there hospitals out there that charge a reasonable rate for the services they provide? Government data show that hospital prices (even within the same city) vary widely for any given medical procedure, but accessing this information has historically not been possible. If you have high quality medical insurance, you may only pay a few hundred dollars towards the cost of a $12,000 trip to the emergency room. Your insurance provider will also not be paying the outrageous prices being charged by the hospitals; they negotiate much lower fees. The only people who are charged and actually asked to pay these usurious rates are folks who don’t have insurance, have low quality insurance, or who have run through their insurance coverage. Put another way, it appears that our current healthcare system is at least partially built on the backs of those without adequate insurance i.e. the poor.

Excessive Executive Compensation

Brill also points out the high salaries being paid to hospital executives, including those at non-profits. Who would have guessed that the CEO of a non-profit hospital (MD Anderson) would be paid $1.8 million (which does not include outside income), and the hospital itself would earn a $531 million dollar profit on revenues of $2.05 billion? For comparison, the president of the entire U. of Texas system, which MD Anderson is a part of, earned only about a third of this amount. Montefiore Medical Center, a large non-profit hospital system in the Bronx, paid its CEO $4,065,000, its chief financial officer $3,243,000, an executive vice president $2,220,000, and the head of the dental department $1,798,000. Are there no qualified people available who would take these jobs for a quarter or a tenth of those amounts? Brill cites an analysis of U.S. hospital financial reports that “found that the 2,900 nonprofit hospitals across the country, which are exempt from income taxes, actually end up averaging higher operating profit margins than the 1,000 for-profit hospitals after the for-profits’ income-tax obligations are deducted.”

In her book The Entrepreneurial State: Debunking Public vs. Private Sector Myths author Mariana Mazzucato points out that many Big BioPharma companies spend huge amounts of money on stock buyback plans, “to boost their stock price, which affects the price of stock options and executive pay linked to such options.….Amgen, the largest dedicated biopharma company, has repurchased stock in every year since 1992, for a total of $42.2 billion through 2011, including $8.3 billion in 2011. Since 2002 the cost of Amgen’s stock repurchases have surpassed the company’s R&D expenditures in every year except 2004, and for the period 1992-2011 was equal to fully 115 per cent of R&D outlays and 113 percent of net income.” Some would argue that it’s a good idea to return “unused” money to shareholders, but many of us suspect that buybacks are engineered by top management to boost their sizeable compensation packages.

Excessive Lobbying

Virtually every industry has one or more trade groups that seek to influence legislation that affects their bottom lines; this is true for healthcare as well. Efforts at reforming our medical system are stifled by some of the strongest, best funded lobbying organizations that you can think of: the ones representing doctors (American Medical Association), insurance companies (Aetna, UnitedHealth, Humana), and drug companies (PhRMA and BIO). In 1971, only 175 companies had lobbying offices in Washington DC. A decade later, the number was up to 2,445. As of June 2012, there were 12,553 registered federal lobbyists. Is anybody wondering why it’s so difficult to get any reforming done in Washington? The healthcare industry’s 2,176 lobbyists have spent around $500 million annually every year since 2008. What do you think all of that money is buying? No doubt it’s higher prices in our healthcare system.

Excessive Drug Pricing

Many drugs are exempt from cost competition for years because they’re covered by patents, which allow them to be sold under monopoly pricing. Biopharma companies need to charge high prices for their drugs because development costs are high and the odds of success are low. Some of that money will be recycled to fund the development of even more new medicines. The real question is: when do these prices move from reasonable to gouging? The cost of drugs for chronic myelogenous leukemia in particular have recently drawn complaints from oncologists who question whether the prices being charged in the U.S. (where costs are twice of what they are in Europe) are morally justifiable. Oncology drugs in particular are starting to get significant pushback due to their astronomical prices (in the range of $100,000 plus for a course of treatment). These prices might be defensible if the medicines were curative, but the majority of them only extend the lives of most patients by a small number of weeks or months.

High drug prices mean greater profits, and make no mistake that for all of its current problems, biopharma remains a highly profitable industry. The PhRMA and BIO folks have processes to help patients afford their meds, including drug coupon programs. However, some of these programs simply shift the costs of these medicines to the insurers. And how will they respond? They’re likely to raise their insurance rates and co-pays, making it more difficult for other consumers to afford their meds.

Biopharmaceutical companies have sullied their once bright reputation via a lengthy series of bad actions, including off-label drug promotions, ghost written papers, and hidden clinical trial data. Industry problems have been spotlighted in numerous books, and the media have done a good job of reporting on all manner of high crimes and misdemeanors. I know of one biotech company that many industry boosters are hoping will actually go out of business. Why? It appears the primary role of the company’s management team is to line their pockets with cash rather than actually develop useful medicines. They adhere to the philosophy of William Henry Vanderbilt, at one time the richest man in the world, who said, “The public be damned…I don’t take any stock in this silly nonsense of working for anybody’s good but our own because we are not. When we make a move we do it because it is our interest to do so, not because we expect to do somebody else some good. Of course, we like to do everything possible for the benefit of humanity in general, but when we do we first see that we are benefiting ourselves.”

The fittingly named Raptor Pharmaceuticals is my current poster child for selling the most overpriced drug (others might argue for Sanofi/Regeneron’s ziv-afilbercept (Zaltrap) or K-V Pharmaceutical’s hydroxyprogesterone caproate (Makena). Raptor’s drug, cysteamine bitartrate (Procysbi), was recently approved by the FDA for treatment of the rare disease nephropathic cystinosis.

Raptor didn’t spend 20 years doing groundbreaking research to identify the cause of this disease, nor did they screen millions of chemical compounds to develop their drug. Its medicine is not even a new chemical entity. It’s actually a “sustained release” version of an existing drug which is already marketed under the name Cystagon by Mylan Pharmaceuticals. Cystagon needs to be taken every six hours, which means patients need to be awoken from their sleep each night to take a pill. A doctor hypothesized that coating the pills would lead to the drug being absorbed more efficiently. Raptor licensed this discovery, ran a 43-patient, six-week trial, and won approval from the FDA to sell a coated version of Cystagon as Procysbi. This new version only needs to be taken every 12 hours, so the dosing is much more convenient, and it has a few other benefits as well. What’s the premium that Raptor decided to charge for this? Cystagon costs about $8,000 per year, whereas Procysbi entered the market at a staggering cost of $250,000 per year. Yes, there are only about 3,000 people with this disease worldwide, so one could make all sorts of arguments about value propositions, limited markets, unmet needs, etc. However, if Mylan can make a reasonable profit on Cystagon selling it for $8,000 per year, Raptors’s outrageous pricing of Procysbi simply looks like gouging.

Excessive Layoffs

Over the past few years you’ve probably read countless articles about the “patent cliff”, where many blockbuster drugs were going off patent. As a result, industry profits were going to be crushed as branded medicines were replaced with generic counterparts. Predictions were dire. It’s true that generic medicines now make up about 80 percent of prescriptions in the U.S. However, I suggested several years ago that the “patent cliff” was a myth and would not dent industry income. You can now this judge for yourself: here are the actual numbers over the past five years (from IMS Health):

US Drug Sales

2008 – $291.5B

2009 – $300.3B

2010 – $307.4B

2011 – $320.7B

2012 – $325.7B

Note that these are sales figures, not profits. During this same time period, and despite the fact that industry revenues were going up, BioPharma collectively laid off hundreds of thousands of workers. These layoffs are still going on at many of the largest biopharma companies. By my calculation, fewer employees + greater revenues = higher profits.

Have things changed since Charles Dickens’ day?

The data would suggest price gouging is clearly not limited to the healthcare field. Politicians of a certain persuasion today are only too happy to champion the freedom of the wealthy to pocket as much money as they can. Here’s how Michael Lewis described the root cause of the recent financial crisis in his book Boomerang: Travels in the New Third WorldIt’s a problem of people taking what they can, just because they can, without regard to the larger social consequences… Alone in a dark room with a pile of money, Americans knew exactly what they wanted to do, from the top of the society to the bottom. They’d been conditioned to grab as much as they could without thinking about the long-term consequences.”

The larger issue gets to the heart of much of our current political debate. Don’t we have a responsibility to help each other out, or should we, like Scrooge, only concern ourselves with grabbing for the biggest piece of the pie that we can? The healthcare industry has an unlimited potential to develop new treatments and medicines based on a plethora of recent scientific advances. However, costs need to be brought under control for this vision to succeed, which means the excesses detailed above need to be called out, protested, and curtailed. After all, what’s the point of discovering new drugs and developing new treatments if a good percentage of our citizens can’t afford them? Ebenezer Scrooge is ultimately redeemed at the conclusion of A Christmas Carol and becomes a generous man. We can only hope that his modern day successors undergo a similar transformation and help reform a healthcare system that too easily exploits the ill, the disadvantaged, and the uninsured.

Stewart Lyman is Owner and Manager of Lyman BioPharma Consulting LLC in Seattle. He provides strategic advice to clients on their research programs, collaboration management issues, as well as preclinical data reviews. Follow @

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  • Tom Hopp

    Amen Stewart. You have laid it out beautifully. If I thought any of those big medical industry moguls had half the conscience Scrooge did, I might have some hope for their enlightenment. But I think we’ll only see cheaper healthcare when these new robber barons are forcibly compelled to surrender some of their vast, immoral, personal cash-grabs. By that I mean, vote Democrat.

  • JSchaible

    Modern day Scrooges? What a load of liberal tripe.

    The issues with modern healthcare are more the natural result of layer upon layer of government mandated bureaucracy, defensive medicine and separation of the buyer and seller from free market forces.

    As you point out, many supermarkets see razor thin margins. But not all.
    High end grocery stores still exist, where customers who value service
    and quality products still shop and thus reward those stores with higher
    margins.

    The rest are forced into a death fight volume business, given astute price sensitive buyers know the price of milk and are willing to switch from one store to another to save a nickel. Are you seriously suggesting this is your solution to healthcare? Unlike hospitals, grocery stores are still not
    forced to give what they sell (say that milk) to all who walk in their doors, regardless of if they can pay or not. If they did, you can bet they too would charge exorbitant prices on zucchini and tomatoes just to survive. (Ethically, is healthcare so much different from food?)

    So maybe today’s healthcare market is on the verge of collapse. But it is not from greed of providers that is causing it to fail. Still, ever the rational optimist, I see green shoots at the same time. You note “medical tourism”. Such is little more than free market capitalism returning to a broken system – where allowed. Educated customers seeking out better pricing and higher end services, allowed to be provided in countries with free healthcare
    markets by those seeking to profit from the exchange.

    In the early 1990’s I had the privilege of spending a day with the late Harold Nue of New York City’s Columbia Presbyterian Hospital, the legendary Chief of the Division of Infectious Disease specialist. We spent most of the day in the isolation wards seeing the legions of uninsured ill from the Harlem
    community. Full blown AIDS, multidrug resistant TB, you name it. But then, after lunch, we rode the elevator to the McKeen pavilion. The doors opened to a different world. Gone was the hospital, replaced with all the appointments of a high end hotel. There was even a piano player in a tux and tea service making the rounds. I was amazed. The cost? A mere $250 out of pocket over the $1,250 insurance billed cost of a standard room. I asked about the disparity. Dr. Neu agreed the optics seem stark, but
    pointed out that patients on this floor paid so much extra out of pocket (plus
    in charitable donations to the hospital) that for the profit margin was so wide
    it allowed for another five patients without insurance to be treated for
    free.

    Like Scrooge, most Americans prove at this time of year, in the end we freely give generously. But the key is in the gift. No one is generous when it is mandated, coerced and extracted from us, which is the way healthcare is headed.

  • Pasteur

    One thing is for sure, if I was looking for consulting for my enterprise I’d NEVER use Lyman Consulting. After reading this garbage, I thought it was a joke when I read the background on the author. Wow.