Monday, September 21, 2015

Drug Pricing and Externalities

I bet a few companies are not too happy about what Turing Pharmaceuticals just did.

Turing acquired rights to the drug Daraprim and pretty much right away increased its price from $13.50 a tablet to $750.  The NYT has the story.

Well, that created quite an uproar.  Hillary Clinton tweeted, "Price gouging like this in the specialty drug market is outrageous. Tomorrow I'll lay out a plan to take it on. -H"

Today the biotech sector had a bad day on Wall Street.


Now what was Turing up to?  Maybe the previous owner, Impax Laboratories, was simply mispricing it?  Maybe there is a difference in opinion as to the price elasticity of demand?

Or maybe there is a difference in time horizon/discount rate between the old owner and the new owner, with the new owner caring more about cash in the present than a lower but longer annuity?

Saturday, September 19, 2015

Competition for Vermont's Hospitals?

I am always intrigued by how some people think they can calculate exactly how many doctors, beds, hospitals, or procedures a population "needs."  And the implicit or explicit conclusion is that it would be wasteful to have more supply than what is the calculated need.

The latest comes from a proposal by an investor group that wants to open an independent (from hospitals) surgery center in Vermont -- see this article for more.

Cases like this are great for seeing the tension between alternative views of efficiency and performance of the health care market.

The proposed center would do outpatient surgeries and procedures only -- colonoscopies, endoscopies, hernia repairs, steroid injections.

It is of course running into opposition by the incumbents.

Amazingly, for Medicare patients, the proposed center would receive only 56% of the payment that a hospital would receive for the same service.  For an umbilical hernia repair, for example, the facility charge for the new center would be $1,417 while a hospital would receive $2,531.  And the proposed center would be profitable at those rates, according to their plan!

Do we think that maybe the Medicare fees are a bit off?

As for the opposition,
"But the project has opponents. They argue that a freestanding for-profit surgical center would threaten the financial health of hospitals and add to the cost of health care in Vermont by duplicating facilities and services. The Vermont Association of Hospitals and Health Systems, which represents all 16 nonprofit hospitals in the state, and Northwestern Medical Center in St. Albans both have been granted interested-party status in the case."
And a VP at Northwestern Medical Center in St. Albans refers to the opening of a similar independent eye surgery center in 2008, saying, "...and we still think the eye center wasn't needed..."From our perspective, it isn't meeting a need."

The President and CEO of the VT Hospitals Association says, "They (such surgery centers) syphon off services that help hospitals maintain a bottom line."

Both the hospital association and the NW Medical Center have "interested party" standing in the decision on the new center.

Here are some questions I would pose:

Is there any place for the process of creative destruction in health care?   
If we aren't prepared to see some duplication of facilities, how do we expect to get any of the benefits of competition? 
Are we prepared at all to see some organizations and facilities become "stranded assets" just like coal plants are becoming in the energy sector? 
Think what would happen if anytime a new auto maker wanted to build a new plant, we did a calculation on whether existing capacity was sufficient -- with the incumbents doing the calculation? 
Or if we had a commission that determined how many seat-miles we needed as capacity in the airline industry? 
How about we let existing universities decide if we need any online competitors?  (And this is my own industry!) 
Or if the Federal Reserve determined how many financial planners we need? 
How will anyone assess relative quality of alternative providers if there are no alternatives?

I know the responses I am going to get:  Health care is different.  Hospitals provide care to the indigent and uninsured, and therefore we need to let them make money in any areas to cover those losses.  This center is just cherry-picking the most profitable Medicare DRGs.  These independent surgery centers have low quality.

While there is certainly plenty of room for debate on these issues, here are some of my thoughts.

As to the indigent and uninsured, that is what we have the ACA for.  Medicaid and subsidized insurance are available in VT.  That issue is now off the table -- that's the beauty of the ACA.

As for cherry picking, if an entrant can get prices at 56% of what a hospital receives and make money, then we have a bigger problem.  It is time to think critically about the "bundling" implicit in Medicare and Medicaid prices. But the inability of Medicare (or Medicaid) to set reasonable prices should not be a license to stop competition.

As for quality of such centers, look at this:

(As a last note, since some of the investors are doctors, the new center could not be an inpatient facility with overnight beds -- the Affordable Care Act bans new physician-owned hospitals and expansion of existing ones.  See here.  How much sense does that make?)