Imagine you have no medical insurance, that you pay cash every time you see a doctor. Imagine you cut yourself and need the wound cleaned and stitched up. Imagine that in your phone directory there were 10 nearby choices of providers who could perform the service immediately, each with an advertisement listing the price for "cleaning and stitching a wound." Imagine then that you instantly could review what patients of these doctors and nurses said about the quality of the service each provided. And based on your sense of the quality and the price charged, you could make a decision as to which provider to see.
If you had all that information, that many choices and you were the one paying for the service, you would be able to make a rational decision. That is essentially the efficient-market model of medicine. It is capitalism.
Capitalism works because buyers and sellers over time make efficient decisions. If the prices charged are too high, profits will be lost as customers take their business elsewhere. If the service is poor or slow, customers don't come back. If sellers don't innovate, they will lose out to competitors who do. Buyers are always looking for high quality products and services, delivered in a timely fashion and at a better price. As sellers provide what buyers want, capitalism generates efficiencies, better products, better services and better prices. And efficiencies add up to wealth.
But, of course, the medical market is not efficient in a number of respects. It does not drive down prices. It does not speed up delivery of services. It does not reward providers who compete on price or other perks patients might like. If a doctor charges too much, has a poor bedside manner, is rude to his patients or has four year old magazines in his waiting room, he won't lose any business, as long as his patients' insurers direct them to him.
Because of the profit motive, providers do have an incentive to innovate. That has created many great diagnostic tools -- everything from X-rays to sonograms to C-T scans and MRIs -- and many salutary pharmaceuticals.
However, those upsides of our system are not entirely efficient.
Because of the incentives to suppliers and demanders, we tend to get too much internally generated demand, all of which is met with willing (and wasteful) supply. Doctors, drug manufacturers and providers of various diagnostic technologies have incentives to make patients believe that their products or services will help. Patients -- who naturally want the very highest quality of medical products and services -- don't pay for what they are getting and normally don't have sufficient information to know if what they are receiving is a good idea. So they often demand more than they need. In other words, patients with insurance get a lot of medical coverage and it costs someone else a lot of money.
Externally, there is another factor which plays into the equation: our malpractice insurance system. It encourages insurers to pay for and medical providers to give more service and order more tests than they might think is necessary. If the provider does not and anything goes wrong -- say a doctor failed to order a second or third series of MRIs -- the doctor will face a malpractice lawsuit and may lose a lot of money if the plaintiff gets the right jury, regardless of the merits of the case. But the doctor who orders endless, needless tests covers his ass and won't lose a lawsuit. His malpractice rates won't go up.
Insurance companies, which pick up the tab for these endless, needless tests have a strong incentive to pay for more tests, because they too can be sued if they denied a patient the test and a jury decided that was the wrong decision.
This all brings me to a fascinating story in today's New York Times about a cancer drug which costs $30,000 a month:
The price of the new drug, called Folotyn, is at least triple that of other drugs that critics have said are too expensive for the benefits they offer to patients. The colon cancer drug Erbitux, for instance, costs $10,000 a month and the drug Avastin about $8,800 when used to treat lung cancer. The price of Folotyn “seems way higher than I heard of before,” Robert L. Erwin, president of the Marti Nelson Cancer Foundation, a patient advocacy group. “I can’t imagine there not being a backlash against the pricing.”
The most interesting part of the story is that Folotyn has not been shown to increase life expectancy among cancer patients:
Critics, including many oncologists, say that patients and the health system cannot afford to pay huge prices for drugs that, on average, provide only a few extra months of life at best. And Folotyn has not even been shown to prolong lives — only to shrink tumors.
As always happens in our system, the seller tries to maximize his profits in the price:
Allos (Therapeutics, the manufacturer) defends the price, saying it made a significant investment to develop the first approved drug for this type of cancer. ... “We believe we are fairly priced,” he added, “and we’re benchmarked” against other drugs. In a conference call with analysts last month, Mr. Caruso said Allos had “not had pushback of any type at this point” from insurers.
As always happens in our system, insurers pay the freight and raise their rates to employers, who buy medical coverage for their employees.
It's ridiculous to blame the pharmaceutical companies for trying to make profits. But for those huge profits, they would not invest so much money in R&D.
Some drugs for rare cancers are close to Folotyn’s price. Genzyme’s Clolar for pediatric leukemia costs about $34,000 a week, though the company says that only two weeks of treatment are typically needed. Genzyme’s drug Campath, for chronic lymphocytic leukemia, costs about $5,000 a week for several weeks. GlaxoSmithKline is charging up to $98,000 for a six-month treatment course of Arzerra, a drug approved in late October for chronic lymphocytic leukemia, which strikes about 15,000 Americans a year. About $60,000 of the cost would be incurred in the first eight weeks, when the drug is given more frequently. ... In a note to clients in October, Joshua Schimmer, an analyst at Leerink Swann, estimated that a typical treatment (with Folotyn) would last 3.5 months and cost $126,000, or about $36,000 a month.
The question here is one of efficiency. Because the consumers of the drugs are not paying the cost and don't really know if the most expensive drug is the best one for them, it is unlikely that there would be any profits in discovering and manufacturing these drugs in a rational market. But, as explained above, our medical market is not rational and it generates far too much demand for goods and services which have less value than they cost. A $30,000 a month drug which may not increase a patient's life is a good example of that.
To put in context just how much money Folotyn will cost us -- and I say us, because although the profits go to a private party, the costs are borne by our entire system -- consider the response of one insurance company:
Dr. Lee N. Newcomer, senior vice president for oncology at the big insurer UnitedHealthcare, called the price "unconscionable."
He said that Folotyn alone would cost as much as UnitedHealthcare now typically spends in total to treat a lymphoma patient from diagnosis until death. That median expenditure now, he said, is $87,000 for a little over a year of treatments. But Dr. Newcomer said insurers would be obligated to pay for Folotyn because there were no alternatives.
That's not exactly why the insurer will be "obligated." The insurer will be obligated because of the costs of lawsuits, in case they denied coverage for Folotyn.
And again, it is not yet known how good this drug really is:
Folotyn has not yet shown an effect on longevity. In the clinical trial that led to approval of the drug, 27 percent of the 109 patients experienced a reduction in tumor size. The reductions lasted a median of 9.4 months. But considering all the patients in the trial, only 12 percent had a reduction in tumor size that lasted for more than 14 weeks. The trial did not compare Folotyn to another drug or a placebo.
“This drug is not a home run,” Dr. Brad S. Kahl, a lymphoma specialist at the University of Wisconsin, said during a meeting of an advisory committee to the F.D.A. on Sept. 2. “It’s not even a double. It’s a single.”
It may be a single, but we are paying for it as if it is one hundred consecutive grand slams. In other words, the market for drugs is inefficient because the end consumers are not paying for what they are getting and often don't know what it is they are taking; the doctor ordering the drug has no incentive to offer a cheaper alternative and could be sued if he did so; the insurance company is forced by law to pay whatever the manufacturer wants; employer rates go up and up; and the government subsidizes through tax breaks those increases in costs.
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