Pricing is the Problem
November 01, 2016

Pricing is the Problem

New insurance premiums are arriving in mailboxes. That means it’s time for the annual outcry against the Affordable Care Act, also known as Obamacare.

But before you cast all the blame at the health care law’s feet, remember this. The ACA has a provision in place that limits insurance premiums. Companies must explain any premium increase of more than 10 percent. In addition, 80 percent of their revenue must go to health care costs and quality improvement.

Such restrictions don’t apply to other entities in the healthcare business. This is evident in their profit margins, and it’s great for investors. It’s not so great for healthcare consumers. And don’t forget, even the luckiest investors will be healthcare consumers at some point.

While restrictions exist to increase competition and keep costs down, many healthcare related companies find ways around them. Consider drug patents. Patents allow pharmaceutical companies time to sell (and price) their product exclusively. It lets them recoup their R&D investment. After the 20-year patent expires, generic manufacturers are able to enter their products into the marketplace. The system is designed to balance the competing needs of ongoing R&D and lower costs.

Pharmaceutical companies would prefer to have market exclusivity as long as possible. This is where the work-arounds come in.

“Evergreening” is the process of taking an old drug and tweaking something about it. Usually the change is inconsequential. They may create an extended release product. They might change a chemical bond that doesn’t impact the effect of the drug. The “new” drug gets a new patent, even though nothing has changed about its efficacy or safety. It’s been evergreened.

The next problem for the pharmaceutical company is competition from the generic version of the old drug. If a doctor writes prescriptions for the old drug, even the brand-name version, pharmacists are able to make a “therapeutic exchange.” This means they can substitute an equivalent generic for the brand name.

But the evergreened product has a new patent, which means it doesn’t have a generic equivalent. So if physicians write prescriptions for the evergreened drug, a therapeutic substitution can’t happen at the pharmacy. Pharmaceutical companies take a few steps to encourage physicians to do so.

They give the evergreened drug shiny new packaging and a fancy marketing campaign. They flood physicians’ offices with samples of the “new” drug. And they remove the original product from the market.

If the company times this right and makes the switch before the original patent expires, they can condition physician prescribing habits. It will protect their market for another twenty years. Then they can do it all over again.

If that doesn’t work, they can just pay the generic manufacturers to stay out of the market. This gaming of markets and regulators isn’t limited to pharmaceutical companies--- they just provide the clearest examples.

So let’s ask questions. What exactly should we expect from our healthcare industry? Are these companies no different than smartphone or automobile manufacturers? Or is the fact that we can’t live without their products a reason to increase regulation and close expensive loopholes, such as evergreening?

The answers to these questions will ultimately have a greater impact on healthcare than whether Obamacare is repealed or improved. Don’t let any politician tell you otherwise.

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