By Ken Congdon
Last week, I attended The 12th Annual World Health Care Congress & Exhibition (WHCC) in Washington DC. The event opened with a keynote by Steve Forbes and subsequent panel discussion where a “free market” philosophy was pitched as the answer to the myriad of problems plaguing the U.S. healthcare system. In other words, make service and quality costs transparent, and allow patients to “shop” for the care that best meets their needs and their budgets. In theory, this approach would lead to competition that would drive down costs and increase the quality of care. It sounds promising, doesn’t it? Forbes and the other panelists shared plenty of examples to support this entrepreneurial concept too (e.g. the dramatic cost reduction of elective procedures like Lasik surgery over time, the rapid technological and quality advancements made in the auto and consumer electronics industries, etc.).
There are elements of this model that have merit. For example, the healthcare industry is in dire need of increased price and data transparency — there’s no question about that. Furthermore, there are several areas of healthcare that can definitely benefit by injecting more entrepreneurship and competition (e.g. routine testing/imaging, common/non-life threatening surgical procedures, etc.). However, I don’t see free enterprise saving healthcare and there are several reasons why.
I’m Sorry, But Patients Are Not Consumers
First, central to the free market philosophy is the idea that the patient is ultimately a consumer of healthcare goods and services. In fact, this ideology isn’t limited to backers of entrepreneurial healthcare — it’s infiltrated just about every corner of the industry. It seemed like every speaker at WHCC referred to patients as consumers at some point in time. Personally, I feel this terminology is misleading and inaccurate. Do I believe patients should own their health data and control their healthcare decisions? Absolutely. Do I envision them being informed shoppers for healthcare services? Yes, but only to an extent.
Let me explain. I believe patients can shop for health insurance. They can even likely compare prices and service quality for a wide variety of healthcare services — from primary care to an MRI to knee replacement surgery or an endoscopy — to make informed care decisions. However, there comes a time when all patients cease to be consumers and simply become patients again. Think of the acute care patients that present in an ER with appendicitis, pancreatitis, or gall stones. Think of victims of traumatic injuries. Think of the critically ill. These people aren’t shopping around for healthcare and they never will. They’re not interested or able to go online and choose a provider based on a list of predefined criteria. These people simply want to be healed, and most are at the mercy of their local healthcare delivery system. In other words, relatively healthy patients can shop for healthcare, but those that are very sick can and will not. For this reason, I make the unfashionable plea to the healthcare industry to stop using the term “consumer” when describing patients. Let’s use a more accurate term like “empowered patient” instead.
Additionally, the patients that fall into this “non-shopper” category are the super-utilizers that account for the vast majority of healthcare expenses in the U.S. How can a free market healthcare system be effective when the most costly patients aren’t swayed by competition?
Big Pharma Sets Bad Precedent
Proponents of free market healthcare also laud the model’s potential to spark innovation and drive down costs. However, I question whether this approach would actually yield this outcome. My skepticism is based on the performance of the pharmaceutical industry in each of these areas to date. While pharma isn’t entirely “free” (i.e. it must comply with its own series of regulations and mandates), it is driven by the competition and profit motive championed by free market enthusiasts. Furthermore, the pharmaceutical industry is inherently tied to the delivery of healthcare in the U.S.
On the surface, the pharmaceutical industry has performed well on the innovation front. Since 1950, more than 1,300 new drugs have been introduced and approved by the FDA. However, recent trends seem to indicate that pharmaceutical innovation is slowing down. In fact, a study by the Pharmaceutical Research and Manufacturers of America shows that increased R&D spending is resulting in fewer drugs.
Many experts blame the pharmaceutical industry’s traditional closed innovation model (i.e. where all key R&D activities are performed within the four walls of one pharmaceutical company) for this downturn. An unexpected consequence of this closed model is that pharmaceutical companies focused too much on identifying the next “blockbuster drug” or developing “me-too drugs” (i.e. formulaic alternatives to treating the same medical condition — think Lipitor versus Crestor for high cholesterol or Viagra versus Cialis for erectile dysfunction). This approach diverted pharma companies from addressing the unmet medical needs of smaller patient populations.
Interestingly enough, many pharmaceutical leaders are now championing an open model to help accelerate and advance innovation — an atmosphere of co-opetition rather than strict competition if you will. In this open innovation model, companies don’t restrict their drug development activities to their own internal compounds. Instead, they actively scan the external environment, from universities and research institutes early on, to startups and specialty pharmaceutical companies later on, for possible drug candidates that fit their business model.1 This sharing of knowledge and resources not only helps improve R&D economics for pharmaceutical companies, it accelerates the innovation cycle and reduces waste.
While the impact of competition on innovation in the pharmaceutical industry is up for debate, the miserable failure of free market economics to drive down the cost of prescription drugs is much more clear-cut. Let’s examine some staggering statistics. More than $329.2 billion are spent annually on prescription medications in the U.S. (that’s more than $1,000 per person).2 Even commonly prescribed drugs such as Lipitor are several times more expensive in the U.S. than they are in other countries (e.g. Lipitor costs $124 per 30-day supply in the U.S., but only costs $48 in France, $43 in the UK and $13 in Spain).3 Then there’s the outlandish prices tied to cancer medications. Common cancer drugs (e.g. Provenge, Avastin, Zaltrap, etc.) cost between $50,000 to well over $100,000 annually. Furthermore, competition seems to have no impact on driving down the cost of these medications. For example, the price of Gleevec, a groundbreaking drug that can add years of life to leukemia patients, tripled between 2001 and 2012 (from $28,000 annually to more than $92,000 annually) despite the fact that several competitive medications entered the market during that time period.4
All told, the average price of brand name drugs increased by nearly 13 percent in 2013 —more than eight times the rate of inflation.5 Meanwhile, the average profit margin for pharmaceutical companies was nearly 20% in 2013 with industry giants such as Pfizer reporting a profit margin of 42%. While the free enterprise model in big pharma has definitely been profitable for the pharmaceutical companies, it has done little to lower costs for patients. Why would a free market approach to healthcare yield a different result?
The Frightening Proposition Of Profit Motive In Healthcare
Opponents of government-run healthcare are quick to tell horror stories of how this model will lead to federal “death panels” that decide when and how someone is treated and whether or not a patient lives or dies. As unsettling as this prospect is (although much of it is pure myth), I find the prospect of profit motive driving healthcare decisions to be even more frightening. There’s big money to be made from those that are seriously ill. In my opinion, healthcare should focus on what’s best for patients. It shouldn’t be distracted or influenced by the desires and demands of investors. In a free market system, where’s the incentive for a company or provider to cure cancer if doing so means it will most likely lose your most profitable consumers forever? Where’s the incentive to lower costs in life and death instances where cost is no object? Healthcare is a difficult puzzle to solve. While I don’t necessarily believe big government is the answer, neither is big business. We must work to find the balance between the two that works best for our country, our healthcare providers, and most importantly, the patients.
- Pharmaceutical Innovation Hits The Wall: How Open Innovation Can Help by Henry Chesbrough as seen in Forbes.
- 2014 IMS Health Study: Spending Growth Returns For U.S. Medicines
- Why U.S. Health Care Is Obscenely Expensive In 12 Charts by Jan Diehm as seen in the Huffington Post.
- The Cost Of Cancer Drugs by Lesley Stahl as seen on 60 Minutes.
- Pharmaceutical Industry Gets High On Fat Profits by Richard Anderson as seen on BBC News.