Healthcare's Icarus Problem

This week’s post is a bit shorter than normal. Don’t worry! I’m in the midst of working up a longer-than-normal post for next week. Consider this an appetizer. 

In an interview this week with Politico, Dan Liljenquist, the driving force behind the Intermountain Healthcare-led generic drug manufacturing consortium, revealed his reasoning behind the project.  Simply put, he wants to save capitalism in healthcare. 

Liljenquist, a dyed-in-the-wool Utah conservative Republican, makes a purely economic argument for the creation of a non-profit generics manufacturer. From the Politico story:

…speaking at a Johns Hopkins Carey Business School meeting on drug pricing and access on Monday, he argued that portions of the generic drug space amount to a market failure that capitalist solutions alone can't correct.

Liljenquist, here, is referring to the market failures like the Daraprim saga of 2015, where Martin Shkreli’s Turing Pharmaceuticals bought the rights to a decades old, off-patent drug and ratcheted up the price more than 100x. In a functional market-driven healthcare system, this move would face heavy competition from firms undercutting the price. But as Daraprim caters to a small number of patients per year, there’s no profit-driven rationale for getting into the space.

American healthcare is an economic labyrinth of incentive misalignment and gross inefficiency. It has allowed for generic pharmaceutical companies like Turing to take products that are, by definition, commodities, and sell them at non-commodity prices. But generic pharma should be a commodity business. The value created by the generic firm is in bringing reliably produced products to market at cost-plus prices. Companies should be able to make a profit, but it should be a standard, razor-thin, commodity margin; not comparable to the branded pharmaceutical companies that take on big risk to develop the drugs in the first place (and whether that’s economically efficient is a subject for another post.) 

But Liljenquist’s push for value alignment doesn’t stop there: this consortium will sell & ship directly to hospital systems. There will be no middlemen - no wholesalers or Pharmacy Benefit Mangers - involved in the transaction. This raises the questions of their value add in the first place: if it can be done here without them, what value are they actually creating elsewhere?

It’s these inefficiencies, exploited for outsized profits by corporations all throughout the system, that add up to big problems for American healthcare. The findings from a JAMA report published earlier this month:

In 2016, the United States spent nearly twice as much as 10 high-income countries on medical care and performed less well on many population health outcomes. Contrary to some explanations for high spending, social spending and health care utilization in the United States did not differ substantially from other high-income nations. Prices of labor and goods, including pharmaceuticals and devices, and administrative costs appeared to be the main drivers of the differences in spending.

The alternative to our attempt at a market-driven system, currently manifesting as Medicare For All, is picking up steam. The Kaiser Family Foundation has been polling for the last 20 years on whether the American public would support a government-single payer system, and their 2017 poll was the first showing a slim majority in favor. 

This is healthcare’s Icarus problem. The profits extracted from the system are getting more egregious on a regular basis, and at some point the industry will fly too close to the sun. Their fall could come in many forms: American voters electing a candidate on a Medicare For All platform, or perhaps a bevy of new entrants into the space who are extremely well-financed, smart, and satisfied with making reasonable profits instead of seeking out maximum profit (see Amazon, Alphabet, Apple, etc).

Can Dan Liljenquist save healthcare from itself? It remains to be seen. Per the same Politico story above, 70 American health systems representing about a third of all American hospitals have expressed interest in purchasing from the new consortium. Perhaps Liljenquist and Intermountain will demonstrate that there is money to be made in healthcare by applying common-sense market thinking to areas of great inefficiency. Or perhaps it’s too little, too late.