How Can Digital Health Startups Work with Health Insurers and Big Pharma?

 

A similar version of this Health Alert appeared at Forbes.

A Health Alert published in October noted that risk capital is fleeing or stagnant in most of health care. The exception is digital health. StartUp Health, a New York investor in new healthcare ventures, reported that $5 billion was raised for new digital health businesses through the third quarter, versus $2.8 billion in all of 2013. 2014 Q3 alone saw $1.7 billion raised, versus $946 million in 2013 Q3.

A Health Alert published in October noted that risk capital is fleeing or stagnant in most of health care. The exception is digital health. StartUp Health, a New York investor in new healthcare ventures, reported that $5 billion was raised for new digital health businesses through the third quarter, versus $2.8 billion in all of 2013. 2014 Q3 alone saw $1.7 billion raised, versus $946 million in 2013 Q3.

Where is all this capital coming from? Since 2010, the three largest investors in digital health are Merck’s Global Health Innovation Fund, Blue Cross Blue Shield Venture Partners (founded by the Blue Cross Blue Shield Association) and Qualcomm Ventures.

It is remarkable to see the venture arms of a leading research-based drug company, the largest association of health insurers, and the company that invented mobile technology all dominate this space.

For a digital-health entrepreneur seeking investment, this poses an interesting choice. Assuming you do have a compelling story, what are the advantages and disadvantages of dealing with one or another of these types of investors, especially the first two? This was the topic of a panel discussion at this week’s mHealth Summit, which included Wendy Mayer, VP of Worldwide innovation at Pfizer; and Jess Jacobs, Director of Innovation at Aetna.

With respect to the research-based pharmaceutical industry’s approach to investing in digital technology, Merck and Pfizer are pretty much at opposite ends of the spectrum. Merck has its own venture-capital fund, which effectively treats the parent company as a limited partner. It invests with other venture capitalists, and looks at the value of deals notwithstanding the parent company’s business strategy.

The Circular Firing Squad in U.S. Health Care

 

Who is to blame for the U.S. healthcare crisis? JAMA has published an opinion piece by three physicians illustrating a fundamental difficulty in identifying the causes of the healthcare crisis. Individuals construct “casual stories” to assign blame. Subjective narratives gain momentum among researchers, policy makers, journalists, and the public:

  • Payers: Insurers create barriers to health care (high deductibles and gatekeepers) and excessive administrative waste (billing and coding).
  • Life Science Industry: Manufacturers saddle patients and payers with excessively high prices and underinvest in novel therapeutics.
  • Physicians and Hospitals: Financial incentives have led clinicians and health care organizations to focus on delivering volume over value. Hospitals overinvest in high margin services (cardiology and oncology) and underinvest in essential services (obstetrics and psychiatry).

National Health Spending Slowdown Underwhelms; Obamacare Hurting Middle Class

 

Last week, the media got more than usually excited about the latest National Health Expenditures (NHE) produced by actuaries at the Centers for Medicare and Medicaid Services (CMS). Modern Healthcare reported that “healthcare spending growth hit 53-year low in 2013,” noting that last year’s 3.6 percent growth was the lowest since 1960.

While it is literally true that last year’s increase was the lowest since 1960, growth in 2009 was only 3.8 percent, after 4.8 percent in 2008. You do not need a PhD in economics to conclude that the recession was likely the largest factor. It is hard to detect much more than noise in the annual changes since the recession hit. This is corroborated by the fact that 17.4 percent of Gross Domestic Product is accounted by health care ― exactly the same percentage as in 2009 and every year since.

Nevertheless, CMS’ actuaries allege that Obamacare’s provisions kept a lid on costs, citing:

  • productivity adjustments for Medicare fee-for-service payments;
  • reduced Medicare Advantage base payment rates;
  • increased Medicaid prescription drug rebates; and
  • the medical loss ratio requirement for private insurers.

Yes, Medicare spending dropped from 4.0 percent in 2012 to 3.4 percent in 2013. However, Medicare’s enrollment growth also slowed, and the Republican-driven sequestration also held back spending. Medicare spending per enrollee actually rose at the same rate as in 2012. It is hard to see Obamacare’s technocratic cost savings in these figures.

Consumer-Driven Plans Continue to Grow

 

Consumer-driven health plans seized five more points of market share in the employer-based benefits market, according to Mercer’s latest report:

  • Mercer survey finds average total health benefit cost per employee rose 3.9% in 2014;
  • Enrollment in high-deductible, consumer-directed health plans (CDHPs) jumps from 18% to 23% of all covered employees following a surge of new implementations;
  • Nearly half of large employers (48%) now offer a CDHP, up from 39%;
  • Private exchanges used by 3% of large employers, with 28% likely to make the shift within five years.

Figure 4 shows that consumer-driven plans are poised to continue their growth. The growth of private exchanges is also good news.

6

Drug Research and Its Discontents: Does It Really Cost $2.6 Billion to Research a New Medicine?

 

A similar version of this Health Alert appeared at Forbes.

My last Health Alert discussed the high cost of researching and developing a new pharmaceutical compound. I noted that the latest estimate, by the Tufts Center for the Study of Drug Development, is “controversial” and promised to address the controversy.

The Tufts group now estimates that it costs $2.6 billion to research and develop a new medicine, 2.5 times more than the previous estimate, which was published in 2003. The 2003 estimate provoked criticism, against which the Tufts group defended itself without qualification.

The Tufts group has not substantively changed its method. So, we can expect the same criticisms to be raised against the $2.6 billion figure. Aaron E. Carroll has most recently challenged the estimate at the New York TimesUpshot blog.

There have been five criticisms of the Tufts group’s estimate: Lack of peer review, use of proprietary data, excluding the value of R&D tax benefits, including the cost of capital as a real cost and the fact that the research-based pharmaceutical industry funds the Tufts group.

The new estimate has not yet been published in a peer-reviewed journal, although the 2003 estimate was published in the Journal of Health Economics. There is no reason to believe that the Tufts group has dropped its standards in 2014; and it can still use the new data for an academic article. However, peer-reviewed journals can take a long time to publish an article.

The 2003 article was received by the Journal of Health Economics over a year before publication. Researchers often release working papers before publication by journals. For example, working papers released by the National Bureau of Economic Research (NBER) frequently have great impact in policy debates, while the associated journal articles are published years later with little impact (except for academic housekeeping).

Politicians are Getting Goofy on Generic Drugs

 

Last month, I noted that prices for some generic drugs have been rising to great heights, inexplicably, and that politicians are trying to find out why. Well, even though we don’t quite know why, politicians are considering very harmful legislation to put a stop to it.

Scott Gottlieb, MD, has prepared a sober analysis of the causes of these price hikes. Dr. Gottlieb notes that prices of most generic drugs remain low: Only about one third of generic drugs have experience price hikes, and only a very small number have experienced very large price hikes. Like me, Dr. Gottlieb suspects that the price hikes are associated with manufacturing problems caused by lack of ingredients or regulatory interference with production. This causes the number of competitors to shrink. Dr. Gottlieb also points to recent government action that will likely increase prices of generic drugs across the board, especially a new FDA labeling rule that exposes generic drug-makers to increased tort liability.

Thousands to Get Kicked Off Medicaid, CHIP

 

Another unintended consequence of Obamacare:

The enrollees who are at greatest risk are pregnant women, children and blind and disabled individuals who were enrolled in Medicaid prior to the effective date of two Patient Protection and Affordable Care Act provisions — the 2014 expansion of coverage to all adults with incomes up to 138% of the federal poverty level, and the establishment of a new formula to define household income under the Modified Adjusted Gross Income (MAGI) standard. (Virgil Dickson, Modern Healthcare)

One of the greatest harms that Obamacare has inflicted is to have increased the fragmentation of access to health insurance. People in the part-time working class will be the worst affected: Churning between Medicaid and Obamacare exchanges, maybe twice a year or more, depending on changes in their incomes.

“Cadillac Tax” Will Hit 38 Percent of Employers in 2018

 

The “Cadillac tax” is the excise tax on high-value health plans, which goes into effect in 2018. If the value of health benefits exceeds $10,200 for an individual or $27,000 for a family, the excise will be taxed at 40 percent.

A new report from the American Health Policy Institute breaks down the effect on employers. As well as concluding that the Cadillac tax will hit 38 percent of employers in 2018, it estimates that the average employer-based policy will be subject to the tax by 2031.

There is no doubt the Cadillac tax will put an administrative burden on employers, and reduce the attractiveness of employer-based benefits. On the other hand, as the AHPI report notes, the Cadillac tax will cause employers to increase workers’ wages in exchange for reducing health benefits. Indeed, the Congressional Budget Office anticipates that 75 percent of the revenue due to the Cadillac tax will be from income and payroll taxes due to wage increases, and only 25 percent due to the Cadillac tax itself.

Crisis in Pharma R&D: It Costs $2.6 Billion to Develop a New Medicine; 2.5 Times More Than in 2003

 

A similar version of this Health Alert appeared at Forbes.

The rate of growth of health spending remains moderate. But one area where prices appear to be increasing faster than they have in the past few years is brand-name prescription drugs. By 2012, blockbusters had lost their patents, and many looked forward to a future where we could all get a month-long supply of generic drugs for $4. Well, it did not quite work out that way.

Specialized drugs for smaller patient populations were introduced with high nominal prices. In September, EvaluatePharma confirmed that the increasing cost of prescription drugs was concentrated in more specialized drugs. Of the 100 top-selling drugs in the United States:

  • The median revenue per patient of the top 100 drugs has increased from $1,260 in 2010 to $9,400 in 2014, representing a seven-fold increase;
  • The median patient population size served by a top 100 drug in 2014 is 146,000, down from 690,000 in 2010; and
  • There are now seven treatments priced in excess of $100,000 per patient per year in 2014, versus four in 2010.

Given these facts, it may be understandable that the health insurance industry is campaigning against the high prices of specialty drugs. For its part, the brand name pharmaceutical industry emphasizes that health insurers (especially in Obamacare exchanges) often put these specialty drugs on the most expensive tier of their formularies. This requires patients to pay high out-of-pocket costs. While this is an accurate description of the situation, a government policy simply forcing insurers to cover a higher share of the price of a specialty drug does not reduce the price. It just moves it from patients’ direct payments to their premiums.

Happy Thanksgiving!

 

From all of us at the NCPA, we wish you and yours a happy and safe Thanksgiving!

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