A Note on the “Perverse Rebate System” in Action this Week
Takeaway: Roadmaps to ‘the next hundred billion in growth’ start and end with better system vision
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The Infinite Loop
Yesterday, the city of Baltimore filed a class-action lawsuit against Biogen, claiming it "bribed" PBMs as part of a 'market switch strategy' to favor its MS drug over generics. The city’s lawsuit claims Biogen pursued an ‘unlawful’ scheme to save its franchise (for the ambitiously curious, here’s the docket).
The effort allegedly originated as Biogen planned to fend off generic companies that hoped to sell lower-cost alternatives to Tecfidera which, several years ago, had been a franchise product and generated nearly half of its revenue. With looming patent expirations, Biogen sought to market a “next generation” version called Vumerity and convince doctors to switch patients to the newer drug.
And in related weirdness, Bernie Sanders has apparently worked out a backroom deal with Big PBMs Optum Rx, CVS Caremark and Express Scripts (all three also getting sued by the FTC for inflating the price of insulin), who said "they won't punish" Novo Nordisk if it cuts the price of Ozempic and Wegovy.
"I have received commitments in writing from all of the major PBMs that if Novo Nordisk substantially reduced the list price for Ozempic and Wegovy, they would not limit coverage," he said in opening remarks at a hearing of the U.S. Senate Committee on Health, Education, Labor, & Pensions, which he chairs.
That hearing yesterday featured Lars Fruergaard Jørgensen, chief executive of Novo, testifying (alone) that the company (i.e., pharmaceutical manufacturers) has little control over what patients pay for its drugs, blaming unique features of the prescription drug supply system in the United States (i.e., PBMs).
Jørgensen was open to discussing the issue with PBMs, saying Novo would be willing to collaborate on solving the "structural issues" sustaining the perversion.
His LinkedIn post following the hearing:
"I valued the opportunity, my second hearing, to share our firm commitment to keeping treatments accessible and affordable for patients. I also made it clear that fixing the complex American healthcare system requires more than the efforts of just one company."
Which is true.
But it's also true that you can't "fix" an embedded economic system.
The infinite, and infinitely recursive, feedback loops in a $5 trillion market reward the complexity it self-generates. The System writes the code to sustain its own flywheel.
Which has led the American Way of Healthcare to where it is today: the practice of medicine, and the health and well being of more than 300 million people, is managed by an orbit of administrative power that, in the words of Alex DeLarge (Malcolm McDowell) in a Clockwork Orange, is "Real horrorshow!"
Yesterday also brought this related news of the “structural issues” that need fixing by someone ‘out there’ in the ether somewhere: Particle Health filed an antitrust lawsuit against Epic, saying Epic is using its position as a ‘control point’ to quash competition in the payer platform sector. Epic dominates about 40 percent of the EHR market.
Particle’s lawsuit alleges Epic took actions that stifled Particle's ability to exchange health information. Over the past six months, according to the suit, Epic cut off data access for Particle customers and flooded the company's support staff with security concerns Particle considered "baseless."
According to the lawsuit, Epic's "manipulation" of EHR access is already having negative consequences for doctors and patients. The complaint details how a network of community oncology practices has seen over 2,800 patients' quality of care harmed because clinical information was blocked.
Epic said in a statement that Particle's claims are "baseless."
A Better “Market Switch Strategy”
When it comes to making a Big Market Switch, the next Congressional hearing should be less fragmentary and more systemic. We all would be better served by more courageous and creative leadership, the kind that breaks ground conceptually with more original thinking around economic competition.
In any industry at any given time, there is a theoretical boundary of performance for which the operational state of the art is attained. This boundary is called the productivity frontier, which Michael Porter defined as the “sum of all existing best practices at any given time.” For the pharmaceutical industry, a formulaic strategy story centered on defending “pricing” (and “cost”) of its products has reached its productivity frontier.
As a theme for strategic communications, it has lost its ability to persuade. That dog, as they say, don’t hunt.
It’s now a losing argument because of ‘message decay’ and monotonous repetition at the extreme end of redundancy. There’s no more juice left to squeeze from the orange. It’s also failing to create new power because of a strategic orientation bounded too narrowly, within the wrong economic context. And so as an industry narrative, it has a low probability of delivering influence, sparking original ideas or reshaping an operating environment that tolerates stagnation and celebrates short-term gains, condemning anything else as failure.
But more than that, the discursive war the pharmaceutical industry has been fighting around “drug pricing” is based on an 'untrue simplification' endemic to an entire body of deeply flawed and illogical economic theory. Healthcare in the United States is a $4.3 trillion system of markets managed by mental fantasy: the idea that any one piece can be isolated from its context and measured with precision.
“The method of freezing the frame, and including in it only measurable moves, works well enough in the analysis of individual markets in isolation, but it breaks down when applied to a whole economy,” explains Robert Skideslky, a British economic historian in What’s Wrong With Economics?: A Primer for the Perplexed, his critique of mainstream economic theories. Skidelsky takes aim at the way that economics is taught and practiced, particularly models which are “beautiful to behold but of little practical relevance.” Economists, he says, “are forced by the requirements of their own reasoning to squeeze their explanations of human behavior into absurdly narrow channels.”
Sanders’ hearing yesterday only proves that point.
Solving for Value Alignment
“The political irony is that PBMs have grown in size and power owing to government policies,” writes the editorial board of the Wall Street Journal on Wednesday (The FTC’s Anti-PBM Suit Could Mean Higher Health Premiums). “Their vertical integration is a byproduct of ObamaCare’s insurance regulation, including its cap on profits. No less than ObamaCare architect Peter Orszag recently lamented that “the stance of the antitrust authorities is directly and problematically opposed to the thrust of other policies.”
In other words, value (and vision) is not aligned across government silos.
Which is the same mushrooming problem essentially every business big or small, in every market big or small, in every country big or small, is dealing with: fragmentation getting worse, not better. Complexity spiraling beyond our current cognitive capacities to understand, much less manage.
Edward DeVaney, President, Employer and Health Plans Division of CVS Caremark, liked the Wall Street Journal editorial. It was well written, he said, here on LinkedIn, which came on the heels of this commentary he wrote on Wednesday:
"....If every adult with obesity received a GLP-1 prescription, costs would surpass $1.2 trillion annually – more than America currently spends on all drugs combined. Given their effectiveness, the health care system is grappling with how to balance the tremendous, and vocal, demand for these products – driven by legitimate medical need – with the high prices set solely by their manufacturers. With list prices at more than $16,000 per year, GLP-1s are still out of reach for many plan sponsors. I hear from our PBM clients regularly who are struggling to afford to cover these medications for their employee population. As clinical research reveals potential other applications for GLP-1s beyond metabolic health, these challenges will be exacerbated.
Why are these new therapies so expensive? Because manufacturers set the price, and have complete latitude to price their products as they see fit. Contrary to comments made by a manufacturer during recent congressional testimony, CVS Caremark passes along more than 98 percent of rebates to our clients: employers, unions, and insurance plans. They then choose how to use those rebates, whether that’s reducing out-of-pocket costs at the pharmacy counter or lowering overall premiums.
That’s why we do what we do at CVS Caremark: fight on behalf of our clients to control costs....
The Main Drift is this:
No one fully understands the machinery, least of all the people supposedly in charge.
So the default is a chronic groupthink, a cognitive pattern mostly unquestioned, accepting the rules of the game and the definitions by which to describe it. There's an entire belief system that's become the root cause of economic perversion and decades of "crisis" in healthcare: that "controlling cost" is The Problem.
Cost is not the thing that needs fixing.
Healthcare is an N-sided market that has never followed the rules of conventional economic theory. It's not just one market that drives innovation and determines “value” but an infinite flow of them. The thing this moment needs is a new orbit for economic competition, a different physics, where 'gravitational pull' comes from new economic systems positioned on the production of affordable health and continuous health engagement, not efficient "utilization management".
[In more related weirdness, Elevance Health LTD's Anthem Blue Cross has requested money back from healthcare providers, alleging they falsified patients’ medical records in ways that led the insurer to cover the medications. The amount demanded in a few cases totaled more than $1 million.]
Bigger ideas are needed.
In the spirit of offering novel solutions, here's a suggestion for all the junior staffers, legislative assistants and policy wonks doing the research and preparing the discussion guides for Congress: get the leadership of PhRMA + American Hospital Association + Pharmaceutical Care Management Association (PCMA) + AHIP in a room without cameras, co-creating with the leadership of U.S. Department of Health and Human Services (HHS) + the U.S. Department of Veterans Affairs + the FDA on industrial policy for the United States, a new market narrative to invent the automobile, rather than trying to preserve the “horseless carriage” of cost.
The better question the United States should ask itself is this: what would be the value to growth and GDP -- worldwide -- of "curing" obesity? And the smarter strategy question for the soon-to-be irrelevant Big PBMs should be this: how can you collaborate with Big Pharma to invent that future?
It's time to go full bore against the grain 🤘
/ jgs
John G. Singer is Executive Director of Blue Spoon, the global leader in positioning strategy at a system level. To engage with a mind stretch: john@bluespoonconsulting.com