AbbVie Leaves the Herd
Note: Updated February 26
“Following federal efforts like the drug price reforms in the Inflation Reduction Act, some states have also taken it into their own hands to curb the prices of drugs. On Friday, February 23, Colorado’s Prescription Drug Affordability Board voted to set an upper payment limit on Amgen’s arthritis drug Enbrel. More states are likely to follow suit.” — EndPointsNews
“After this summer's major drug pricing reform that left pharma lobbying groups high and dry, one major player has turned its back on prominent trade groups in Washington. AbbVie is leaving both the Pharmaceutical Research and Manufacturers of America (PhRMA) and the Biotechnology Innovation Organization (BIO), plus the Business Roundtable” — FiercePharma, December 16, 2022
Renovation is required to the PhRMA storyline of value.
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 worldwide, strategy centered on defending “pricing” in the “drug market” has reached its productivity frontier.
As a theme for strategic communications, it has lost its ability to persuade.
It is 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 is 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.
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.”
It’s almost as if economic theory assumes away reality.
Economists almost never start with the facts; there are too many. Their general approach is to represent individual choices as parallel straight lines….to ‘make the crooked timber of humanity straight’….by expanding the zone of exclusion in order to make the subject matter of the enquiry “work” within the requirements of the model. So the thing being studied is forced to fit the math, the analytical model serving as a starting point that leads to an unrealistic destination: that an 'optimum equilibrium' is out there waiting to be discovered and proven.
Look no further for evidence of this methodological persistence than The Right Price: A Value-Based Prescription for Drug Costs , by a team from the Evaluation of Value and Risk in Health (CEVR) at the Institute for Clinical Research and Health Policy Studies at Tufts Medical Center.
"The pricing of medicines is one of the hardest problems in public policy, brimming with clinical and economic complexity. This remarkable book written by the world's leading group on drug pricing explains the key issues clearly, and without compromise. If you read only one book on how to price medicines smartly, this should be the one," writes Amitabh Chandra, Harvard Kennedy School of Government and Harvard Business School, in his review.
If your jumping-off point is illogical, and then you proceed logically, you're still going to get an illogical conclusion.
Discovering the “economic truth” of a market entails converting an open system into a closed one, and then making recommendations born from that false sense of separation, the “division of labor” as path to productivity, introduced by Adam Smith in the first sentence of An Inquiry into the Nature and Causes of the Wealth of Nations in 1776. As a frame for novel strategic thinking, mathematical gymnastics around a single market is not only intellectually fraught, it’s root cause of the nearly 50-year “crisis” in the American Way of healthcare.
The implications of this psychic disintegration are profound. The Western urge to break things apart to study (and sell) them has, to quote the Talking Heads, stopped making sense. Outcomes happen at a system level: never just one thing, but many things simultaneously and interactively. It’s the and that matters.
Healthcare is a ‘nested market’ — its main feature is the density of structural linkages and interactions that cut across domains (Nora Bateson calls this “transcontextual”). By not understanding how to create with complexity, we are missing the moment to develop policy for market integration, to cohere the ‘commercial determinants of health’ on shared marketspace. The next cycle of innovation in the business of healthcare is not about “price” of a piece, but ‘the production of health’ and ‘continuous health engagement’ as new economic objectives.
It’s time to sweep the old concepts out of the saddle.
Healthcare in the United States has become ‘uneconomic’ in the sense that the benefits it is providing are less than the costs it is imposing. In terms of ROI, the negative EBITDA from a $4.3 trillion investment in American healthcare reveals a market + government system that has been badly mismanaged for decades. Writes Sandro Galea in a JAMA Health Forum piece this week (Principles to Guide the US Toward Better Health for All):
“The US spent more than $4 trillion on health care in 2020, or almost 20% of the gross domestic product. This amount is expected to increase by more than 5% annually over the coming decade, reaching more than $6 trillion by 2028. The US spends far more than any other high-income country on its health, even as US residents live sicker, shorter lives than their counterparts in many of these countries. In no small part, the gap between national spending and achievement in population health is due to underinvestment in the forces that shape health….
Any approach to move the US beyond its disappointing state of health must also recognize and grapple with the inextricable link between health and the assets that produce it. This challenge means advancing the national conversation substantially toward recognizing that health and health gaps cannot be improved without making structural changes that remedy historical underinvestments.”
That means a brick through the window of convention and cliche.
"Optimization, market discipline, austerity and other harmful dogmas should not be allowed to make a comeback," say Matheus Grasselli, Alan Kirman and William Hynes here in A Systemic Recovery, their editorial published this month in a special issue of the Journal of Risk and Financial Management devoted to learning and applying the lessons of the COVID-19 pandemic. "What is needed is [a whole] new framework" inspired and informed by strategy and innovation at a system level.
“Our economic systems are exacerbating inequality and other social challenges along pre-existing fault lines, creating negative feedback loops back into the economic system, as unequal societies tend to be less dynamic, less stable, and, even serve to make most of their citizens less well off. The marked increase in inequalities has engendered perceptions of a rigged system, which have in some cases helped to fracture societies, undermine democratic processes and institutions, as well as erode post-WWII international institutions and the spirit of multilateralism.
Addressing such issues requires bold policy action based on a realistic theory of how society works and the role of the economy in relation to the other social and physical components of the overall system.”
Economic reality — whatever that is — is too complicated to be directly interrogated; so it must be simplified to the point of caricature. But therein lies the problem with most economic models. They don’t fit the reality of how people, and systems of markets, actually behave.
The era of linear solutioning is over.
As long as you ride the rails of 'expert knowledge' of the past, the more you reward legacy narratives and obsolete operating theories, the further away you become from navigating the transition space to compete in a different context.
Constructing New Economic Systems (“Ecosystems”)
Big tech companies have failed to “fix” healthcare, says Oliver Kharraz, cofounder and CEO of Zocdoc, in a perspective published in Fast Company over the weekend, because they have either attempted to change healthcare from the outside in, or they have tried to force their solutions upon the many players and systems within the space.
“Successfully changing healthcare requires taking all of the component parts that already exist and finding ways to make them work together. Companies that make a lasting mark on healthcare will be unifiers that build the connective tissue necessary to bring together existing participants, technologies, and applications.
The likes of Google, Apple, and Amazon are not set up to do this type of hard, slow, connective work that requires a deep understanding of the system’s complexities and how to change it for the better. Rather, they are set up to launch new business lines that leverage their core competencies to help grow their market caps. There is no bigger opportunity for them to do that than in healthcare—whether their core competencies are relevant or not—and so try, they must.
It is not only the large tech players who have failed to deliver impact at scale in healthcare. Newer healthtech entrants—who collectively received more than $40B in venture funding in 2021 alone to fuel their respective efforts to “fix” healthcare—have also struggled to make their mark. And while their approaches are different to the tech giants’, the underlying reason for their lack of traction is the same: they are unwilling to deal with the complexity of the healthcare system on the whole.
Instead, these newer entrants set out to fix the fragments of a fragmented system: They offer telehealth-only services while the vast majority of healthcare interactions take place in person. They offer cash pay solutions only while the vast majority of healthcare interactions are funded through insurance. They only target the “worried well” population while ignoring the vast majority of patients who have acute problems. They offer ephemeral solutions that were only relevant during the pandemic, a once-in-a-century event. The result is that they fail to address the vast majority of patients’ needs, and so they cannot reach the critical mass needed to scale. “
The complex reality of the current chaos of collapse is that we all are going to have to re-examine some of our dearest shibboleths. The rules governing and constraining mindsets no longer work for multiple shifting paradigms. The unmet need is a new science of synthesis, a new conceptual frame to solve for market fragmentation.
“There is no mystery to what an ‘economy’ is,” writes Michael J. Sandel, the Anne T. and Robert M. Bass Professor of Government Theory at Harvard University Law School, in What Money Can’t Buy: The Moral Limits of Markets. “An economy is just a group of people interacting with one another as they go about their lives. In this account, economics is about not only the production, distribution and consumption of material goods but also about human interactions in general and the principles by which individuals make decisions.”
And there’s no greater principle by which people make decisions than their healthcare.
If we learned anything in 2020, it should be that public health is not separate from economic health. "Healthcare" is the economy, a meta-market around which $142 trillion in global GDP is linked and flows. If you buy into that view, then the new growth engine ‘for an economy’ is health market integration: the intentional design of entirely new industry ecosystems as the basis for strategic competition.
The roadmap starts by “disrupting" the market in economics, decoupling the future from economic methods that stopped delivering practical and predictive value decades ago. Said differently, the market to displace is the one selling faulty economic models, that shift attention from the truth of what is being asserted to the means by which people are persuaded of its truth.
John Maynard Keynes on economics’ ability to replace common sense with quantitative predictions: “It is as though the fall of the apple to the ground depended on the apple’s motives, on whether it is worthwhile falling to the ground, and whether the ground wanted the apple to fall, and on mistaken calculations on the part of the apple as to how far it was from the center of the earth.”
More to the point:
By fighting a discursive war over flawed economic theory, the pharmaceutical industry is defending the wrong hilltop.
/ jgs
John G. Singer is Executive Director of Blue Spoon Consulting, the global leader in positioning strategy at a system level. Blue Spoon specializes in constructing new industry ecosystems.
Disclaimer: Blue Spoon Consulting does not have a financial relationship with any company or individual mentioned in this post.
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