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The Drug-Cost Blame Game Gets Political

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From Bioscience Expert Patrick Cox - The Most Life-Changing Book You'll Read This Year - Click Here

February 19, 2016

Dear Reader,

I’ve written a lot about the convergence of IT and biotech. Instead of repeating myself, I’ll refer you to a new book by Freeman Dyson, who spent most of his life as professor of physics at Princeton’s legendary Institute for Advanced Study. Dyson, who personally knew most of the giants of 20th-century science, has long maintained that the most important effect of computer technologies is the acceleration of biotechnology. He further develops that theme in Dreams of Earth and Sky, which I’ve just downloaded to my phone.

That biotech acceleration is clearly underway, though it may not be evident to those whose only gauge is popular media. Much of the progress has come from the creation of more powerful and inexpensive analytical tools such as genome sequencers and molecular analyzers. In some cases, however, the progress is taking place entirely inside computers.

Precise models of existing and theoretical molecules can be tested in virtual-reality simulations of cellular systems. These in silico experiments can be performed millions of times faster than they could in traditional labs, and they are increasingly accurate. In fact, drugs derived from virtual reality are in development now.

A VR simulation of your body (accurate down to the noncoding genes of your DNA) will exist in the cloud. Powerful AIs will constantly run complex experiments and correlations aimed at extending your health span via drugs, supplements, and other factors. This technology will lower healthcare costs and allow people to work and invest longer. In short, it will do what the Affordable Care Act was supposed to do.

If you’ve been reading this missive for a while, you know I predicted that the Affordable Care Act would not result in lower healthcare costs and dramatically expanded coverage. The reasons are painfully simple.

First of all, the ACA was as big a mess as the enrollment website. If I were given access to the best healthcare economists in the country and told to create a national medical system that would minimize costs and expand coverage, I would have asked for several years to work out the intricacies. The ACA bill was cobbled together in a ridiculously short time by politicians and lobbyists. The Obama administration’s top public-policy experts were frozen out of the process, and some resigned soon thereafter.

The bigger cause of the failure, however, is that the ACA ignored the main reason why healthcare costs have gone up… and will continue to go up. It is that medical options are constantly expanding and improving, allowing the treatment of formerly untreatable conditions. As a result, lifespans are rising and the population as a whole is aging. Because healthcare costs increase exponentially with age, the national medical bill has to go up—unless we solve the problems of accelerated aging.

Instead, we keep hearing that an increase in healthcare spending as a percentage of GDP is somehow a bad thing, as if the consumer-spending pie chart could possibly be stable throughout history. How do grownups get away with that kind of babbling?

The median age of an American has increased by about 10 years since the late 1960s and is now about 38. Women live several years longer on average, and this matters because they spend about 30% more on total lifetime healthcare than men. Ignorance of these huge demographic factors dooms most healthcare models to irrelevancy.

Moreover, average and median age (along with total healthcare costs) will continue to go up due to longer lifespans and lower birthrates. Here’s a nice overview of the trend lines, based on UN population data, showing that the US is not the only graying population.

Click to enlarge

At this point, nobody is pretending that the ACA has bent the healthcare cost curve downward as we were promised it would. In fact, the inconvenient truth is that premiums and deductibles have gone up.

Rather than admit that the act does nothing to address the big forces driving healthcare costs, supporters seem to have agreed on a scapegoat: the pharmaceutical industry. Lest you think I’m in the bag for the drug businesses, I’ve been consistently critical of their revolving-door relationship with the FDA. Still, it’s simply inaccurate and unfair to blame drug prices for rising healthcare costs.

To begin with, prescription drug costs account for only about 10% of the total. The actual amount may be higher or lower, depending on who does the accounting, but it is essentially irrelevant compared to the cost of hospitalization and physician or clinical services, which make up half of our total bill. In 2012, spending on drugs actually fell slightly due to the increased use of generics. Nevertheless, people are angry with drug companies.

One reason is the Martin Shkreli phenomenon. Shkreli, the so-called “pharma bro,” is unquestionably an embarrassment to the industry. People are outraged by his unrepentant antics after raising the cost of Daraprim, needed by toxoplasmosis patients with cancer or HIV, from $13.50 to $750 per pill. Clinton and Sanders both promised to increase regulation of the drug business in response, contributing to the general down trend of biotech equities.

The problem, of course, is that pharma is already one of the most regulated industries. While politicians complain about the cost of drugs, very few seem to care that the industry has to spend between $1 and $4 billion to get a single drug to market. Most of these costs are due to regulations that are routinely challenged as unnecessary or harmful by many healthcare economists.

I think, though, the biggest driver of public anger toward the drug business is the ACA itself. To cover higher costs, the insurance companies have raised not just premiums but also deductibles. This means we are spending more out of pocket for drugs… even if their wholesale price is stable or falling. People are angry, but they don’t seem to understand why. Insurance companies exploit this misunderstanding to deflect attention from their own policies.

In this deflection, they’ve had help. I remember, for example, a mock public-service announcement made by comedian Will Ferrell during the battle over passage of the ACA. It was a well-produced parody modeled after those pleas to help starving children in Africa. Ferrell’s plea, however, was that we protect health insurers from the ACA.

The implication, of course, was that ACA opponents were protecting insurance companies that didn’t want to cover preexisting conditions or the poor. It was clever, painting skeptics as heartless dupes of big business. It was also absurd because we know now that the medical-insurance industry helped draft the ACA and later emerged the biggest winner.

What industry would not support a law that fines people who don’t buy its products and that provides taxpayer subsidies to ensure that it doesn’t suffer financially if profits fall?

Unfortunately, the farce goes on. Now, major insurers and hospitals have made common cause with politicians who supported the ACA to paint all of pharma as a Shkreli-level scam. Calling themselves the National Coalition on Health Care (NCHC), they are lobbying for legislation that would further regulate drug prices and make the process of getting new drugs to market even more difficult.

Fortunately, there is already some pushback from pharma and allied politicians on both sides of the aisle. The pharmaceutical industry itself is no slouch when it comes to the lobbying game. Moreover, drug developers have international options today that didn’t exist in the past.

I don’t think the kind of disastrous price controls the NCHC is talking about will actually become law, but I want you to know what’s going on as insurance companies continue this political attack on drug makers.

I suspect a lot of the people associated with this effort understand that this is all political spin. Hopefully, some might realize that the only real solutions to rising healthcare costs are vastly superior treatments for existing diseases and anti-aging drugs. Many of these cost-saving drugs are in the pipeline now.

If you want to know more about those superior treatments, the innovative companies working on them, and which ones you should invest in, try my monthly newsletter, Transformational Technology Alert.

Patrick Cox
Patrick Cox
Editor, Transformational Technology Alert

Mauldin Economics


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