How a Cabal Keeps Generics Scarce

http://www.nytimes.com/2013/09/03/opinion/how-a-cabal-keeps-generics-scarce.html

by dopkew • 13 years ago

43 24 13 years ago

zhemao• 13 years ago

It took me a few seconds to realize that this was about the pharmaceutical industry and not the Haskell programming language.

JonnieCache• 13 years ago

I thought it was a rant against golang until I saw the domain.

RBerenguel• 13 years ago

Thought the same. I should stop reading the go-nuts email digest for a few days

Guvante• 13 years ago

I had opened the tab in the background and later wondered where my Haskell tab went :)

esmael• 13 years ago

TL;DR The article was not about the Haskell Cabal.

Symmetry2• 13 years ago

How could this happen in a free-market economy?

I don't think you can reasonably call our system of medical drug production "free-market". Heck, I'm not even convinced that our drug production system is freer than the Soviet Union's was, though it's clearly still quite capitalist.

jerf2• 13 years ago

Look at a fuller quote:

"Policy makers apparently failed to ask the important question: How could this happen in a free-market economy? That would have steered them to the giant purchasing organizations that control the procurement of up to $300 billion in drugs, devices and supplies annually for some 5,000 health care facilities. These cartels have undermined the laws of supply and demand."

I'm pretty sure the question is meant to be a question you ask to lead you to where the free market is indeed being broken, not a claim that we have a free market.

This is solid logic; if the free market can do anything, it's match supply and demand via price signals. (If you're having a political reaction to that statement, I mean this in a simple microeconomics sense; it is indeed what free markets do.) In the absence of raw material problems, pervasive shortages are effectively proof that somewhere in the system, someone's fixing prices to below production costs. Sounds like they might be combining that with some good ol' fashioned corruption.

(This is why I'm a "libertarian" and not an "anarchist"; the free market needs defenders, because as beautiful as the theory is, in the real world, stuff like this happens, and it needs to be stopped by somebody with the power to stop it.)

skyraider• 13 years ago

Of course, in the theory, there aren't price controls (because one of the fundamental lessons of economics is that price controls cause shortages).

And in reality, there are lots of price controls on generics. That's not a bug with the theory; drug production is only a partially free market at best.

Symmetry2• 13 years ago

Yes, you're right that I was being unfair there. But I'd argue that the biggest ways the drug production system fails are related to the legal controls that prohibit companies from legally ramping up production to meet shortfalls in production from other producers without lengthy negotiations with regulators first.

bonemachine• 13 years ago

This is solid logic; if the free market can do anything,

Whether it can in principle, versus whether it does in reality are of course two very different things.

refurb2• 13 years ago

No offense, but this is a very weird article.

A little background on group purchasing organizations: GPOs represent their member hospitals. They "buy in bulk" and extract discounts from manufacturers and take "administration fees" to cover theirs costs.

Who owns the GPOs? The hospitals do! The largest GPO, Novation, is owned by VHA and UHC, two of the largest healthcare alliances that is comprised of US hospitals.

Margaret Clapp, the first author of this article used to work for Mass General who is a member of VHA, who thus owns the GPO Novation.

These GPOs exist because the hospitals themselves created them.

And it's ridiculous to say that GPO discounts are responsibly for drug shortages. GPOs don't want drug shortages because (1) their member hospitals don't get the drugs they want (2) because the GPO loses money every time a hospital can't order a drug.

The current drug shortages are actually due to a number of different factors:

(1) Margins on generic drugs are razor thin, they are basically commodities. The purchasers of these drugs don't care who makes them, since they are all deemed equivalent by the FDA; the result is that whoever has the lowest price gets to sell their drug

(2) The generic drug market looks like a commodity marketplace, but in fact it isn't. There are a number of costs associated with manufacturing a drug to FDA standards. If the FDA comes in and says "you can't ship that drug", you've probably just lost all of your profits for an entire year.

(3) Drug prices are "sticky" due to the way that Medicare and Medicaid pays for drugs. If you suddenly have a manufacturing problem and need to raise the price of your drug to cover costs, you're out of luck since it means the purchasers of your drug will lose money.

(4) Because of the low profit margins, companies are simply getting out of the business. There are other products they could sell that are lower-risk and higher margin.

logfromblammo• 13 years ago

This is the sort of corporate shell game that is only profitable due to the practices of Medicare, Medicaid, and health insurers.

The exact workings are beyond my investigative ability, but I think it very likely that kickbacks, payola, and other off-book activities are involved. The cash flows are massaged until it appears that the hospital itself is operating on thinner margins, and the satellite business entities are making fatter profits. Since only the hospital deals directly with the insurers, this tricks them into paying for procedures at a rate much higher than the actual bottom-line cost to the hospital.

I think the reason hospital systems are so secretive about their billing and procurement systems is that the public would find their practices to be scandalously avaricious, if not outright fraud.

Unfortunately, I can't support even a tiny bit of my hypothesis with actual evidence.

humanrebar• 13 years ago

If generic drugs are too cheap, it seems (3) is the real issue here. (2) can be accounted for by large companies if they are allowed to raise the costs of their products.

(4) wouldn't be a concern if there was room to innovate on the business model of pharmaceutical manufacturing. It seems like this sort of thing would be a great opportunity for disruption in other industries. I'm assuming that the regulatory burden makes this difficult? Car dealerships, restaurants, and grocery stores all have razor thin margins as well.

refurb2• 13 years ago

I don't disagree with your assessment. (3) is a major factor in drug shortages.

There is room to innovate in the generic drug industry. Most generic drug manufacturers have R&D budgets aimed at reducing the cost of manufacturing.

However, the generic drug market is an odd one. It all comes down to price and some companies price certain generics at below cost (i.e. loss leaders) in order to gain other business.

The most interesting quote I've read was from Barry Sherman who runs Apotex, one of the biggest generic drug makers. I don't have the quote in front of me, but to sum it up: "I rarely make any profit on any of my drugs. Most of my profit comes from patent settlements and court cases I win again the branded drug makers."

mschuster91• 13 years ago

Well, for all those who say "a free market does exist": I don't consider a market as strictly regulated in terms of manufacturing (FDA) as well as in pricing (at least in Germany, and IIRC in the US anywhere Medicare/Medicaid is involved) as a truly free market.

That being said, the medical sector needs extreme regulation for obvious purposes (eg. to give all people access to adequate health care, not only the rich, and to make sure that the products do what advertised and do not kill the patients). What has been missing in the US is a compulsory insurance scheme...

chongli• 13 years ago

Not only that, but sick people are making choices that, while technically free choices, are typically dilemmas, Catch-22s, Hobson's choices or worse: Sophie's choice.

jotm2• 13 years ago

Opening a drug manufacturing business nowadays is ridiculously hard - the regulations are insane, the costs for getting everything right are insane, and the clients are also insane (you think a hospital with shortages will gladly buy your stuff? Ha, dream on, they've already got their arrangements).

And so there are shortages. Or you get stuff from China, where manufacturers can ship you 1 or 1000 KGs of stuff with a month's notice.

toomuchtodo2• 13 years ago

So why doesn't the VA, Medicare, and Medicaid fund two GSEs (similar to Fannie Mae and Freddie Mac on the housing/lending side) who are non-profits, and their only role is to provide generics and other non-patented medical/surgical devices at cost? Non-profit to remove the profit motive, two for redundancy, and sponsored by the government because sometimes healthcare shouldn't have a profit motive when the free market has failed.

jotm2• 13 years ago

Non-profit in health care by the largest insurance companies in America? You gotta be crazy, son...

efnx• 13 years ago

I actually thought this article would be about Haskell, lol.

codygman• 13 years ago

Did anyone else think this was about Haskell and get disappointed?

When I saw nytimes.com I thought of the Haskell project they did with the supermodels.

How a Cabal Keeps Generics Scarce

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