Risikoflotte and drug pricing

The non-profit medical supply producing entity that hospitals and other purchasing bodies have set up is starting to ramp up initial production.

Does this matter as the following response asks?

I think it does matter.  The goal of Civica is to bring down pricing on some drugs by being able to be a countervailing force in being even if not in actuality.  We looked at this logic in the winter of 2018 as we went through the five pricing stories for drugs.

Story 3: Cheap generics get expensive fast — the Martin Shkreli story and the Epi-Pen story.  Here the exploit is a lack  generic manufacturers that can quickly shift to produce near substitutes.  The time and cost of other manufacturers to set up a production line to make a cheap competitor won’t ever return a profit as the original manufacturer/distributor will drop prices to or below marginal cost as soon as they see a threat.

The recent agreement by a number of large hospitals to set up a non-profit generic manufacturer is a response to this story.  The new entity would be willing to lose money to set up a production line for a generic drug that just saw its charged price increase by 1,000%.  I think the entity’s leadership would be totally happy to certify the capability to get a few simple drugs and one complex generic approved as a demonstration of capability and then just use their capability as a looming threat to tamp down on these pump and dump schemes.  That would be a stunning success even if the entity never ships a single pill for anything other than demonstration purposes.

Story 4: Short term price spikes for some generic drugs during shortages — this is a distinct story from number 3.  There may be other manufacturers that are in the process of responding to a price signal to enter or expand production for a drug but it will take a while.  The new entity could serve as a policy response here as a source of production reserves.  Larger stockpiles and diversifying supply chains so that most of a particular drug is not made on a single hurricane prone island is another possible response.

 

 

As long as supply increases at lower net price point, Civica will have achieved its core objective. This objective is fairly insensitive to methods.






21 replies
  1. 1
    MattF says:

    So, how do the Pharmacy Benefit Managers feel about this? Seems to me that they could be either for or against– they’ve been able to work the system profitably in its present form, but they also have a preference for lower prices.

  2. 2
    Wag says:

    They should next take on insulin pricing.

  3. 3
    Gin & Tonic says:

    Is “risikoflotte” supposed to mean something?

  4. 4

    @Gin & Tonic: It is a reference to German naval strategy 1895-1914 where they acknowledged that they could not outbuild the Royal Navy but they could build enough to threaten serious enough losses to the RN that the RN would not want to take the risk of a confrontation as a local loss could lead to empire wide weakness.

  5. 5
    Gin & Tonic says:

    @David Anderson: Thanks.

  6. 6

    @Wag:
    Insulin pricing is a much tougher nut to crack. The whole situation is a mess. I found this interesting article that tries to explain what’s going on with insulin prices, and they mention several problems:

    1) Doctors are reluctant to prescribe older versions of insulin, largely because they’ve been told the new versions are better. I’m sure industry marketing has something to do with that, but plenty of doctors tend to think newer is better and tend not to consider price when making prescriptions.

    2) Patents.

    3) Regulatory obstacles to new applications. This is one I hadn’t heard of, but which is an obvious reason why it’s likely to be a few years before any new generic insulin product is likely to hit the market. Insulin is considered a biologic, and until fairly recently there was no process for approving biosimilar drugs*. For some stupid reason, the FDA has created a deadline next year when the process changes, and applications for biosimilar insulins that are pending on that date will be arbitrarily dropped and need to be resubmitted. Because of the uncertainty in how long the application process takes, that has scared off potential biosimilar manufacturers, who are likely to put off any applications until after that deadline.

    *Strictly speaking, a “generic” insulin would actually be considered a “biosimilar”. Biologics, meaning drugs like proteins that are expressed in bacteria, are each considered to be unique products because it’s effectively impossible for a third party to precisely replicate the production process. Instead they are classified as “biosimilar”, meaning that they’re trying to produce the same sequence but that they can’t be considered to be exactly identical because of the differences in the production process. This makes it more difficult to get regulatory approval for a biosimilar than for a generic version of a drug that’s synthesized chemically.

  7. 7
    J R in WV says:

    I would prefer not to discuss my medical situation in depth, but without going into diagnosis and medication names, here goes.

    For many years I took a generic with $5 co-pay for a 90 day supply. It was prescribed to take “as needed” and so lasted longer than that. Then one day I went to get a refill, and was told my insurance no longer covered that specific medication, no matter how well it worked for my diagnosis. I asked what the cash only price was, $900 odd for a 90 day supply – no wonder my insurance dropped it from their formulary. My doctor prescribed a different drug, not quite as good, but what can you do.

    My wife takes a maintenance medication which was pretty much routine, then one day her refill was a $500 copay!! at the Kroger’s pharmacy. She went to her doctor, who practices at a large non-profit health care group, and he told her to check with his group’s non-profit pharmacy, where the same drug was a $50 cash purchase. So both wife’s insurance company and the pharmacy were making out like bandits on that medication!!

    Another med I take went from $5 copay to $41 cash only for a 30-day supply not long ago, that’s $492 annual cost. I then found out that there’s a “club membership” that dropped that to $11, which isn’t so bad. But the wild changes in cost, whether a drug on patent or generic off patent is crazy and needs to be controlled by rigid regulation on drug prices based on the cost of production. Actual outlay costs, not piled higher and deeper costs!

    If I understand correctly pharma research is mostly underwritten by and conducted at universities. So the Big Pharma routine of “high drug costs are due to research funding!” is Bullshit, we all know it’s mostly crack and whores for CEOs and their senior minions.

  8. 8
    MattF says:

    @J R in WV: I agree that the current regime of drug pricing is ridiculous– I’ve looked at the with-insurance and without-insurance prices of the medications I’ve taken, and there’s no excuse for the obvious price gouging. There’s something very bad about forcing sick people to pay extra for their medicaiton.

    However, pharma companies are not completely and irredemably evil– they have actual concerns about cost and about the viability of their own enterprises. A good source for the ‘yes, but…’ argument is Derek Lowe’s ‘In the Pipeline‘ blog.

  9. 9
    Dr. Ronnie James, D.O. says:

    @Wag: Asthma maintenance medications would be another great choice, but if this company only serves hospitals, I wouldn’t be surprised if that’s not a priority. Currently, huge numbers of poor people esp in urban areas where there’s a lot of pollution to trigger attacks, use their “rescue inhaler” several times daily, which is terrible management. There’s even a underground market in inhalers because the need is so great. It’s all because the maintenance therapies that would control their asthma are too expensive. It’s a real scandal.

  10. 10
    Martin says:

    I don’t see how this could work. I mean, yeah, Civica could eliminate the self-dealing shitshow that has plagued the drug mfg/distribution scene, but at the end of the day, the hospitals need the meds, and the drug companies could simply refuse to sell to Civica. Unlike most other markets, the supplier has the power here because they know the drug must be purchased from somewhere. There is no such thing as a ‘walk away’ price. So long as the generics are willing to continue to collude on pricing, adding new distribution players won’t have a meaningful impact.

    I appreciate that the hospitals are doing this. They need to do *something* and this is within their power, but it still seems wholly insufficient.

  11. 11
    Martin says:

    @MattF: Some of them are (Purdue, for instance). And if they hold the patent on the thing keeping you alive then you’re fucked.

  12. 12
    Juice Box says:

    @Wag: The production of biologic drugs like Insulin is more complicated. The old fashioned insulins were purified from the pancreases of slaughtered pigs and cows, but the modern stuff is made in yeast with recombinant DNA. Production of small molecule drugs is simpler. The modern stuff is a lot better. It doesn’t have the potential for producing allergies and has a much more predictable absorption profile that makes tighter blood sugar control muuuuch easier and which makes insulin pumps possible.

  13. 13
    Mnemosyne says:

    I’m assuming they’re also planning to produce/source things like sterile saline, which has been in ridiculously short supply for a while, even before the manufacturing facilities on Puerto Rico were hurricane-damaged.

  14. 14
    PAM Dirac says:

    @MattF:

    A good source for the ‘yes, but…’ argument is Derek Lowe’s ‘In the Pipeline‘ blog.

    As some one who spend a career in drug discovery, I highly recommend the “In the Pipeline” blog. Derek is pretty good at separating the reality from the bullshit, but the commenters are also usually well informed and uninterested in supporting PR nonsense, so usually the back and forth is focused on substantive issues.

  15. 15

    @Martin:

    I mean, yeah, Civica could eliminate the self-dealing shitshow that has plagued the drug mfg/distribution scene, but at the end of the day, the hospitals need the meds, and the drug companies could simply refuse to sell to Civica.

    It only works for generic and biosimilar drugs. The idea is that there are a bunch of drugs that are unduly expensive not because they’re protected by patents but because of the way the regulatory system works. Getting approval to sell a generic takes a bunch of time and money, and manufacturers aren’t willing to put that money in if they don’t see a return.

    What assholes like Martin Shkreli discovered is that if they’re the only company approved to sell, they can crank up the price and rely on the regulatory barriers to keep out competition. They can make a killing in the short term- often enough that it doesn’t matter if they go out of business in the long term- and they always have the threat to drop prices to unprofitable levels if another company tries to get into the market. Other companies are reluctant to spend the time and money on the regulatory stuff if the Pharma Bro company can threaten to kill their return.

    The idea behind Civica is that the hospitals behind buy enough of these medications to make it worth taking on that threat to drop prices. They can sign an exclusive contract with a second manufacturer that makes it worth their while to enter the market. The hospitals do well because they can get a price that’s guaranteed lower than what the price gouger is offering, and the company they’ve contracted with is guaranteed a big enough market to make the process worth their while.

  16. 16
    PAM Dirac says:

    @Roger Moore:

    Doctors are reluctant to prescribe older versions of insulin, largely because they’ve been told the new versions are better

    I’m hardly an expert, but my searching though PubMed to find the underlying papers suggests that there is very good, but maybe not definitive, evidence for believing that the newer modifications are better. There are a lot of fairly short term (~6 month) studies that show the newer drugs give much better control of blood sugar. Everyone expects the better control of blood sugar to result in better overall health, but I couldn’t find a lot of studies that tried to look at this directly. The few I looked at mostly showed a positive effect on broader health measures, but but the magnitude of the effect was varied enough that it might be the case that the effect is not large enough to justify the major increase in cost.

    Instead they are classified as “biosimilar”, meaning that they’re trying to produce the same sequence but that they can’t be considered to be exactly identical because of the differences in the production process. This makes it more difficult to get regulatory approval for a biosimilar than for a generic version of a drug that’s synthesized chemically.

    The problem isn’t so much in the different production processes, but due to the fact that modern analytical techniques are capable of determining the exact structure of small molecules and determining small (<1%) impurities, but the techniques can't do this for biologics. The result is you don't really know what your biologic drug is to the same extent that we know for small molecules. With a small molecule, you can verify your production process by showing it produces the exact same structure as the original drug. With biosimilars you need to verify the production process by clinical trial, which is going to be longer and much more expensive.

  17. 17
    Kenneth Fair says:

    “They’re f***ing taking all the money back from you guys? All the money you guys stole from those poor grandmothers in California?”

    “Yeah, grandma Millie, man.”

    “Yeah, now she wants her f***ing money back for all the [generics] you’ve charged right up, jammed right up her ass for f***ing $250 a [shot].”

    Change a couple of words, and you’ve got Enron all over again.

  18. 18

    @PAM Dirac:

    The problem isn’t so much in the different production processes, but due to the fact that modern analytical techniques are capable of determining the exact structure of small molecules and determining small (<1%) impurities, but the techniques can't do this for biologics.

    But they can. I can analyze a protein and get 100% sequence coverage to prove that it is exactly what it’s supposed to be, and I’m not even doing this at the level the drug companies are. I know a guy at Amgen whose job is to analyze in extreme detail all of the stuff like the protein synthesis pathway incorporating the wrong amino acid, and he can look at variations that are in the mid parts per million range. It’s probably a better level of detail than we can get for small molecule stuff. There are other people looking for host cell protein contamination, and they’re getting down into the low ppm range.

    I think a big part of this is that the regulators still don’t really know what to make of biologics. We can look at a small molecule*, figure out a handful of likely contaminants, and figure out whether the observed level of contamination is a problem. But even though we can do a fantastic job of characterizing the contaminants in a biologic, the FDA isn’t comfortable converting that data into a risk assessment, so they force the manufacturer to redo things that wouldn’t be required for a small molecule drug.

    *Where “small molecule” includes fairly good sized peptides that are synthesized chemically rather than expressed in cells.

  19. 19
    Chris Johnson says:

    The time and cost of other manufacturers to set up a production line to make a cheap competitor won’t ever return a profit as the original manufacturer/distributor will drop prices to or below marginal cost as soon as they see a threat.

    How is this not criminal extortion?

  20. 20
    Procopius says:

    @Roger Moore: I notice that Martin Shkreli is in jail (a good thing in itself, but for fraud, not for price gouging which is not illegal), but the company has not lowered the price by one cent.

  21. 21
    Procopius says:

    @Chris Johnson: This is not extortion because TPTB classify it as competition. Which is why unregulated markets are not what you we are taught in Econ 101. In fact, although I don’t think many professors mention it, the kind of market described in Econ 101 barely exists. It used to in places like soybean and wheat markets, but I believe both markets are now dominated by consolidated buyers, so no longer have competition. When you hear raving about “the magic of markets” and the “wonders of free competition” put your hand on your wallet and hold on because you’re hearing the biggest lie ever.

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