Following up on my last conversation about corruption in entertainment, government, big business and elsewhere, I want to focus a bit here on corruption in the area that is perhaps most personal to us, healthcare. Ever since the government began crowding out private healthcare in America with Medicare in the 1960s, if not before, corruption and collusion between government and healthcare providers has been steadily increasing. Today, as the bond between government and corporate lobbyists, CEOs and insiders grows ever stronger, and with extreme levels of regulation, insurance mandates, legal immunity for corporate wrongdoers, and the absence of a true marketplace in most healthcare areas, opportunities for corruption in healthcare have soared.
A 2016 report by Transparency International found that corruption was widespread in the the medical sector. Corruption was found across the the healthcare sector, from the politicians whose policies negatively affect public health, to the way drug trials are performed and reported on, how medicine is marketed and the way medical services are delivered. Sophie Peresson, director of Transparency International's pharmaceuticals and healthcare program said, “From the politician to the patient, corruption (in the healthcare sector) has all too sadly become just a part of doing business.”
Donald Berwick, former head of the Centers for Medicare and Medicaid Services (CMS) estimated in 2012 that about $270 billion a year, 10% of total U.S. healthcare spending, was lost to fraud in the healthcare industry. Combining fraud and corruption with waste and inefficiencies gives staggering estimates of wasted medical costs. In 2012, the Institute of Medicine estimated that $750 billion was wasted or lost to fraud back in 2009, amounting to almost 30% of total health spending. Medical has increased sharply since then, likely in combination with even more industry corruption and waste.
In 2015 three separate studies reported estimates of healthcare waste in U.S. ranging from $600 billion to over a trillion dollars a year. The first study estimated that 40% of the waste went to unnecessary care, including overprescribed antibiotics and unnecessary diagnostic lab tests (to avoid malpractice exposure). That same study estimated that 19% was to lost to fraud, 17% to administrative inefficiency, and 12% to healthcare provider errors. The second study estimated that about a quarter of overall waste resulted from both unnecessary services and “excessive” administrative costs, with an additional 14% due to excessive (above market) prices paid for services and 17% for inefficiently delivered services. Lastly, the third study estimated about a quarter was lost to both overtreatment and administrative complexity (regulations), with further losses from poor healthcare delivery and “pricing failures”.
The reasons behind such waste and inefficiency? One analysis attributes the failures to structural flaws in the way healthcare services are delivered. That includes the tendency for doctors to overtreat and over diagnose (for higher revenues), direct-to-consumer marketing, physician-directed pharmaceutical marketing, medical malpractice laws, and lack of cost transparency.
The Drug Industry Rules
According to the CMS, more than $380 billion is spent yearly by Americans and government on pharmaceuticals (after any discounts or rebates are taken into effect), a number that has exploded over the last few decades. Even compared to soaring healthcare and medical costs overall, drug spending has grown even faster over the last few decades.
While governments, academia and the media want to warn about the so-called dangers of nutritional supplements and vitamins, homeopathic medicine and other forms of alternative medicine, these industries are tiny compared to the drug industry (see chart below). A single drug company, Pfizer, has yearly revenues - $53 billion in 2016 – higher than the entire U.S. vitamin and supplement industry.
A glaring example of corruption and conflicts of interest between government and healthcare involves Julie Gerberding. She was director of the CDC from 2002-2009. In 2009 Gerberding resigned from the CDC and went to work for Merck, becoming president of Merck's vaccines division, later executive vice-president of the company. During her years at the CDC and after, Merck's vaccine division grew handsomely, increasing to over $6 billion in yearly revenues. While at the CDC, Gerberding helped to increase the schedule and volume of vaccine recommendations. She also helped win approval for Merck's Gardasil vaccine (approved in 2006). These actions helped earn billions of dollars in yearly future revenues for Merck. Ms. Gerberding has done well herself since retiring from “public service”, awarded more than $4 million of Merck stock, in addition to her lucrative salary at Merck. Such a clear conflict of interest between the head of the CDC and corporate vaccine makers would hardly be allowed in an uncorrupted regulated marketplace, but in the government/health care partnership, it's called doing business.
Such corruption and conflicts of interest also exists between the drug industry and academia. A 2014 report published in the Journal of the American Medical Association found that of the 50 largest drug companies in the world, 40% had at least one board member who held a leadership position at a U.S. academic medical center. That includes medical school deans, CEOs, department chairs and university presidents. The average compensation for those fortunate individuals was $313,000 a year. These individuals are then supposed to provide unbiased recommendations both to their schools and the companies where they work.
The report listed the dean of the Yale School of Medicine who received $259,000 a year, in addition to more than 10,000 shares of stock, to serve on Abbott Laboratories board of directors. As to possible conflicts of interests, a spokeswoman said that the director would have no role in decisions such as clinical trials, drug samples or drug formularies, and that “if ever he had the opportunity to be involved in a decision affecting Abbott, he would recuse himself.” So why exactly is Abbott paying someone $259,000 a year to serve on a board of directors who will make no decisions about the company?
Similarly, Mary Sue Coleman, received $276,000 a year serving on Johnson & Johnson's board, while simultaneously acting as president of the University of Michigan (apparently, being president of a university doesn't keep one busy enough). She accumulated $3 million of J&J stock while doing so. (Despite retiring from the university in 2014, she has remained on Johnson & Johnson's board.) The company also had research grants and consulting fee arrangements with the University of Michigan. While Johnson & Johnson acknowledges that it sells healthcare products and services to the university, it said the relationship did not “impair the director's independence or judgment”. Such arrangements are now called business, for the benefit of both parties involved, even if the true nature of the arrangement is kept behind closed doors.
Giving monopolies to drug companies
When Congress created Medicare Part D in 2003, it prohibited Medicare from negotiating with drug companies for lower drug prices. This was a great gift for drug makers, less so for taxpayers, as government dollars are responsible for close to half of all drug purchases in America. Although private insurers are able to negotiate for lower drug prices, private health insurance has increasingly been crowded out by government insurance. Private health insurance is not particularly private either, more a private/public partnership with the government which dictates coverage and restricts competition in the health insurance industry. And forget about pushback from consumers. Consumers pay just 14% of the cost of their drugs out-of-pocket. Many will pay nothing or nearly nothing for drugs sold for hundreds or thousands of dollars a month. And even if consumers paid 100% of their drug costs out-of-pocket, they would still not greatly affect the drug market, especially for brand name drugs, because the drug industry is less a market, than an assortment of protected monopolies.
The most relevant factor for high and rising drug prices is the robust government-enforced patent protection. This gives many drug makers and their drugs monopoly control of areas of the marketplace. In the drug market, as in most of healthcare, consumers are price-takers, at the mercy of unflinching drug companies and government. While the government is supposed to be charged with the task of preventing monopolies in the marketplace, it gives outright monopolies to those in the pharmaceutical industry.
Most brand drugs are covered by patents covering 10 or more years of “market exclusivity rights” guaranteeing that drug makers will not have competition from much cheaper generic drugs for many years. According to IMS Health the brand name drugs have an average of about 13 years of sales before a generic competitor enters the market. And with tens of millions of Americans taking drugs for chronic medical conditions, such brands will have a captive market.
Without an actual marketplace in medicine, government-corporate partnership and little or no competition for many drugs, high and rising prices for drugs has been and will be the overall result. A Blue Cross Blue Shield study found that its members increased their drug spending 73% over seven years. The main problem, the study noted, are the long patents that restrict competition, especially for drugs treating chronic conditions. The study found high and rising prices for brand (non-generic) drugs under patent protection and (by government dictate) with no allowable generic alternatives. These drugs are called single-source drugs, because they come from one supplier, and there is no direct drug substitute.
With such monopoly control over prices, it was found that the prices for these single-source drugs increased by an average of 17% a year from 2010-2016, with total spending for these drugs up 285% over those six years. Those patent-protected single-source drugs now make up nearly two-thirds (63%) of drug spending now, more than doubling their share since 2010 (when it was 29%).
Average drug prices increases for these single-source drugs have risen sharply for most drug groups, including those to treat some of the most critical health conditions. Those include a 19% yearly average price increase from 2010-2016 for antivirals like Hepatitis C and HIV, an 18% yearly increase for cholesterol drugs, a 17% yearly average increase for cancer drugs, and 14% yearly price increases for both diabetes and drugs for neurological diseases like MS and Alzheimer's. Drugmakers impose such price inflation on its vulnerable consumers because it has been given monopoly power to do so.
By contrast, the same Blue Cross study found that the average yearly increase of generic drugs over the six years was 0%, no average price increase at all. And brand-name drug price increases in “mixed” markets, with both brand name and generic alternatives (in other words, where competition was allowed to exist) averaged just 3%. Over the six year period, cumulative spending in the “mixed-drug” market fell 47%, while it rose 285% in the single-source (monopoly) market. The rise in overall drug spending in the U.S. is completely due to the extensive patent protection from single-source drugs. So, what shouldn't be a surprise to anyone, but amazingly still is, is that competition in the drug industry works to provide more alternatives to consumers and keep drug prices stable, instead of sharply rising. Lack of competition and artificial patent protection provide fat profits for the drug companies and high prices for consumers.
As for the concern that drug companies wouldn't make any money without such extensive levels of patent protection, generic drug makers with lots of competition have profit margins comparable to average Fortune 500 companies in America. In contrast, drugmakers with monopoly patent protection have about the highest profit margins of any industry in America.
For consumers, the U.S. now spends considerably more than other developed nations (see chart below). Given the near-doubling in U.S. overall drug spending since just 2013, per capital drug spending is significantly higher than this graph shows.
The healthcare system in America, despite its excellence in certain areas, has overall, not been a model of success. Corruption is extensive, the pricing system is nearly non-existent overall, taxpayer and consumer waste is extreme and many the health outcomes for consumers has been deteriorating in many areas. It was recently reported that average life expectancies in the U.S. Fell for a second straight year, something that hasn't happened in more than a half-century. Consumers are paying (much) more for less, while insiders in business and government profit from the lack of industry transparency. Unfortunately, those in control and benefiting from the system have little incentive to change. And many consumers have accepted rising costs for drugs and treatment, industry inefficiencies, frustration with health solutions, and a broken healthcare system, as inevitability.