Big Hospitals Vs. Big Pharma
Fortune India|May 2021
As talk of healthcare reform grows, the two titans are gearing up for an epic clash over wh ’s most to blame for soaring costs. Will it lead to truly radical change?
Geoff Colvin

TRUST AND CONSEQUENCES — HEALTHCARE

“IT’S JUST APPALLING,” says Molly Smith, group vice president for public policy at the American Hospital Association. She’s talking about a new report from the Pharmaceutical Research and Manufacturers of America (PhRMA). “Hospitals’ Practices Increase Costs of Medicines for Patients & Employers,” the press release blared, further claiming “the system routinely rewards hospitals for extracting two to three times more revenue from the sale of a medicine than the company who discovered and made it” when administered under a government programme for getting drugs to the most vulnerable patient populations.

Smith, steaming, is having none of it. “The programme was solely created because of the high drug prices that [drugmakers] and they alone set,” she says. “And then when they’re upset that such a programme got set up because of their egregious pricing practices, they come after it. They’re making hand over fist in profits. But, you know, anything that cuts into their bottom line …”

America’s hospital industry and pharmaceutical industry—combined 2019 revenues: $1.6 trillion—are feuding more sharply and publicly than ever, and for good reason. One political party currently controls both the legislative and executive branches. And when that happens, especially in a new President’s first two years, big changes tend to follow. That’s how the Tax Cuts and Jobs Act became law under President Trump and how the Affordable Care Act got passed under President Obama. Now President Biden and the Democrats who control Congress have come to power with ambitious plans to reform U.S. healthcare and stem the everrising costs—and Big Hospitals and Big Pharma could be in the crosshairs.

This has set the stage for an epic showdown. Both Big Pharma and Big Hospitals know that reform in some guise is almost certainly coming out of Washington, D.C. The real questions are just how severe the crackdown will be, and, crucially in their eyes, which side gets hit hardest. So after a long period of relative détente, the two behemoths of the healthcare industry are circling each other like Godzilla vs. Kong—breathing fire, beating their chests, and pumping themselves up for a public relations and lobbying battle for the ages. Each side wants to make the other into legislative target No. 1.

The public holds both sides about equally responsible for today’s healthcare problems. A Gallup poll finds that 76% of Americans think they’re paying too much for most care they receive, relative to its quality. The two main culprits, says a Kaiser Family Foundation poll, are drug costs (cited by 78%) and hospital costs (71%). Several polls show large percentages favouring government control of both drug and hospital charges.

It’s a propitious moment for Biden, who wants to go big on healthcare. The President wants to limit newdrug prices and price increases, allow Medicare to negotiate drug prices with pharma companies, and potentially break up some of the biggest hospital, drug, and health insurance companies.

Biden’s secretary of health and human services, Xavier Becerra, would go much further; he has long supported a single-payer healthcare system and has endorsed Sen. Bernie Sanders’ “Medicare for All” proposals. He can’t make those things happen on his own, of course. And Becerra said at a Senate committee meeting before his confirmation hearing that Biden’s agenda “will be my mission”. But his leanings are alarming to the industry.

Taken together, it sounds like a threatening outlook for hospitals and drugmakers, with one enormous countervailing factor: the pandemic. Over the past 13 months, hospital workers have been heroes in the truest sense, risking and sometimes giving their lives in the fight against the plague. Meanwhile, much-reviled Big Pharma has pulled off one of the great achievements in medical history— developing multiple effective COVID-19 vaccines in 10 months rather than 10 years, and rapidly manufacturing them in massive quantities. Says Niall Brennan, CEO of the Health Care Cost Institute, a nonprofit research organisation: “They have gained the moral high ground.” Are these the businesses America wants to punish?

This combination of pandemic and politics puts healthcare on the front burner like it hasn’t been since passage of the ACA 11 years ago. That landmark law has achieved a great deal; the portion of the population without health insurance has dropped from 15.5% when the ACA was enacted to 9.2% in 2019 (most recent data). But so far it has not bent the cost curve downward in the big picture. Total national healthcare spending per capita, in constant dollars, increased far faster in the six years after the ACA took effect in 2013 (18%) than in the six years before (7%).

Understanding just why these costs have remained so maddeningly untamable is crucial as we enter into another bruising national debate on how to address the issue. And no one has a bigger stake in the outcome than hospitals and pharmaceutical companies—the largest players in the largest sector of the largest economy on earth.

THE POLITICS OF HEALTHCARE are as closely interwoven with human psychology as they are driven by academic arguments. An economist may raise the alarm to assert that costs can’t keep growing faster than GDP. But politically, that’s not what counts. Voters tend to see those big macroeconomic trends merely as abstract numbers that don’t hit home. People care most about their own situation. It’s certainly true in healthcare—yet not quite in the way one might expect.

Consider, for example, annual per capita out-of-pocket spending on prescription drugs. In theory, that’s what people ought to care about, the money coming from their own wallet. So they might be surprised to learn that the government’s National Health Expenditure data shows this expense being broadly flat for almost 20 years. On average, Americans are spending no more of their own money on drugs than they were in 2003; in fact, they spent less out-of-pocket in 2019 ($164) than they did in 2006 ($189). So why do large majorities of Americans rail against drug costs and want the government to control them?

The answer reflects an important truth about healthcare economics and especially about healthcare politics: Extremes are often more important than averages, and healthcare is a world of extremes. Among people with private health insurance, only 3% spend over $1,000 a year out-ofpocket on drugs, but they account for 40% of total out-of-pocket spending, reports the Kaiser Family Foundation. More broadly, in any given year, 5% of Americans account for about 50% of total healthcare spending. As KFF researcher Cynthia Cox observes, we all know that “at any given point in time, we might end up being in that 5%”.

Americans aren’t worried about averages. They’re terrified of being in the 5%. “A lot of this is about shifting anxiety from consumers up onto somebody else,” says Alan Scarrow, a neurosurgeon and former president of Mercy Health System in Springfield, Missouri, who has written a book about the U.S. healthcare system called Hope Over Experience.

Consumers have read about people who have drained all their assets to pay for the drug that could save them or have been pushed into poverty by mammoth hospital charges. Says Vincent Rajkumar, a physician at Mayo Clinic who has written often on drug prices: “Someone can make $50,000 a year for 25 years and lose all they’ve got just like that once they get ill.”

Those are the anxieties that policymakers and legislators of both parties want to quell—or spin to their advantage.

$ 1.6 TRILLION

COMBINED REVENUES IN 2019 OF THE HOSPITAL INDUSTRY AND PHARMACEUTICAL INDUSTRY, THE TWO LARGEST PLAYERS IN U.S. HEALTHCARE

Putting a Price on a Miracle Drug

WHY AMERICA’ S MOST EXPENSIVE MEDICATION IS WORTH THE MONEY.

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