Lilly CEO Opines Cost Effectiveness Stifles Innovation

Published by clickbroker.blogspot.com

Pharmaceutical giant Eli Lilly & Co. (LLY) CEO John C. Lechleiter’s Wall Street Journal opinion “Health-Care Reform and the 'Innovation Test'” attacks the establishment of a government health insurance option for all Americans. The subtitle “Government-run insurance plans have curtailed access to new medicines” is not even supported in the text, unless he is implying that America is on the path to adapting the European model for cost-benefit reimbursement screening.

First I will address why a government health insurance option is imperative for healthcare reform, and then discuss each of Lechleiter’s arguments. Private insurance includes many risks beyond preexisting condition exclusions, medical underwriting and policy rescissions. Each policy contains a wide array of limits and restrictions such as the number of doctor visits per year on co-pays, maximum annual and lifetime benefits by finally divided subcategories and overall, pre-approvals, and network restrictions.

Let’s say you are one of the few that has read and understands the hundreds of pages in your health insurance policy and thought you did enough homework to fully comply. You obtain your preapproval, and your hospital and surgeon are in your insurance policy’s network. Then you’re disheartened to learn that your pre-op lab tests were sent to an out of network lab without your knowledge and the radiologist whom you never met, does not accept your plan. To make things worse, the hospital assigns an out of network anesthesiologist for your surgery, without you approval.

As you can see in this example, even with high quality health insurance you cannot stop medical providers from gaming the system at your expense. The private health insurance industry says that new regulation is needed for consumers to regain trust. I say the government option is the only way to set the standard for trust. Under a private only insurance environment, no one is totally secure.

Now let’s exaggerate our example: You are sent by ambulance to an out of network hospital. Your plan only covers 50% of the policy’s predetermined rates for medical services. Your responsibility is the other 50% of the predetermined rates plus any charges in excess of the predetermined rates. The insurer does no negotiation on your behalf. Contrast this with standard Medicare where seniors always only pay 20% of Medicare’s dictated rates. Which leaves you feeling more secure?

In general, Lechleiter claims that private companies are the engine of medical innovation and government inhibits innovation. He fails to distinguish between basic research and application, and does not acknowledge that the government through the NIH and university grants funds most basic research. Most biotech companies are started by professors incubated in the university system, funded by government grants. Further, the NIH and US Military directly fund the most cutting edge research and clinical development at small biotech companies. Vical’s (VICL) DNA plasma based H1N1 flu vaccine is an example.

Lechleiter conveniently leaves out that the pharmaceutical industry spends far more on marketing, sales and promotion than research and clinical development. Instead he wails out against the possibility of the government dictating prices on branded medicines; claiming any type of cost control will stifle innovation. Yet Lilly and other innovative pharmaceutical companies are operating very profitably in Europe, and show no signs of leaving. Does Lechleiter believe Americans should pay more for pharmaceuticals than Europeans?

Lastly, Lechleiter asserts that “private insurers and patients tend to control costs by insisting on value -- forcing companies to demonstrate how the effectiveness or broader savings generated by their product justifies its price.” If this were true, pharmaceutical product life cycle management would be ineffective and healthcare inflation would be well controlled. As I wrote in “GM and UAW Retiring Viagra and Nexium”, private insurers have no incentives to either seek value or manage costs.

Just as the private insurance industry is realizing they cannot survive by simply rejecting any customer that might incur medical expense, big pharma also must come to terms with the fact that innovation cannot exist in a vacuum without the gravity of cost. Only the government has the resources and motivation to determine cost effectiveness. Is one month of life worth $10K, $20K, $30K or $100K?

Don’t let the pharmaceutical industry scare you into believing cost effectiveness will bring rationing. Rationing exists now. When high cost medicines are included in insurance policies, consumers are rationed out by the price of insurance. Only the government can provide an effectiveness basis for rationing. I know this will impact pharmaceutical industry profitability, but they must adapt. The industry will only create value if they have to.

The government subsidizing private insurance will only increase the profits of both the insurers and drug companies, with no real cost containment. Lechleiter just wants more customers while maintaining the status quo. Lilly is joining Merck (MRK), Pfizer (PFE) and UnitedHealth Group (UNH) with their heads in the sand.

Disclosure: Author is long PFE and VICL.

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