Filed under: Economic Analysis of Health, Pharma, Unemployment
Anyone familiar with pharmaceutical industry restructuring will not be surprised by this prediction from the FT’s John Gapper for 2011:
A drugs company will drop early-stage research. Big Pharma has struggled for a decade with a dearth of potential blockbusters. Companies such as GlaxoSmithKline have restructured and slimmed down their research arms but the sector remains troubled, as the departure of Jeff Kindler, Pfizer’s former chief executive, on the grounds of “exhaustion” indicates.
The obvious course with something that is not working is to drop it. Shire Pharmaceuticals pioneered a strategy of outsourcing early-stage research to smaller companies and focusing on developing and trialling promising drugs. This will be the year when one of the industry’s biggest takes a similar tack.
Gapper seems pretty unworried about this transition, and perhaps from the standpoint of pure economic theory it makes little difference whether research is conducted in-house or purchased from other, smaller firms. But as a matter of public relations and political economy, this is a troubling development.
The Post-R&D PR and Jobs Crises
First, the pharmaceutical industry has long justified its profits by arguing that it invests in research and development. For those who favor a market-based approach to drug research, this is a vindication of laissez-faire. Rather than relying on the heavy hand of government to try to direct the research done at pharmaceutical firms, we can expect the “invisible hand” of the market to spin off solutions for everyone’s problems–from the richest to the poorest. Innovations eventually filter down from the highest-income individuals to those with fewer resources. Spending by the wealthy on health care leads to investment in research infrastructure that ultimately redounds to the benefit of all.
But to the extent that the industry spins off its research and development, shouldn’t policymakers be more concerned about the health of research firms than the continued thriving of Big Pharma? I suppose one could make the argument that big Pharma is evolving toward a Walmart or Google style of value creation via skilled intermediation. Its key role in that scenario is to identify the most promising researchers, CROs, marketers, distributors, and advertisers.
If that evolution occurs, it reminds me of another of Gapper’s predictions for 2011:
As China tries to make itself a hub for environmental [and energy] innovation, the US is retreating. Silicon Valley venture capital groups that identified green energy as a big opportunity are playing it down and turning to social media. China has the market, the cash and the science to stick with it.
In other words, Big Pharma’s moves toward becoming virtual companies, mere hubs of certifications, trademarks, tax dodges, and contractual obligations, mirror a longer-term hollowing out of the US economy. Whereas a nation like China has an industrial policy that encourages production of useful goods and full employment, US capital is migrating toward “platform plays” that merely redistribute bargaining power and information about goods and services. One can imagine all sorts of clever entrepreneurial ploys that fall out from this strategy—think Groupon for cheap pills! What remains unimaginable is how social networking leads to viable occupations for all but the most connected and tech-savvy.
Top US economic strategists used to claim that offshoring didn’t matter, as US citizens’ superior productivity, technological skills, and education would attract high-value jobs to the country. Given America’s massive failures in educational policy, we no longer hear much about the “high value” jobs that a global division of labor was supposed to deliver to us. Instead, we see ever higher unemployment and no plausible plan to keep decent jobs in the country, or to be sure that those that remain are paid decently. Andy Grove has also helpfully demonstrated the necessary connections between ongoing manufacturing capacity and research designed to make production better. As he puts it:
Startups are a wonderful thing, but they cannot by themselves increase tech employment. Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production. This is the phase where companies scale up. They work out design details, figure out how to make things affordably, build factories, and hire people by the thousands. Scaling is hard work but necessary to make innovation matter. The scaling process is no longer happening in the U.S.
You could say, as many do, that shipping jobs overseas is no big deal because the high-value work—and much of the profits—remain in the U.S. That may well be so. But what kind of a society are we going to have if it consists of highly paid people doing high-value-added work—and masses of unemployed? . . . .
Finally, the increased outsourcing of R&D may menace existing cross-subsidization of research for neglected drugs and tropical diseases. To be sure, not much of this is going on presently; of the 1300 compounds tested for safety and effectiveness by major drug companies from 1992-2005, only 1% were directed toward diseases that predominate in the developing world. And a recent conference at BU gave me some hope that humanitarian research efforts could be distributed among small teams of researchers. Still, I worry that the ongoing shrinkage of Big Pharma will have results in the medical field similar to the gradual dissipation of Bell Labs.
Pharma as Part of a Larger Industrial Policy
Are there any solutions to be offered? The key to effective policy here is to recognize the extensive role the US government plays in the pharmaceutical industry. Epic battles over the scope of patent rights in the US are routinely fought in the US Congress. The US Supreme Court has recently opined on a number of fundamental issues in patent law in rapid succession. Legislation like the Hatch-Waxman Act prescribes a regime of protections and obligations for drug manufacturers that is extraordinarily complex, and continually contested. The FDA is involved in every step of a drug’s approval and marketing process. Medicare Part D legislation also significantly increased the US Government’s involvement in the pharmaceutical sector, providing an enormous amount of funding for spending on drugs for the elderly. International treaties like TRIPS also play a very important role in the pharmaceutical sector. In short, if there is one sector where state action is not simply a side constraint on “the market,” but rather serves to constitute it, that is the pharmaceutical sector.
Therefore, the US government needs to be much more involved in shaping both the output and the business practices of the industry to reflect national and humanitarian needs. On the humanitarian side, there are many excellent ideas in the book Incentives for Global Public Health. On the industrial policy side, perhaps there are lessons to be learned from this article on Chinese practice:
Foreign companies have been teaming up with Chinese ones for years to gain access to the giant Chinese market. Now some of the world’s biggest companies are taking a risky but potentially rewarding second step—folding pieces of their world-wide operations into partnerships with Chinese companies to do business around the globe.
Several earlier joint ventures inside China have soured over concerns that Chinese partners, after gaining access to Western technology and know-how, have gone on to become potent new rivals to their partners. “Foreign partners are seeing they will have to sometimes sacrifice or share the benefits of the global market with the Chinese partner,” says Raymond Tsang, a China-based partner at consultancy Bain & Co. “Some of the [multinational corporations] are complaining. But given the changing market conditions, if you don’t do it, your competitors will.”
To the extent that big Pharma is a truly global industry, US policymakers should be just as aggressive as Chinese ones in assuring that present private profits leave behind infrastructure that meets national needs for both quality healthcare and a balanced and highly skilled workforce. To neglect these imperatives is to declare unilateral economic disarmament vis-à-vis a competitor to which we are already massively indebted, and which has shown no qualms about taking US-developed intellectual property. If China wants certain concessions from multinationals for the good of its citizens, the US should demand no less.
While Medicaid Enrollment Rates Increase, States Face Financial Pressure to Decrease State Medicaid Spending
Filed under: Medicaid, Medicare, Medicare & Medicaid, The Uninsured, Unemployment, Uninsured
Last week, the Kaiser Family Foundation released a report indicating a large jump in state Medicaid enrollment from June 2008 to June 2009. The report said that the 7.5 percent increase was the greatest one-year jump in enrollment rates ever, with over 3 million people joining the public health program funded jointly by the federal government and individual state governments. The reason for the increase is thought to be that because more people became unemployed due to the economic crash, more individuals turned to Medicaid for health coverage. However, because the economic downturn meant less revenue entering into state budgets, state Medicaid programs have not been able to keep up with the rise in new enrollees.
During a convening of state governors at the White House this week, state officials will likely raise the issue of Medicaid spending. The issue is pressing in light of the impending funding cut when stimulus money from the American Recovery and Reinvestment Act of 2009 will expire in December of this year. The governors will likely ask that the stimulus funding be continued until states can somehow make up for their large current budget deficits. In addition to asking for more money, the governors will also likely discuss the feasibility of health care reform efforts. With both House and Senate versions of health care reform proposing increases to state Medicaid programs to ensure the coverage of more uninsured individuals, the state governors would, understandably, like to know where the money for such expansion would come from.
The National Association of State Medicaid Directors estimates that states’ budgets will fall short $140 billion in the next fiscal year. This means even less money for the likely further increase in Medicaid enrollment to come this year, as Medicaid enrollment generally lags behind unemployment. To account for the deficit, many states are planning to reduce their Medicaid programs. USA Today finds that three categories of such reductions exist:
- California, Arizona and Virginia propose reducing who’s eligible. In Arizona, 310,000 people would lose coverage. California also wants to increase premiums.
- Michigan, Tennessee, Massachusetts and others propose eliminating benefits. Masachusetts’ elimination of restorative dental services would save $56 million, says Medicaid director Terry Dougherty.
- Texas, Pennsylvania, Louisiana and others propose cutting payments to hospitals, doctors or nursing homes. Several states are considering new taxes on hospitals as a way to avoid cutting these payments.
States that accepted stimulus money to expand their Medicaid programs in 2009 are restricted from any such cuts that would affect low-income enrollment. However, if the stimulus funding is not extended, some states are planning on heightening eligibility requirements. For other states, while decreasing hospital and doctor reimbursement seems like the worst possible option– given that many doctors have already stopped accepting Medicaid patients due to what they deem to be an insufficient rate of reimbursement– many states’ officials find that the only other viable option they have is raising taxes. Many state leaders refuse to increase taxes in fear of the political backlash come November.
Realizing the need for health care reform to help manage the burden of paying for health care, state governors have stated a desire to be part of the health care reform conversation. Many have already expressed their dislike for individual mandates, which they believe will drive more individuals to state Medicaid programs. For the most part, however, the governors want reform and they want it now, finding that they simply can’t afford to wait another year.
It is also worth noting that an underlying issue from these new numbers is whether the Medicaid program is actually a good prototype for expanding health care coverage. Drew Altman, President and CEO of Kaiser, put in perspective Kaiser’s report as well as the concerns of public spending that were sparked by the Centers for Medicare and Medicaid Services’ projections for 2009-2019– which forecast that public spending on health care will surpass private spending. He noted that while spending in public health insurance programs would increase, the cost-benefit would be better, since per capita costs on health care were lower in government-run programs than in private insurance programs. According to Altman, such numbers did not undermine health reform efforts, but instead denoted “the need to control health care costs in the public and the private sectors alike.”
Filed under: Prescription Drugs, preventive care, Unemployment, Uninsured
In a move that has garnered both praise and criticism, Walgreens is offering free health care at its in-store Take Care clinics to patients (and their uninsured children and spouses) who have lost their jobs. This program, called the Take Care Clinic Take Care Recovery Plan, is designed to assist current and future patients who lose their jobs and health coverage on or after March 31, 2009.
Free services do not include full spectrum preventive care, but do include routine screening and treatment for respiratory illnesses, seasonal allergies, urinary tract infections, etc. Quest Diagnostics has teamed up with Walgreens to provide free laboratory testing services associated with the care of qualified patients. A significant item not covered by the program is the cost of any prescription necessary to complete treatment for any of these conditions.
Walgreens warns that “[t]he Take Care Recovery Plan is in no way intended as a substitute to COBRA health benefits or any other insurance” and advises patients to carefully consider all forms of coverage that may be available to them given the limitations of care available for free through a Take Care Clinic.
While many may view the program as an advertising stunt, it is hard not to take solace in the fact that families who might otherwise have to resort to a hospital emergency room, and potentially face an exhorbitantly high bill, may now take refuge in a local clinic.
As the economy continues to sour and the unemployment rate reaches levels not seen in more than a quarter-century (8.5%), the impact on access to healthcare and our economy could prove to be unprecedented. One study indicates that for every 1% increase in unemployment, Medicaid and SCHIP enrollment would increase “by 1 million (600,000 children and 400,000 non-elderly adults) and cause the number of uninsured to grow by 1.1 million.” And as we noted in a post at the beginning of this year, there are those (including Jane Sarasohn Kahn of The Health Care Blog) who believe that even that dire metric will prove to be somewhat understated for present conditions.
I am certain that Walgreens is concerned with its bottom-line in this effort: calling it an “experiment,” restricting the hours that non-paying patients can seek care, and noting that every patient who visits a clinic talks to about 8 other people about the experience. Most people, I am certain, are aware that the move is a mere band-aid on a wound that is hemorrhaging. But for the families the program helps, these points are probably irrelevant. What is relevant is the fact that a company is using its own resources to provide free health care to a growing population who need it.
Filed under: Medicaid, State Initiatives, Unemployment, Uninsured
Today, President Obama will release $15 billion in Medicaid funds to the states according to USA Today. As further reported by the NY Times, this is only one small portion of the $127 billion states will see over the next two and a half years for health care alone.
Attached to these funds will be the addition of a new category of individuals who qualify for Medicaid. Stimulus legislation allows “those who are receiving unemployment benefits, their spouses and child under 19,” to now be eligible for Medicaid, reports the Times. Further, states must abandon the use of any means test when unemployed individuals apply for Medicaid.
The affect this will have on states’ approaches to health care has not gone unnoticed. Republican Governor Mark Sanford (SC) has been a vocal skeptic of such changes to the extent that State Policy Network has described Sanford as fearing that the federal government is taking “yet another step in the march towards a government takeover of health care.”
But it’s not just Republicans that are at odds concerning the plan. Democratic Governor David Paterson (NY) is meeting with state legislators this week to attempt to reach an accord on how New York’s stimulus money will be spent on health care, reports Newsday. State legislators would like to see a share of the stimulus fill recent cuts to hospitals and other health care facilities and programs, but Governor Paterson would rather further reduce those state initiatives in the state budget.
Filed under: Medicaid, Unemployment, Uninsured
The New York Times reports that
“The nation lost 524,000 jobs in December…. The unemployment rate, meanwhile, jumped to a 16-year-high of 7.2 percent, the Bureau of Labor Statistics reported on Friday.”
This is up from 6.7% in November, 2008; up from 4.7% in November 2007.
Last week, in a post about prognostications for health care in 2009 (“Ringing in a New Year in Health Care, For Whom the Bell Tolls?“), we quoted the following from Jane Sarosahn Kahn in The Health Care Blog:
Keep in mind the Kaiser Family Foundation’s metric on unemployment: an increase of 1% unemployment leads to 1.1 million uninsured, and 1 million more people added to Medicaid. This was the math that worked in 2007-8. The metric will probably change in 2009 as Governors struggle to balance budgets while providing medical services, education, and safe streets to citizens. The National Governors Association, and the individual state heads, have all warned that Governors will inevitably cut services in 2009 and into 2010 if tax receipts continue to decline.
In response, we stated:
According the U.S. Bureau of Labor Statistics, in November of 2007 the unemployment rate was 4.7%. For November of 2008 it was 6.7%. Regardless of the metric, the consequent health insurance math is less than reassuring.
Regardless of its lack of reassurance, perhaps the math should be done.
Using the Kaiser metric, understated as it may be for 2008-9, the half per cent increase in unemployment in December (7.2% from 6.7% in November) is equal to:
- 550,000 more people without health insurance
- 500,000 more people on Medicaid
This is in addition to a two per cent raise in unemployment from November 2007 (4.7%) to November 2008 (6.7%).
That 2% equals:
- 2,200,000 more people without health insurance
- 2,000,000 more people on Medicaid
Total from November 2007 (4.7% unemployment) to December 2008 (7.2% unemployment) equals:
- 2,750,000 more people without health insurance
- 2,500,000 more people on Medicaid