US Healthcare Policy And Pharma Industry

In terms of looking at the grand strategy of healthcare policy, there are 3 main policies that have a counterbalancing effect on one another.  In this sense, I’m reminded of a Caltech saying that there are 3 things that you can do in school:  1.)study 2.) socialize 3.) sleep and that at Caltech you can only pick 2 and the other suffers.  In a similar vein, healthcare policy has its own three: 1.) Low cost 2.) Access 3.) Innovation, pick 2.

For most of the world, the choice with universal healthcare obviously focuses on 1.) low cost and 2.) access with many of the the latest innovations not available and/or not having an industry producing innovative treatments.  The U.S. however has a fairly unique combination of of 1.) Low cost and 3.) Innovation while suffering on 2.) access.  While many of us won’t debate that the U.S. has innovation, but does it have low cost?  In a sense we do even if it is not in absolute terms.  For example, generic drug prices are among the lowest in the world.  The low cost is a result of near free market pricing in a competitive environment.  Over time, this drives down prices of innovations.  The downside is that access suffers since only those with insurance (and their collective bargaining power) will have access leaving 49M uninsured in the US not able to receive tx.

However, the U.S.’s policy is changing with regards to healthcare policy in the sense that Healthcare reform seems to be strengthening 1.)Low cost and 2.) Access.  Based on the three legs described above, it is hypothesized that 3.) Innovation will start to suffer.  If not, then the U.S. has a very ambitious goal of giving everybody access to low cost tx and drugs while maintaining a healthy environment for innovation.  This in my mind is very tough b/c the low cost is a result of squeezing biopharma and med device companies and/or squeezing payers/providers who then squeeze biopharma.

But health reform believes that there is a way to get everything.   The magic word is “healthcare information technology (HIT).”  The theory is that HIT will remove the inefficiencies and waste in the system and hence lower costs while at the same time, improve patient outcomes.  There is some legitimacy to the claim, which is probably why companies in HIT such as Cerner, Allscripts, McKesson have been having some nice rides.  An ETF for this industry could be interesting, but in my mind, this is a zero sum game since one’s success is another’s failure.  But back to the 3 legs, I think that the cost savings from HIT for “right tx, right person, right place, right time” might be overblown b/c this is suggesting that innovation is being funded by waste and inefficiency.  While certainly true in an incremental sense, but in a fundamental sense certainly not.  Thus, the low cost will primarily be a result of directly and indirectly squeezing biopharma industry and not more efficient healthcare.

With theoretically 49M more people coming onto the insurance rolls, most of them through Medicaid and previously underinsured, we can be guaranteed that the payers and government will be squeezing pharma for existing medications and tx on the market, which will affect future funds for innovation.  No matter how you look at it, pharma will not be benefiting from a shift from low cost/innovation to low cost/access in US policy.

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