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All opinions are my own.

Friday, February 9, 2018

Could Amazon (A), Berkshire Hathaway (B) and J.P. Morgan Chase (M) be the Anti Ballistic Missile (ABM) needed to Control/Curb Rising Healthcare Costs?

Recent announcement of Amazon, Berkshire Hathaway and JP Morgan Chase (1, 2) to address rising healthcare costs for their employees has caused a bit of uproar on the healthcare landscape. Healthcare companies and many others have expressed their concern and doubts about success of the partnership (3). There will be many “naysayers” and many will pontificate. Their concerns could be real but time for “creative destruction” (4, 5, 6) on the healthcare landscape has come. It has been long overdue.

In the last one hundred years creative destruction/disruption has led to significant innovations in almost every industry. To a major extent pharmaceutical and healthcare industries have escaped this disruption. It is my perspective that time for the needed disruption has come. Banding of ABM (Amazon, Berkshire, Morgan) is start of an alternate landscape. There will be evolution. Some of the elements that need the change are also being discussed (1). Discussion of healthcare costs and controlling them is out of the closet. These three companies with a combined revenue of about $500 billion dollars per year and over one million employees are going to explore possibilities of how the costs can be contained and even lowered will be a good thing.

The task is going to be challenging, multi-faceted and evolutionary. There will be significant resistance from every cog of the healthcare wheel. Political and economic power of the healthcare industry will be tested. We should not be surprised if legislators, intellectuals and consultants also get in the act to score points.

For success there will be strategic re-modeling of the current business model, rejuvenation of the manufacturing practices, supply chain changes and re-allocation of the workforce. Status quo of the current practices is going to be increasingly disrupted and disturbed with every ABM success. Each success will bring in new players to improve the process. Business strategies will change. Technology, artificial and real, along with process of continuous improvement will play a major role.  

ABM effort to lower healthcare costs is counter to the current operating philosophies of the pharmaceutical, insurers and pharmacy benefit manager companies. A quick look just at the pharmaceuticals tells us part of the story. Most of the revenue growth of the pharmaceutical companies is in the developed countries (7). Lately pharmaceutical companies due to their inability to create affordable new drugs that are more effective than the current drugs for the mutually subsidized healthcare systems and affordable to 98+% of the global population are depending on high priced orphan drugs, preventing generic entries and are raising prices. Due to political pressures some pharmaceutical companies have opted to less than 10% price increases (8, 9). I am not sure how long this these strategies will work.

At the initial going (1) ABM alliance has supposedly conceded drug distribution to industry’s middlemen PBM (Pharmacy Benefit Manager’s). However, if the Alliance has to be successful in lowering drug prices it will have to crack open the PBM pricing juggernaut between the formulation sellers to the patients. Reverse calculations will show ABM how the price multiples traverse between the API manufacturer and the patient (10).

ABM alliance is giving the healthcare industry and opportunity to stay afloat. There will be survival tug of war. My conjecture is fissures in the healthcare citadel will develop and could get wider thereby lowering healthcare costs.

Other healthcare components would most likely experience similar cost pressures. Since there are multiple elements in healthcare, I am sharing my perspective of the possibilities as they relate to drug prices (pharmaceutical manufacturing) only (11).

A recent post Comparison of Drugs Prices: US vs. India: Their Manufacturing Costs & Opportunities to Improve Affordability” (10) gives us a perspective of drug price differences for the generic drugs. Brief review suggests tremendous price change possibilities.

While collecting the pricing information (10) I noticed drug packing that might be worth mentioning. Majority of the drugs in India come in blister pack or foil strips of 10 to 20 counts each. When one asks for a specific drug, customer receives the prescribed/required number of tablets. Since air-conditioning is not available at every pharmacy, blister pack or foil strips might be preserving the drug from extremes. Such packing could be used in the developed countries also. Few advantages in such packing i.e. reduce waste, reduced cross contamination if the tablets are a look alike and speedier drug dispensing. Every cost reduction could be passed on to the patients.

Opportunities:

Since Amazon is an online store and they are already serving the needs of patients, they could throw each of the following elements to serve and lower drug costs.

Local same day delivery could play a major role in Amazon business expansion. Through reverse calculation (10, 11, 12, 13) ABM could negotiate with various OTC, generic and even with the brand companies the best prices they can provide offer via Amazon.com to their employees and expand to serve others. Reverse calculation will improve price negotiation and incorporation of better technologies to improve product quality, profits and lower costs. ABM enterprise through Amazon could have more than one supplier for the same drug offerings. It would be a case similar to companies competing for “shelf space” on the basis of product quality and sell price as is being currently done by different producers of the same products on Amazon website and at the grocery stores. Another significant benefit of ABM’s effort and the drugs being available via Amazon.com will result in drug pricing transparency. Through technology copay systems of mutually subsidized systems could be incorporated. Single pay system could also be tested and if successful could be expanded.

My conjecture is that if companies compete side-by-side for the same product quality they will compete on costs. This also means inclusion of manufacturing technology innovation through “economies of scale” (14, 15), which has been shunned in API manufacturing and their formulations.  

FDA will also have to change its process review and approval methods. It will have to develop and promulgate a road map so that the ANDA approval process could be lowered to three months (16, 17). NDA approval methods will have to be revisited. FDA will face significant internal resistance to such a change but the long-term benefits will outlast the short-term hiccups. Since “Lower the Healthcare Cost” Genie is out of the bag and is recognized, change will happen. 

FDA’s regulatory quality compliance would still stand. My conjecture is that if companies compete side-by-side for same product quality they will compete on costs and quality and that means manufacturing technology innovation through inclusion of “economies of scale” in API manufacturing and their formulations.

Since drugs being available via Amazon.com another significant benefit of ABM’s effort will be drug-pricing transparency that is hidden from the patients in mutually subsidized healthcare systems.    

 

Quoting WSJ Editorial Board (6)… health care is long overdue for a shake up, and the leaders of these companies—Mr. Buffett, Jeff Bezos and Jamie Dimon —deserve credit for jumping in. The public would be the beneficiary if this trio can figure out how to lower costs and increase quality, and the odds are better with them than another political intervention.” Since change in healthcare is much needed by the constituents of our country it will also be a test of metal of our legislators’ short and long-term interest and alliance. Political and economic pressures will be tremendous.

Only time will tell who wins and who does not and by how much. One thing is for sure that each segment of healthcare (pharmaceutical development, manufacturing, distribution and insurers, providers, hospitals) will have to review/alter their modus operandi to lower their costs and improve quality of products/services they provide.

Assembly line methods e.g. cataract in India, knee replacements and other procedures might have to be adopted, streamlined or considered to improve and lower healthcare costs. Drug affordability is an issue and will become increasingly an important part of the discussion as America ages. Healthcare providers will have to forgo their latent prevailing sentiment that patients will pay the highest price to get well and extend their life.


Many will be rooting for the ABM alliance success but there will be many who could create obstacles.

Girish Malhotra, PE
EPCOT International

  1. Triple Threat: Amazon, Berkshire, JPMorgan Rattle Health-Care Firms, The Wall Street Journal, January 30, 2018, Accessed January 31, 2018
  2. If Amazon And Buffett Lift Veil On Health Prices, Insurers Are In Trouble, Forbes.com, January 31, 2018, Accessed January 31, 2018
  3. JPMorgan to Banking Clients: Joint Health-Care Venture Is No Threat, WSJ.COM, February 4, 2018, Accessed February 4, 2018
  4. Creative destruction: https://en.wikipedia.org/wiki/Creative destruction Accessed January 31, 2018
  5. Malhotra, Girish: Is "Creative Destruction" the way to go for the Pharmaceuticals? Profitability through Simplicity, December 11, 2008, Accessed February 5, 2018
  6. Welcome to the Health-Care Jungle, WSJ.COM February 1, 2018, Accessed February 5, 2018
  7. Malhotra, Girish: An Alternate Look at the Pharmaceutical World Revenues and Drug Affordability, Pages 2-5, www.gmpnews.net, Autumn 2017, Manufacturing Chemist, Volume 88, Number 10, October 2017, Pg. 28-32
  8. Facing Criticism, Drug Makers Keep Lid On Price Increases, WSJ.COM [https://www.wsj.com/articles/facing-criticism-drug-makers-keep-lid-on-price-increases-1488157893], February 26, 2017, Accessed February 5, 2018
  9. US pharma industry holds to price-cap pledge, Pharmaceutical Technology [https://www.pharmaceutical-technology.com/comment/us-pharma-industry-holds-price-cap-pledge/], January 5, 2018, Accessed February 5, 2018
  10. Malhotra, Girish: Comparison of Drugs Prices: US vs. India; Their Manufacturing Costs & Opportunities to Improve Affordability, Profitability through Simplicity, January 18, 2018
  11. Malhotra, Girish: May Day May Day: Can Someone Help and Lower Drug Prices?Profitability through Simplicity, May 1, 2015, Accessed February 5, 2018
  12. Malhotra, Girish: A Blueprint for Improved Pharma Competitiveness, Contract Pharma, September 8, 2014 Accessed February 6, 2018
  13. Malhotra, Girish: Can An Alliance Between US Pharmaceutical Benefit Managers (1) and Make in India (2) Lead to Lower Global Drug Prices? Profitability through Simplicity, June 17, 2015 Accessed February 6, 2018
  14. Malhotra, Girish: Recent Posts That Relate to Pharmaceuticals and Chemicals-I, Profitability through Simplicity, 2013, Accessed February 6, 2018
  15. Malhotra, Girish: Neglected Tropical Disease (Infectious Diseases) Drugs: What are they telling us about Innovations! Profitability through Simplicity, March 7, 2012, Accessed February 6, 2018
  16. Malhotra, Girish: Can the Review and Approval Process for ANDA at USFDA be Reduced from Ten Months to Three Months? Profitability through Simplicity, March 25, 2017
  17. Malhotra, Girish: ANDA (Abbreviated New Drug Application) / NDA (New Drug Applications) Filing Simplification: Road Maps are a Must, Profitability through Simplicity, May 11, 2017

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