Wednesday, March 21, 2012

The Business Of Medicine

The intention of this post is not to put a negative spin on things or propagate a conspiracy theory. Think of it as a question I'd like to think out aloud. Like many dreamers who dream of a bright future - I often dream and look forward to developments in medical science that will bring about a cure for cancer and other deadly diseases. Then I wonder about reality.

Each project in any field needs some sort of business justification. This especially applies to the medical industry. Consider a patient getting admitted in a hospital for cancer treatment. Lets assume this hypothetical patient gets admitted to a mid-range hospital (not Apollo at the high end and not Adyar Cancer Institute at the low end).  We will also assume that a person will have at least a 2-3 year supplier-customer relationship with the hospital (The hospital is in the business of selling treatment and the patient is a customer who purchases the treatment). So - over a 3 year period the hospital stands to earn a revenue of around 10 lacs (Rs, 10, 00,000 or $20,000) from the patient. It could be more but lets assume subsidized rates and also include all the consulting fees (I actually think I am underestimating the cost. In 1989 my grandfather had brain tumor and we spent 2 lacs. Applying inflation means that today's cost would be around 16 lacs).

Now let us say some pharma company found a cure for cancer. I am the hypothetical managing director of a hypothetical Hospital ABC. I get 1000 cancer patients every year. This means my ongoing revenue is Rs 10 ^ 9 every three years. I have new medical equipment and specialists in chemotherapy that costs about Rs 10^4 every 3 years which means I make a profit of Rs 9000000 every 3 years.  What does the new cure for cancer mean to me? Consider the analogy of a Petrol Bank owner finding out one day that an alternative to petrol has been invented. What would he do? The 10 Petrol Banks he owns aren't entirely worthless. They are fuel distribution centers and so he can use the place to distribute the new form of fuel. He will have to exhaust his petrol stock and pay off loans on equipment that are petrol specific. But the key thing is: will the new fuel make him more money?

Let us set aside for a moment the notion that the medical industry is out there for a noble cause and they aim to create a 100% disease free world. Our disease is what keeps them alive. Let us assume they need to meet revenue targets, pay off loans on equipment, pay their staff etc. The first challenge for the MD of the hospital is that his existing equipment that is specific to the previous treatments for cancer is almost obsolete overnight. His non-doctor staff who are specialists in using that equipment could be put to other use. but he isn't sure. The key question that is on his mind is (a) can he use his hospital to sell the new drug? and (b) Can he charge Rs 10 lac/patient or more for administering the drug?. In effect after cutting out all costs associated with old treatment and accounting for new price of the new treatment - can he make a lot of money? If the answer to (a) and (b) is 'no' - what does he do?

The question becomes interesting - if 100 hospitals in a state begin to wonder the same thing. Then 1000 hospitals  in the country begin to wonder about this. And then 100,000 hospitals across the entire world wonder about this. Will they block  the new drug? In the 90s many eye doctors who weren't in the business of Lasic surgery were saying bad things about Lasic treatment.  Would they have said that if they stood to earn a lot from Lasic? The few eye doctors who started administering Lasic had great things to say about Lasic. So lets assume the doctor community has an incentive to block the cure if it doesn't bring them good business. Add to this the constraint that WTO imposes that newly invented drugs must be discounted by 97% for developing countries - which led to the Intellectual-Property-rights-quashing historical judgement against Bayer. This doesn't provide a lot of incentive for pharma companies to develop a 'eliminate-the-disease' kind of cure. What if the Pharma companies who are supposed to be doing research and inventing a cure for cancer are also in the business of supplying drugs for existing cancer treatment? What if they don't see a good business case that supports inventing the drug?

This brings me to my question. I am sure I am missing something here and I'd like to know what that is. In my lifetime I haven't heard of a life-threatening disease being cured by a newly invented pill. I actually haven't seen the big diseases getting knocked out by medical science related improvements. Doctors pretty much give the same answers today for brain tumor as they gave in my Grandfather's case 20 years ago. I assume cure for small pox, polio, MMR etc came before medical industry became a huge business. Is the research world really as incestual as I describe it to be (That the people who research on a new drug are funded by the same organization that produces existing drugs and the new drug will cannibalize revenue from existing drug)? Would the public ever find out if legitimate cure for cancer has been kept in abeyance because people haven't found a business solution yet? How would new breakthroughs in medical science find its way to the public? Is it purely by accident or is it caused by market forces where errors in the existing system get amplified over time causing the cure to slip through the cracks and into public domain?

42 comments:

Extra-Ordinarily Ordinary said...

There is a lot to write about this. Will email you....

Anonymous said...

I dont think that is far from reality.
Kodak invented the digital camera even though its revenue came from the film business.
Of course, kodak is now dead.
Whether or not the businesses try to block the new drug, the insurance costs are sure to increase. How else can hospitals get back the revenue?

Anonymous said...

We should really set aside the notion that medical industry is here for a noble cause.

-KP

Saravanan said...

I think what you have said is mostly valid. However, I would like to add two other points:

(1) Creating a cure for (virus based )diseases like Cancer or AIDS is incredibly hard and may not even be ultimately possible. (However, it is possible to generate vaccines for which your argument applies)
(2) Pharma industries are not the only players who can "create/invent" new drugs. I think (atleast in US) funding agencies like NIH and NSF also play a reasonable role by providing funds to researchers who can invent new drugs. However, the process for getting approval is onerous which prevents individuals from entering industry. I only hope that in the future the bar for entry reduces which can cause a silicon valley like environment in medical industries too. I am very optimistic about the nascent DIYbio movement. Time will tell how things change !

I am a ComplexNumber said...

Short incomplete answer is that innovation comes out of people who are crazy enough / rebellious enough to try the idea and in fact are passionate about their idea (sometime more than what it aims to solve). This produces new economies and new companies.
That is why innovation comes more out of Startups than large established places. Note: the unsatisfied rebels from established places typically start those start ups.

Let us say that I am with a huge tech company. I hate the way we make money by essentially fooling the customer in some way or the other.
And let us say that I come up with a great idea to eliminate that waste. If my company is NOT going to support me (As it will lose money in the interim and possibly long term), I am going to typically come out of that place if I am very passionate about the idea.

Now I might fail or succeed. Let us say that I fail, but start communicating by writing a blog or publish a paper. X years later, some other person comes up and tries my idea but an improvisation on the same due to improvement in technology for instance. The idea gets more powerful at that point.
This essentially creates a better opportunity for it to see light of day.

This is how I have seen innovation coming out. I have never seen innovation coming out by thinking, "hey, you know what, let me find a cure for cancer". It happens because "hey this bunch of ATGCs are interesting for me...hey i can introduce trait A and trait B...boy how powerful am I" ==> leading to "oh btw that happens to cure cancer too....this is sweet shit"...leading to new companies like Amgen...etc for instance...

Now, how long will that take to happen....well the first automobile was invented in last century...after years and years of human generation....Medicine...we have heard vedic stories and susruta etc...each industry has its maturity....Whether we end up seeing some cure or not...there are way too many contributing factors for me to say Insha Allah...or Insha Krishna....or god willing....

Murali said...

Medical research is a complex field, with lots of dedicated people, even today. If we see the number of diseases in any area and their cures, it is immense. I have heard cases of great creativity and intelligence shown by doctors to identify disease and cures. New cures in areas of ENT do come in even today. ENT, btw, is a field as old as dinos.

Clinical research (drug) is a completely different field. It is about finding a way to manufacture & test drugs for human consumption. If their new wonder drug cures a disease at 1/100th of the cost, it is not in their interest to hold off the drug. Surely, we do not have dearth of patients. They'll price it higher, based on demand and manufacturing capacity, to get back their in investment. But, never hold off.

Medical equipment manufacturers, also would not hold off invention for similar reasons. It will force the consumers (hospitals) to refurbish their equipment.

Free market will find a way to reduce the transaction costs.

The anomaly we see in medical transactions is due to a completely different reason. Expertise and lack of real choice.

Consumers of medical products/services do not have the expertise to rate services. They, in a real sense, do not have a choice. I, as a consumer, have no real say to a doctor like "Show me drug a, b & c with the costs & benefits. I will pick what suits me". And medical community rarely acts against itself. This lack of choice/information is what costs us dearly, not the research.

புருனோ Bruno said...

//This brings me to my question. I am sure I am missing something here and I'd like to know what that is//

Common Sense is Missing

புருனோ Bruno said...

//I am sure I am missing something here and I'd like to know what that is. In my lifetime I haven't heard of a life-threatening disease being cured by a newly invented pill.//

Because your life time is so small :) :)

--

What about TB, Leprosy

What about Polio

--

And then

In India what is the percentage of people using Govt Health Care

What is the percentage using Private Health Care

புருனோ Bruno said...

//This brings me to my question. I am sure I am missing something here and I'd like to know what that is.//

Yeah

Common Sense is Missing :) :)

புருனோ Bruno said...

// In my lifetime I haven't heard of a life-threatening disease being cured by a newly invented pill.//

You are ill informed

Read more :) :)

புருனோ Bruno said...

//I actually haven't seen the big diseases getting knocked out by medical science related improvements.//

Your knowledge is limited

Read More

புருனோ Bruno said...

//Doctors pretty much give the same answers today for brain tumor as they gave in my Grandfather's case 20 years ago.//

Not at all

There has been a vast improvement in the past 20 years

புருனோ Bruno said...

//I assume cure for small pox, polio, MMR etc came before medical industry became a huge business//

So

When do you think Medical Industry became a huge business

Can you specify the year

புருனோ Bruno said...

//Is the research world really as incestual as I describe it to be (That the people who research on a new drug are funded by the same organization that produces existing drugs and the new drug will cannibalize revenue from existing drug)?//

Nopes

You have totally disregarded Government Medical Colleges

That is the main problem with your post

புருனோ Bruno said...

//Would the public ever find out if legitimate cure for cancer has been kept in abeyance because people haven't found a business solution yet?//

No Idea
This is a valid Question

புருனோ Bruno said...

//How would new breakthroughs in medical science find its way to the public?//

Like how all break throughs have found its way to the public so far

Through Journals and Conferences

புருனோ Bruno said...

//Is it purely by accident or is it caused by market forces where errors in the existing system get amplified over time causing the cure to slip through the cracks and into public domain? //

If you (or any other readers) are genuinely interested in knowing more, I can explain

If your aim is just one post, no point in me wasting time

புருனோ Bruno said...

//We should really set aside the notion that medical industry is here for a noble cause.

-KP//

Yes

Private Hospitals are for making money

That is why Health care needs to be nationalised

புருனோ Bruno said...

//The intention of this post is not to put a negative spin on things or propagate a conspiracy theory. Think of it as a question I'd like to think out aloud. Like many dreamers who dream of a bright future - I often dream and look forward to developments in medical science that will bring about a cure for cancer and other deadly diseases. Then I wonder about reality. //

Agreed

Ask specific Questions

I will try to answer

புருனோ Bruno said...

But

Before that

Please remember that

80 % of health care delivery in India is by govt setup

You have based your write up 100 % on Corporate Hospitals (to which you have been exposed)

Suggest you make a trip to a PHC, GH and Medical College Hospital to see the other part of spectrum

புருனோ Bruno said...

I have send you a PDF

Read it and we can discuss further

I said...
This comment has been removed by the author.
I said...

AIDS is rampant in Africa. The pharma companies based elsewhere, mostly in the West. Mitigating drugs cannot be paid for by the Africans. In Western countries where people might be able to pay for it, the volume is too low to make a profit. The cost of research, approvals etc etc. Hard to make a ROI. So why even bother?

Hawk Eye said...

Bruno,

Since you are person with more knowledge than me and i in general respect doctors - i will let go of the some the condescending statement you made regarding me not having common sense. i also thank you for taking time to provide me with some additional information.

i think the risk our conversation runs is - because of the time you have spent on this issue - you are going to look at me as a person who doesnt know what he is talking about and so will respond with that cognitive bias. i request you to focus on the logic of the post, which I dont feel you have done so far.

1. Your pdf file did not answer even a single question i had posted. it was too specific on pricing of drugs in india.

2. that 80% of people go to public sector healthcare in india does not change the logic of the post. You did not address if 80% of medical revenue comes from Govt healthcare or if 80% of all cancer patients went to Govt healthcare. I understand that these may be different.

3. i do not consider TB leprosy and polio as life threatening diseases of my generation. 30+ years is a long time. so i would like focus on elimination of life threatening diseases eliminated after 1980.

4. so i have seen govt hospitals in palaymkottai to madras. i am aware of what they do from a consumer point of view. so i dont understand what you mean when you suggest i check them out- are they doing ground breaking research to cure diseases that I was not aware of ?

if i am ill-informed about something or if you feel that the logic of my post was wrong here is what I would have expected you to say

a. That research on new drugs and cure for life-threatening diseases is done by government which is not influenced by pharma ndustries

b. Opinion of doctors from corporate hospitals or lobbying of corporate hospitals do not influence what pharma companies do

c. Pharma companies and drug researchers or general researchers work independent of revenue interests of hospitals or drug manufacturers or pharma companies.

d. 2-3 major life-threatening diseases that we have found a complete cure/vaccine for since 1980. (for e.g. telling me that doctors can now prolong the life of brian tumor patients by one more year isnt answering my question)

if you had said or provided info that said one of the above a-d points. unfortunately you have not.

புருனோ Bruno said...

//a. That research on new drugs and cure for life-threatening diseases is done by government which is not influenced by pharma industries//

YES
Not always
But, nevertheless, YES


//b. Opinion of doctors from corporate hospitals or lobbying of corporate hospitals do not influence what pharma companies do//

YES

//
c. Pharma companies and drug researchers or general researchers work independent of revenue interests of hospitals or drug manufacturers or pharma companies.
//

General Researchers - YES
Pharma companies work independent of revenue interests of hospitals - YES

//d. 2-3 major life-threatening diseases that we have found a complete cure/vaccine for since 1980.//

ORS for ADD
Hepatitis B Vaccine


// (for e.g. telling me that doctors can now prolong the life of brian tumor patients by one more year isnt answering my question)//

புருனோ Bruno said...

//me not having common sense/

I did not say that you did not have common sense

What I said is that Common Sense is Missing from this post

For example

1. //i do not consider TB leprosy and polio as life threatening diseases of my generation.// Why ? How ?

What do you mean by your generation

Are you saying that No one died because of TB / Polio in the past 30 years

2. // 30+ years is a long time.//
Common Sense says that 30 years in Medical Research is a VERY VERY SHORT TIME

புருனோ Bruno said...

// i request you to focus on the logic of the post, which I dont feel you have done so far.
//
Yes. That is what I have done
Only that your post is off logic from many point of view

it assumes many things

1. Cure of disease is only drugs / medicine

WRONG

Diseases are also cured by
Surgery
Community Intervention

2. If none of my relative of friends died of TB in the past 30 years, it means TB is not a life threatening disease

OBVIOUSLY WRONG

DOTS for TB was introduced within the past 20 year

புருனோ Bruno said...

I request you to read about

DOTS - RNTCP
ORS - The Oral Rehydration Therapy

Do you think that they are not addressing Life threatening diseases.

Sridhar said...

Bruno,

I like your passion for this field. But you are not explaining well to a layman. Your statements are like "It is so because I say so".

FOr example I would not call 80% of healthcare is delivered by government hospital as common sense. Many people don't know about it. You know it because it is your field. I can't say some RF technology that I work on daily that fuels your cell phone to be common sense just because you use cell phone daily.

Romba kovama pesina eppadi podhumakkal purinjupaanga?

புருனோ Bruno said...

Read about ORS at this site

புருனோ Bruno said...

//Bruno,

I like your passion for this field. But you are not explaining well to a layman. Your statements are like "It is so because I say so". //

OK

Please ask specific questions
I am ready to answer

Or

If you answer my simple questions and then ask a question based on it, we can build on

//For example I would not call 80% of healthcare is delivered by government hospital as common sense.//

Agreed
That is why i did NOT mention it as an example in my posts above

//Many people don't know about it. You know it because it is your field//

Exactly
That is why i did NOT mention it as an example in my posts above

// I can't say some RF technology that I work on daily that fuels your cell phone to be common sense just because you use cell phone daily.//
Fully Agreed


//Romba kovama pesina eppadi podhumakkal purinjupaanga?//
No anger at all boss

புருனோ Bruno said...

// I can't say some RF technology that I work on daily that fuels your cell phone to be common sense just because you use cell phone daily.//
Fully Agreed

Now Tell me whether you have any doubt regarding the following

1. TB is a life threatening disease

2. Cholera is a life threatening disease

3. 30 years is a short time in drug and disease research

4. Diseases are cured / managed by (1) Drugs (2) Surgeries (3) Community Intervention

Is there any doubt in the above statements

pradeep kumar said...

I feel it is impossible to withold new breakthroughs in medicine. Talking about Hepatitis B, 2 billion people worldwide have been infected with the virus and about 350 million live with chronic infection. 600000 persons die each year due to complications.
Like Dr.Bruno says, the vaccine for Hepatitis B has been in use since 1986 which will help to control the disease.
We are constantly seeing innovations like vaccines for rotavirus diarrhoea, Human papilloma virus which causes cervical cancer and pneumococcus vaccine.

bwl said...

Good one…
bangalorewithlove.com

krish said...

Very thought provoking, Every time you talk about an illness and a dcotor, the word used is TREATMENT not cure, Talk to a diabetic, heart, stroke or a cancer patient he has to be in treatment life long consuming tons and tons of pills, There is no world called cure, Feeling Sad

Anonymous said...

The most important point you are missing is competition.

Assume every hospital is colluding with each other to keep life saving drugs from the market to protect their own interests.

In this scenario, all it takes is one hospital to actually serve the drug. They can eat everyone else's lunch and run everyone else out of business while enriching themselves.

There is no way for the existing hospitals to prevent this unless they have either muscle power or political power to prevent an upstart from coming up. This is probably difficult in the medical industry (although, it is quite prevalent in other industries. Think telecom), which is why you will still see innovation no matter what the existing players want.

Smart companies already know this fact and will try to be the first one to innovate themselves.

This, precisely is the market force that drives most capitalist innovation.

Venkat said...

You are spot on with your analysis on this post.

The healthcare industry can be divided into 2 categories - preventative and reactive. Reactive medicine addresses the patient's need for reducing painful symptoms. For example, a 50 year old man having problems because of enlarged prostrate can have it removed through surgery. Modern medicine makes this possible. If someone goes with stomach pain and if it is because of appendicitis, Doctors are able to cure by removing it.

Healthcare industry has improved a lot in terms of diagnosis, equipments used for such diagnosis, pills, invasive treatments etc.

But there are no patrons for preventative care. Because there is no money in that side of the fence. According to Dr. William Davis who runs the Track your Plaque (TYP) program, a form of preventative program for cardiac care, "Cardiac care is big business. As a nation, US spent $59 billion on cardiovascular care per year (American Heart Association, 2002). Annual hospital revenues for bypass surgery total $25 billion. Thirty percent of hospital revenues and 50% of profits are from cardiac care. Heart care to a hospital is like the Accord is to Honda, or Windows is to Microsoft-it's a hot seller.We live in an age when hospitals measure their success by the number of coronary bypass surgeries they perform. Incredibly, it is still easier to get a bypass operation than it is to get good information on heart disease prevention."

Added to this, health insurance companies have realized long back that it is economical to spend money on reactive medicine rather than preventative care. Let's consider a manufacturing company that has 1000 employees. How many of them are going to be hospitalized for any reasons anyway? If 20 employees fall sick over a 12 month period for hospitalization, insurance can pay for those 20 folks expenses. If they have to follow preventative care, they have to spend money for all 1000 employees when in reality only a much smaller subset of it are going to be impacted. So they do not stand benefitted by spending on preventative care.

Orgs like ADA, AHA only concentrate on securing/restoring patient rights rather than spending money and effort helping us cure any such diseases because they (ADA and AHA) get identified by these diseases and if the disease is cured, these guys do not have an identity / work / money anymore. So they will stifle anything new that could potentially come as a cure.

The hope can come only from pharma (new or old) companies to come up with any cure. They will try to block as much as possible until the shit hits the fan (the moment for that invention has come and cannot be blocked anymore).

Statins (simvastatin, rosuvastatin, lipitor, crestor) are a $20B per year business. It will be shocking to know that Statins are being administered to patients world over in the name of (dubious) science. And pharma companies spend a lot time and money orchestrating its need.

Thanks

Venkat

Anonymous said...

While some of your observations have been routinely discussed in movies and documentaries before and have some semblance of truth, cancer research is an extremely trying area. I'd highly recommend the Pulitzer prize winning Emperor of all Maladies by Siddhartha Mukherjee for a wonderful history of how much work has gone into developing the stop-gap solutions we now have. While "chemotherapy" has been around for some time, its very essence has changed. The forms of cancer and the unique treatments that are needed are an extremely difficult hurdle to cross.

On the flip side, big corporations are not the only people investing in cancer research -- non profits are heavily into it as well...

Anonymous said...

These questions are really valid and i have wondered about similar things. That is why, I have started reducing my dependence on allergy medication and similar OTC drugs. A few years ago, there was an "allergy season"; now, these products are being advertised all through the year;

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Srikz said...

I think the simple answer is we are still quite young in the field of medical research. We didn't have the tools we had 10 years back for deep-diving research. The tools will continue to come out & so will more answers to problems. We discover new things about our own bodies everyday. We still don't know the scientific answers behind something as basic as Sleep. Yes, we are still young in this field. And considering the greedy human nature, if there's 1/100th of a chance that a new drug might make a person/company rich & famous, people will jump towards supplying it with all their power.

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