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?