Eli Lilly CEO on Nationalized Health Insurance: Cost Effectiveness Stifles Innovation

Pharmaceutical giant Eli Lilly & Co. (LLY) CEO John C. Lechleiter’s Wall Street Journal opinion piece “Health-Care Reform and the 'Innovation Test'” attacks the establishment of a government health insurance option for all Americans. The subtitle “Government-run insurance plans have curtailed access to new medicines” is not even supported in the text, unless he is implying that America is on the path to adapting the European model for cost-benefit reimbursement screening.

First I will address why a government health insurance option is imperative for healthcare reform, and then discuss each of Lechleiter’s arguments. Private insurance includes many risks beyond preexisting condition exclusions, medical underwriting and policy rescissions. Each policy contains a wide array of limits and restrictions such as the number of doctor visits per year on co-pays, maximum annual and lifetime benefits by finally divided subcategories and overall, pre-approvals, and network restrictions.

Let’s say you are one of the few that has read and understands the hundreds of pages in your health insurance policy and thought you did enough homework to fully comply. You obtain your preapproval, and your hospital and surgeon are in your insurance policy’s network. Then you’re disheartened to learn that your pre-op lab tests were sent to an out of network lab without your knowledge and the radiologist whom you never met, does not accept your plan. To make things worse, the hospital assigns an out of network anesthesiologist for your surgery, without you approval.

As you can see in this example, even with high quality health insurance you cannot stop medical providers from gaming the system at your expense. The private health insurance industry says that new regulation is needed for consumers to regain trust. I say the government option is the only way to set the standard for trust. Under a private only insurance environment, no one is totally secure.

Now let’s exaggerate our example: You are sent by ambulance to an out of network hospital. Your plan only covers 50% of the policy’s predetermined rates for medical services. Your responsibility is the other 50% of the predetermined rates plus any charges in excess of the predetermined rates. The insurer does no negotiation on your behalf. Contrast this with standard Medicare where seniors always only pay 20% of Medicare’s dictated rates. Which leaves you feeling more secure?

In general, Lechleiter claims that private companies are the engine of medical innovation and government inhibits innovation. He fails to distinguish between basic research and application, and does not acknowledge that the government through the NIH and university grants funds most basic research. Most biotech companies are started by professors incubated in the university system, funded by government grants. Further, the NIH and US Military directly fund the most cutting edge research and clinical development at small biotech companies. Vical’s (VICL) DNA plasma based H1N1 flu vaccine is an example.

Lechleiter conveniently leaves out that the pharmaceutical industry spends far more on marketing, sales and promotion than research and clinical development. Instead he wails out against the possibility of the government dictating prices on branded medicines; claiming any type of cost control will stifle innovation. Yet Lilly and other innovative pharmaceutical companies are operating very profitably in Europe, and show no signs of leaving. Does Lechleiter believe Americans should pay more for pharmaceuticals than Europeans?

Lastly, Lechleiter asserts that “private insurers and patients tend to control costs by insisting on value -- forcing companies to demonstrate how the effectiveness or broader savings generated by their product justifies its price.” If this were true, pharmaceutical product life cycle management would be ineffective and healthcare inflation would be well controlled. As I wrote in “GM and UAW Retiring Viagra and Nexium”, private insurers have no incentives to either seek value or manage costs.

Just as the private insurance industry is realizing they cannot survive by simply rejecting any customer that might incur medical expense, big pharma also must come to terms with the fact that innovation cannot exist in a vacuum without the gravity of cost. Only the government has the resources and motivation to determine cost effectiveness. Is one month of life worth $10K, $20K, $30K or $100K?

Don’t let the pharmaceutical industry scare you into believing cost effectiveness will bring rationing. Rationing exists now. When high cost medicines are included in insurance policies, consumers are rationed out by the price of insurance. Only the government can provide an effectiveness basis for rationing. I know this will impact pharmaceutical industry profitability, but they must adapt. The industry will only create value if they have to.

The government subsidizing private insurance will only increase the profits of both the insurers and drug companies, with no real cost containment. Lechleiter just wants more customers while maintaining the status quo. Lilly is joining Merck (MRK), Pfizer (PFE) and UnitedHealth Group (UNH) with their heads in the sand.

Disclosure: Author is long PFE and VICL.

Comments

[PastTense:]

I quite agree. And note that overwhelmingly people have the same types of illnesses and are cured by the same types of medicines throughout the world (although there is some variation in the prevalence of various illnesses). So the creation of new drugs depends on the health care financing structure throughout the whole world.

May 14 04:39 PM

[Jason722:]

Your arguments about the inefficiency within current plans offered by private insurers is a good one. However, your leap to a national government-provided solution is still missing the point. I fully agree that everyone in the industry gauges whoever they can. But I would also argue that the consumer is more to blame for the skyrocketing costs of healthcare. The consumer uses a two-pronged attach: they over-use medical care (because for most 'covered' individuals, it is free (or basically free) after premiums are paid) and they sue for any medical outcome that was not 100% in their favor.

A nationalized health insurance system does nothing to address the consumer-based woes in the system. First of all, it is a government system, created by those seeking re-election. Politically, it will be much easier to demonize the pharma, biotech, and medical industries and take a whack at the overall system costs with price controls.

Even worse, as a nationally run system, it will be run corruptly and inefficiently. Look at all the medicare fraud now. It will get worse with all that money available.

Lastly, and to me this is the core of the issue on both side for me, I do NOT want my taxes being used for that others can go to the doctor every time they are in a room with someone who sneezes.

I agree there is not one solution that will cure all the problems of health care. This is no small problem. But I firmly believe actions must be taken on both sides of the transaction for any meaningful resolution to occur without a loss of service/quality/innova... And I have zero confidence the government, in any administration, is capable of pursuing the appropriate measures.

May 14 07:18 PM

[Riley:]

Taxes will go up that peopl won't believe. If you don't believe me talk to people from Canada and Europe Gas $10.00 Gallon and that is just the beginning, every thing they buy in Canada is a lot higher than here I Know i have friends who live in Canada. and you can't leave the country if you are old are have a health problems!!!!!!

May 14 07:37 PM

[redbaron:]

If Lily wasn't spending twice (or more) on marketing, as research, there might have been some legitimacy to the arguements their CEO presented, but in my mind, the fact that they are spending much more on marketing then on research, negates all of his arguements. If drug companies want to be taken seriously on some of these points, they should have been acting more like serious scientific research organizations, rather than just a marketing group. IMHO

May 14 09:42 PM

[User 414308:]

I do not agree on U.S. Government reforms on healthcare or in the any other form of healthcare provided by Pharmaceutical Companies, the same thing will prolong the agony of many americans, why? It is all business, they cannot garantee a total cure, they want us to maintain those drugs, like maintening our sickness, not a maintenace of health........for me it is better to use Herbs as an Alternative Medicines to prevent and cure many illness. That is a true meaning of Business... you help people and vice versa....

May 14 11:32 PM

[Shotei:]

The aurthor of this artical could have saved a lot of space and time by saying , these capitalist companys are wrong because look how well socialist/communist countrys are doing. (bowing down to hier obama)

May 15 11:49 AM

[ladocsc:]

Insurance companies are the modern day equivalent of stock brokers -- they are just useless administrative middlemen making money but providing no value. They will disappear -- I would short every one. The goal of insurance is to spread risk, and hence the larger and more inclusive the pool, the better the risk is spread. Including all 300 million americans in 1 risk pool is the most efficient way to insure all of us, and having 1 administrator administer that risk pool is also the most efficient. The for profit insurance system has demonstrated its inefficiency and its ineffectiveness -- I cant imagine anything worse. Yes, we will have a single payer insurance system and yes there may be some politics around the edges of what is covered. But even the most stringent of systems, such as Australia, recognize true innovation and provide a fair return to innovative companies. Truly innovative pharma companies will do just fine.

May 17 07:10 AM

[RollingMyEyes:]

It's wonderful that Medicare's participants are never charged more than 20%, even for "out of network" care. The problem is, Medicare will reportedly be broke by 2017. What good will it be then?

Universal Health Care, as proposed by Obama, is Medicare multiplied by an order of magnitude, and in this era of absolutely insane deficit spending, is completely unsustainable without taxing the productive segment of this country into oblivion.

The author likes to pontificate about marketing vs. research cap-ex.
However, he conspicuously left out the *largest* pharmaceutical sinkhole, which is government over-regulation. "Overdose: How Excessive Government Regulation Stifles Pharmaceutical Innovation" by Richard Epstein is a very good read, for those interested in fact, rather than the rhetorical and myopic BS found in articles like this.

May 18 10:17 PM

[cdcas:]

"I do NOT want my taxes being used for that others can go to the doctor every time they are in a room with someone who sneezes."

Have you ever considered that the way the current health care system is run may perpetuate this problem? The average person, having little expertise on health issues, does not know when to go to the hospital. The simple solution to this is to have a doctor on staff 24-7 who can answer the phone and tell an individual if his or her health condition is severe enough to warrant going to the hospital. It may even be possible to have one doctor serve patients from multiple different hospitals.

This should be done, nationized health care or not.

Jul 07 10:39 PM

[Willerundi:]

I'm still trying to figure out how a 10ml bottle of insulin still costs $60... wasn't it discovered in something like 1920...? Banting and Best...? How come there isn't a generic by now...? how hard is it to make to justify that...?

Jul 31 11:51 AM