Right On: What is Intermountain Healthcare thinking?

Photo by Juan Darien iStock / Getty Images Plus; St. George News

OPINION — High prescription drug prices got you wishing you could make your own?

That’s not very practical for you and me. But as reported by Fox13Now, Utah’s largest employer, Intermountain Healthcare, has announced plans to get into the business.

This sounds like such a bad idea that I wonder if it’s not a bluff.

As a matter of fact, IHC’s chief executive Marc Harrison said, “This is a shot across the bow of the bad guys.” Shots across the bow are meant to intimidate opponents, not damage them.

Martin Shkreli is one of the bad guys who pulled off a textbook case of price gouging. He obtained exclusive rights to two generic drugs, Thiola and Daraprim, both of which treated rare conditions but were vital to those who used them. Given their small volumes, both had only a single supplier and neither had a good substitute.

Shkreli raised the price of Thiola from $1.50 to $30 per pill. Patients need 10 to 15 pills a day. He raised Daraprim prices from $13.50 to $750 per pill. The only thing that changed about either pill was the price.

So why didn’t a competitor step in and offer the same formulation at a price close to the original? After all, these are generics; their ingredients are public knowledge.

The answer is unique to the drug market and poses the challenge to IHC: A new provider of any drug still requires federal Food and Drug Administration approval.

For generic drugs, the FDA has an abbreviated application process. Sounds good until an applicant like IHC discovers that it costs anywhere from $3 million to $10 million to get through the process and that a new applicant has nearly 3,000 other applications ahead of it. Lately it’s been taking three to four years to get approval.

So Shkreli knew he’d eventually have competitors, but with massive price markups and a three or four year window until generics received FDA approval, there was plenty of money to be made.

There are dozens of reputable generic drug companies around. Why wouldn’t one of them enter a market with these huge markups? In fact, if the market is large enough, one or more often do.

Composite image: Lab by i3D_VR, epinephren injection by Roel Smart, both iStock/Getty Images Plus; St. George News

Take the EpiPen saga for example. To those like my granddaughter with severe allergic reactions, an EpiPen can mean the difference between life and death. EpiPens give an emergency shot of epinephrine, a cheap generic drug. They have to be replaced every year whether they are used or not.

Mylan acquired the company that makes the EpiPen in 2007 when they were selling for $57 each and raised the price steadily. Seeing an opportunity, Sanofi introduced the Auvi-Q in 2013 and competition kept prices reasonable.

But when an Auvi-Q defect was found in 2015, Sanofi recalled all its devices. Mylan promptly raised EpiPen prices to as much as $500 each. When Auvi-Q problems were fixed, it came back on the market and EpiPen prices dropped.

EpiPen demonstrates the risks IHC would face in the drug business. Even a large, established company like Sanofi, the world’s fifth-largest drug company by prescription sales, can stumble. There’s no reason to expect that IHC would be faster to market or less susceptible to problems; instead, it’s likely IHC would be worse.

Suppose IHC’s new generic drug company had been around when Shkreli was terrorizing his customers in much smaller U.S. markets.

IHC would need to figure out how to produce Thiola or Daraprim in quantity, which isn’t as easy as it sounds. Next IHC would need to configure its factory and then, tens of millions of dollars later, it would wait several years for FDA approval.

Finally ready to offer its drugs at or near pre-Shkreli prices, IHC would likely force him out of the market. But at what cost? IHC would either take a loss that would be subsidized by its hospital business or if it raised prices enough to cover its startup costs, it could eke out a small profit.

Meanwhile, Shkreli would be off to new specialty drugs and the process would start again. Well, probably not Shkreli: he went to prison for securities violations. But another bad actor could take his place.

For IHC, other risks arise should it proceed with this public service project.

First is management distraction. No matter how hard they try, IHC senior management will be forced to spend a substantial amount of time on starting, operating and continually upgrading the new business, time no longer spent on hospitals and clinics. Keep your eye on the ball.

Second, once its drug factories are in place, IHC will want to use its own output regardless of whether its products are cost-competitive or whether a competitor’s new drug is more effective.

Factors like these are what undid conglomerates in the 1960s, a business model still bedeviling the likes of General Electric today.

IHC undoubtedly has polished business plans prepared by management consultants explaining how it will lower costs, serve the public and still make a profit.

Color me skeptical. IHC should stick to firing warning shots across the bow of the generic drug industry rather than spending millions tilting at windmills.

Howard Sierer is an opinion columnist for St. George News. The opinions stated in this article are his own and may not be representative of St. George News.

Email: hsierer@stgeorgeutah.com

Twitter: @STGnews

Copyright St. George News, SaintGeorgeUtah.com LLC, 2018, all rights reserved.

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8 Comments

  • Kyle L. February 15, 2018 at 8:26 am

    Maybe some of the money spent on medicare and medicaid should be shifted to pay for the operating costs of the FDA and the fees for applications completely dropped for manufacturers if they agree to set pricing for a period of time. The offset in price for medications would balance the money taken from the medicaid and medicare budgets. Also the FDA could offer this program to specific drugs that have the biggest cost on medicaid and medicare. Just a thought.

    • tcrider February 15, 2018 at 4:59 pm

      Are you stupid, take money away from medicaid?? you must be from the bundy ranch, most of the
      people from the bundy ranch will never be eligible for medicaid or social security because they never
      contributed to anything in their miserable life except trying to fill a septic tank.

      • Kyle L. February 15, 2018 at 8:41 pm

        After reading your comments in the past I know not to take anything that you say to seriously. You are at best an uneducated bike rider. BTW Whats the difference between a Harley and a Hoover? You can fit two dirt bags on a Harley.

  • 15secondsoffame February 15, 2018 at 12:46 pm

    Did you do any research whatsoever before you started tilting at your own windmill? I know “research” is a foreign word to many journalists (“don’t bother me with details!”), but they said they would most likely start with 3rd parties that already are licensed and ethical (unlike …well, I won’t go there), because they knew start up of a facility would take several years. Seriously … at least look at their web site or do an internet search. You come across as an idiot.

    • tcrider February 15, 2018 at 4:56 pm

      I totally agree with everything you wrote and would like to add, that the authors opinion could be self serving,
      who knows maybe Howeird owns stock in some of the corrupt drug companies.

  • commonsense February 15, 2018 at 8:41 pm

    Price gouging must be stopped. Companies take life saving drugs and conspire to fix prices and eliminate competition for large profits. This is wrong and Trump has promised to stop it. We will see.

    • Striker4 February 16, 2018 at 12:11 pm

      Hang in there prophet Bob I agree with you 100%. let’s lower the price of health care and medication so you can afford to stay on your meds

  • SSTEED February 17, 2018 at 4:22 pm

    I read the article just for the Quixote reference; but I’m happy to say I’m not a customer.

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