The “real” scoop on pharmacies, drug companies, and health insurance plans


One of the funniest comedians I ever saw in person was Robert Klein, back in 1973, when I was a law student at Harvard and he performed at the Passim Coffee House in Harvard Square. One remark he made that night comes back to me whenever I think about the healthcare industry.

Klein’s comic style was to point out something we all see every day and to give us the “real” scoop on it. I remember him talking about life insurance and contrasting the TV ads at the time, which proclaimed “Insurance is love.” He then said: “That’s not what life insurance is really all about. The real message of life insurance is “I bet you every day until you die that you don’t die.”

Klein pointed out the obvious about the real sources of profits from the life insurance business: accurately pricing the risk based on correctly predicting how long the people they insure will live and making money on the insurance premiums they collect until that time.

Unfortunately, the healthcare business has many extreme contrasts between what marketers like us to believe and what actually makes money. I thought about this recently when CVS made the “courageous” decision to stop selling cigarettes in its pharmacies. What made the decision “courageous?” CVS makes far more money selling cigarettes than it does not selling most prescription drugs.

In fact, CVS and the other major pharmacies make far more money selling cigarettes, candy, and unhealthy sodas and snacks than they do selling pharmaceuticals and health-promoting products. CVS’ decision is “courageous” because they have lived up to what the brand of a pharmacy should be, but they have had to sacrifice what pharmacies actually do, which is to make a lot of money selling products that kill people or make it more likely that they will have life-shortening chronic diseases.

Pharmaceutical companies are very good at promoting the fact that they develop, produce and market drugs that treat illnesses and diseases. However, the dirty secret of pharmaceutical companies is that they are far more likely to promote a drug like Viagra, a lifestyle drug that, while approved for therapeutic uses, is marketed to many men because it enables them to have longer and better sexual pleasure.

Why is this the case? The brutal reality is that there is a much larger and more profitable global market for Viagra than for many drugs that cure or control illnesses. It is exceptionally difficult today for pharmaceutical companies to get focused on new antibiotics, because most individuals take them for an acute condition for a limited period of time and then stopping taking them. The prescriptions for them are almost never refilled.

However, a drug like Viagra is highly likely to be used over an extended period of time and to have multiple prescriptions written and refilled. It is far more likely to generate huge profits than the next breakthrough antibiotic. Hence, more money and marketing muscle will be applied to it and more people will use it for non-therapeutic benefit than for an antibiotic.

As a general rule, pharmaceutical companies like drugs of lower societal benefit, as long as they arguably deliver some benefit, if they can be prescribed over a lifetime, than a drug that delivers great benefit for a limited period of time.

The other “dirty little secret” about the big pharmaceutical companies is that they spend far more money on sales and marketing than on research and development. Their sales efforts, while less abusive than a decade ago, when highly attractive women were recruited to peddle samples and gifts to doctors, have far more economic return than investment in new drugs.

Health insurance companies and many other independent firms are successfully selling health and wellness coaching programs. There are more than 150 health and wellness firms, and the number keeps growing. Yet, a number of recent studies, most recently a study conducted by Soeren Mattke of the RAND Corporation relative to Pepsico’s lifestyle management program, demonstrate conclusively that these health and wellness programs, or, as he calls them, lifestyle management programs, produce no economic return.

See www.rand.org/content/dam/rand/pubs/research_briefs/RB9700/RB9744/RAND_RB9744.pdf

The fee structure for many of these programs for the employers who buy them actually makes it more likely that they will not produce a significant economic return. The vendor charges a per member-per month fee, regardless of the overall usage of the program. Not surprisingly, the vendor benefits if it can incur staffing costs at a much lower rate than the revenues it collects from the employer health plan. I call it the “fitness center business model,” since many fitness centers count on collecting membership fees from people who will use them once, or not at all, and then never come back.

The economics of these programs would be horrible for vendors if they had to serve every individual who could benefit from their services. The employer health plan would benefit from potentially lower healthcare costs, but the fees the vendors would have to charge and the staffing they would have to add would cause many employers to discontinue such programs.

Why do employers buy these programs, when the evidence on their effectiveness is not there? It makes the benefits people look good for buying a blue-chip health promotion program for the plan members. It may marginally reduce absenteeism. It particularly results in positive comments about HR and Benefits to the CEO. But what it does not do is reduce healthcare costs that are killing employers of all sizes.

Unfortunately, the best bargain in healthcare, which is a bargain because health insurance companies, Medicare, Medicaid and all other payers undervalue it, is the consultative care we receive from our primary care physicians, which include internal medicine practitioners, family practice doctors, pediatricians, and, some would argue, ob-gyn specialists for adult women.

We undervalue what really can help people the most and we allocate healthcare system resources, including the pharmaceutical companies, the retail pharmacies, and employer-sponsored health plan dollars to many products and services that either do not improve health or healthcare, have a marginal benefit at best, or are very harmful.

I can only imagine what Robert Klein would say about all this if he reappeared at the Passim Coffeehouse and delivered a rip-roaringly funny comedy routine about our healthcare system.