Fraud and abuse occur at every point in the drug distribution chain. Although most of the people who help bring drugs to market are honest, many are not. Consequently, the variety of schemes and scams is enormous. This chapter begins with a case involving a medical professional whom no one would ever suspect: an admired and successful local pharmacist.
In 2001, Kansas pharmacist Robert Courtney was worth over $18 million and enjoyed many of the trappings of wealth.1 He owned a mansion, collected luxury cars, and took frequent ski trips to Colorado. He held an esteemed position in his church, to which he had pledged $1 million to the building fund.
No one knew that Courtney amassed his fortune by diluting prescription drugs. Make two doses out of one and you double your money. Altogether, Courtney diluted 98,000 prescriptions for 72 different drugs taken by 4,200 patients. He diluted all types of drugs, including chemotherapy medications and antibiotics. How many of his patients died who might have been saved? No one can say for certain. In 2002, Courtney pled guilty to a host of crimes and was sentenced to 30 years in jail.
When federal agents were first alerted to Courtney’s misdeeds, they refused to believe his actions were intentional. According to FBI Agent Judy Lewis, “everybody who sat around that table that day had the same feeling, which was: ‘There’s got to be another explanation. I don’t care how it looks. No one could do this.’”2
Why did hardened FBI agents, who spend all their time dealing with criminals, react with disbelief? Pharmacists enjoy a wonderful reputation, and we trust them to do the right thing. Most of the time, we are right to do so. But our politically controlled, third-party payment system creates endless opportunities for pharmacists and other health care providers to enrich themselves by cheating. Persistent exposure to bad incentives is inherently corrupting. Although most providers draw the line at hurting people, when serious money is on the line, some do not. And because policing is so spotty, the immoral ones rarely have to worry about being caught.
Courtney’s wrongdoing occurred over several years. Why did no one notice? One obvious reason: medical treatments fail all the time. Many cancer patients die even when they receive full doses of chemotherapy drugs. Some infections are antibiotic resistant. Until Courtney’s scheme was discovered, the patients who died after receiving diluted drugs were thought to have lost nature’s lottery. Neither they nor their loved ones had any reason to suspect a monster was at work. Courtney also flew below the radar of those whose job was to look for fraudsters.
Courtney’s downfall was precipitated by, of all people, a sales rep for a drug company who received commissions when Courtney purchased drugs through him. Somehow he learned that Courtney was dispensing far more of his company’s chemotherapy product than he was buying. He figured Courtney was giving him the end run by purchasing drugs on the black market, and he expressed this concern to a nurse who happened to work for an oncologist. The nurse passed the story on to her employer, who had been ordering chemotherapy meds from Courtney for years. The doctor sent one of Courtney’s prescriptions to a lab. When the results showed that the drug was diluted, the oncologist contacted the feds.
Courtney is an outlier. Most pharmacists are honest. But with almost 300,000 of them dispensing medicines in the United States, if even 1 percent are not, that is a lot of pharmacists gaming the way we pay for drugs.
In 2012, an epidemic of fungal meningitis infected more than 700 people and killed 64 of them. It was the deadliest outbreak of the disease ever in the United States. The infections and deaths occurred because a compounding pharmacy, the New England Compounding Center (NECC), used unsafe procedures and expired ingredients when producing vials of a steroidal medication.
Barry Cadden, the owner of NECC, was not convicted of homicide, however. Instead, in 2017, a jury found him guilty on more than 50 counts of racketeering and mail fraud for having put misbranded drugs into interstate commerce with the intent to deceive. A judge sentenced him to nine years in prison. In October 2017, Glenn Chin, a second NECC pharmacist charged in connection with the outbreak, was convicted of racketeering, conspiracy, false labeling, and mail fraud, but acquitted of murder.3
As frauds go, the NECC case is fairly simple. NECC was a badly run outfit that made unsafe drugs and sold them to the public. Other schemes involving compounding pharmacies are more involved.
At Fort Hood, Texas, for example, 10 people allegedly bilked TRICARE, the health insurance program for soldiers and their families, out of more than $102 million by paying people $250 a month to use compounded creams for pain, scars, and migraine headaches, and for taking vitamins. The ringleaders, Richard Cesario and John Cooper, disguised the scam by characterizing the payments as compensation for participating in a medical study, and then billing TRICARE for the compounded creams and vitamins. They even created a charity, the Freedom From Pain Foundation, to make the payments seem legitimate. The study was a hoax. Cesario and Cooper also allegedly used the charity’s funds to bribe doctors to prescribe their medications.4 Cesario and Cooper had no education or licensing in the medical, nursing, or pharmaceutical fields.5 Yet they took TRICARE for more than $100 million, and they lived lavishly. Their wealth included four houses in Texas, a fifth in Florida, more than a dozen bank accounts, and 21 motor vehicles, including “a Jaguar, a Maserati, a Ferrari, a Porsche, an Aston Martin and three Mercedes-Benz; two motor coaches; and one boat.”6
Two other scams involving compounded creams occurred in Florida, where separate groups of fraudsters milked private insurers and TRICARE for $157 million and $175 million over two to three years.7 The smaller scam, which ran from October 2012 to December 2015, involved A to Z Pharmacy in New Port Richey and several other pharmacies located in Miami. Collectively, the conspirators submitted $633 million in false claims to Medicare, TRICARE, and private insurers, and received $157 million in payments. The leader of this scheme, Nicholas A. Borgesano Jr., pled guilty in late 2017, bringing the total number of guilty pleas to eight.8 In his plea agreement, Borgesano admitted that he and his fellow conspirators “manipulated billing codes in the reimbursement claims and submitted reimbursement claims for pharmaceutical ingredients they did not have.”9 They also “paid kickbacks and bribes in exchange for prescriptions and patient-identifying information used to further the scheme, including to a physician in exchange for the physician signing prescriptions for patients he never saw.”10
The larger scheme, which lasted two years and led to 16 indictments, was run out of Boca Raton, Florida. Its mastermind was Clifford Carroll, who joined several co-conspirators by confessing his guilt in 2017. Carroll and others also paid kickbacks to corrupt doctors and other medical professionals for prescribing compounded pain medications. “In some cases, the co-conspirators received as much as $31,000 for a single tube of compounded cream medication from private insurance companies.”11 They bribed patients too, offering them payments disguised as reimbursements for data collection. In an interesting twist, the conspirators purchased failing pharmacies and used them as fronts for their operations, and they created call centers to encourage military veterans and other patients who had previously been prescribed medications to refill their prescriptions or obtain new ones.
According to a federal complaint filed in 2017, however, the mother of all schemes involving compounding pharmacies—which is said to have taken TRICARE, Medicare, other public and private payers, and pharmacy benefit managers for more than $400 million in four years—was centered in Hattiesburg, Mississippi. Advantage Pharmacy allegedly pulled in at least $155 million. Two other outfits involved in the scheme, World Health Industries and Medworx, are said to have collected about $120 million and $130 million, respectively. 12
The complaint alleges that the pharmacies “maximize[d] profits from the fraud scheme” by “creat[ing] their own demand for compounded medications.”13 They did this by “engag[ing] a series of marketers to provide incentives to doctors to write prescriptions for compounded medications and divert patients to the pharmacies.”14 The marketers also identified “complicit doctors willing to write prescriptions for compounded medications for patients whom they never saw and where there was no determination of medical need.”15 The marketers recruited willing patients too, and compensated them by paying kickbacks. Can you imagine this happening if the patients were spending their own money? Neither can we. The dominance of open-ended third-party payment makes massive fraud possible—and easy to commit.
With such astonishing sums taken in, it is no wonder the people alleged to have run these scams became fabulously rich. Before setting up Medworx, Thomas E. Spell Jr., whom the feds identified as a principal architect, made less than $200,000 a year. “After managing Medworx for only 18 months, he was able to amass assets estimated to be worth more than $12 million.”16 As a group, the participants did extremely well. The assets seized by the government included 8 Florida homes that were collectively worth over $5 million, another 43 properties in other states, 24 vehicles, 5 planes, 2 boats, and 80 bank accounts containing a total of $15 million.17 The principals seem to have been printing money.
To date, two people have been criminally charged in this scam, but the four “key” names referenced in a civil forfeiture filing have not yet been charged.18 More details will presumably emerge as the drama plays out in court.
When you go to the drugstore to buy aspirin, ibuprofen, or some other pain reliever, you know that capsules and tablets are interchangeable. An aspirin pill and an aspirin capsule contain the same ingredient: acetylsalicylic acid. You may prefer one to the other. You may find capsules easier to swallow or dislike the aftertaste of pills. Or you may not care and buy whatever’s on sale.
Because capsules and tablets are so similar, people won’t pay $25 for a bottle of aspirin capsules when a bottle of aspirin tablets can be had for $5. They will buy the tablets and save $20. This explains why retail outlets sell capsules and tablets for about the same price. Consumers care about the price, and their ability to switch deters overcharging.
Where third-party payment predominates, different ways of delivering the same amount of the same drug can fetch wildly different prices. Consider ranitidine, the generic form of a popular heartburn medication (Zantac), typically dispensed in tablet form. When the patent on Zantac expired, ranitidine tablets became the approved generic replacements for the original medication. Knowing that ranitidine tablets were cheap and would be in high demand, Medicaid set a low standardized reimbursement level. This payment was known as either a Federal Upper Limit or a state Maximum Allowable Cost (MAC). But no similar limit was placed on the capsule form of ranitidine—presumably because it was rarely used and there was no reason to expect it to be dispensed in large numbers.
This quirk in Medicaid’s payment system made it much more profitable for pharmacies to dispense ranitidine capsules than ranitidine tablets. Illinois’ Medicaid program paid only 34 cents per ranitidine tablet, compared to $1.36 per ranitidine capsule.19 Tennessee’s Medicaid program paid 32 cents per tablet and 87 cents per capsule.20 Florida’s Medicaid program paid 28 cents per tablet and 91 cents per capsule.21
The reverse was true for fluoxetine, the generic version of Prozac, the popular anti-anxiety drug. There, Medicaid set a MAC for capsules but paid higher prices for tablets. In Florida, a pharmacist who filled a Prozac prescription with fluoxetine capsules received 57 cents per capsule from the state, whereas a pharmacist who delivered fluoxetine tablets received $1.77 per tablet—three times as much.22 Indiana’s Medicaid program paid 69 cents per fluoxetine capsule and $1.91 per tablet.23
Medicaid even paid different prices when pharmacists delivered the same amount of the same medicine in the form of two tablets rather than one. Buspirone, the generic form of Buspar, another anti-anxiety drug, was normally prescribed in single 15 mg tablets, so Medicaid set a low MAC on that tablet dosage. But Medicaid’s payment system set no MAC for 7.5 milligram (mg) buspirone tablets. The result was that a pharmacy that dispensed two 7.5 mg tablets would be paid more than a pharmacy that dispensed one 15 mg tablet, even though both pharmacies dispensed the same amount of buspirone. Michigan’s Medicaid program paid more than five times as much for the two-pill combination as for the single buspirone pill—$1.70 vs. 28 cents.24 In Tennessee, the single 15 mg tablet fetched 49 cents while the price for the pair of 7.5 mg pills was $1.93.25 Florida, Indiana, Louisiana, and Virginia all paid at least three times as much for the two-pill combination as for the single pill.26
On a per-tablet or per-pill basis, these differences seem modest, but they can add up to big money for pharmacies that fill lots of prescriptions. Walgreens, CVS, and Omnicare, a large pharmacy specializing in long-term care facilities, collected hundreds of millions of dollars from Medicaid by swapping dosage forms.27 Start with Walgreens. In July 2001, it decided to automatically switch all prescriptions for ranitidine tablets to capsules.28 Walgreens’ supplier for ranitidine capsules estimated that Walgreens would increase its annual profits by $75 million by making this one simple change.29 Put differently, the company would force taxpayers to pay $75 million more than necessary to provide ranitidine to Medicaid enrollees. Fluoxetine tablets would become “the #1 Rx profit item in the company.”30
Omnicare pulled a similar trick with fluoxetine and buspirone and reaped similar rewards. In a December 2001 email, Dan Maloney, the company’s head of generic drug purchasing, reminded employees that “on average every Buspirone switch is worth about 38 dollars and [every] Fluoxetine 18 dollars.”31 In another email, he wrote of having “shared” with other managers a “financial analysis on the two drugs [fluoxetine and buspirone]” showing that the switches for both drugs “combined were worth well over half a million per month in profits.”32
This wasn’t even Omnicare’s first pharmacy scam. It had previously been caught stealing from Medicaid by failing to reverse the charges for medications that were returned unopened after being prescribed for patients who had died. Omnicare was effectively on probation for that earlier offense, since it was subject to a Corporate Integrity Agreement with the feds.33 But it still entered into the drug-switching scheme.
The drug-switching scam lasted only three years—but not because Walgreens or any other participant suddenly grew a conscience. Walgreens was caught by a whistleblower who filed a lawsuit accusing the company of filing false claims. When the federal government and several states’ attorneys general joined the lawsuit, the heat became too much for Walgreens to bear. Separate lawsuits were filed against CVS and Omnicare. All three companies settled these cases. Omnicare paid almost $50 million, and Walgreens and CVS paid roughly $35 million each. All three companies denied wrongdoing, and none of their employees went to jail.
A closer look at the drug-switching scandal reveals a hidden player and an additional wrinkle common to all three lawsuits. Sources report that Par Pharmaceuticals, a manufacturer of generic drugs, figured out how to game Medicaid’s pricing system and explained the scam to the pharmacies. Not coincidentally, Par also manufactured ranitidine capsules, fluoxetine tablets, and buspirone tablets in the 7.5 mg size. Par made money by selling these products—and to help increase its sales, it gave significant discounts to pharmacies that achieved target levels of drug conversions. Because Par was the only supplier of ranitidine capsules, fluoxetine tablets, and 7.5 mg buspirone tablets, it could charge monopoly prices and make much more money.
Par and the pharmacies needed one another to pull off the scheme. Par needed pharmacies to switch patients from the prescribed medications over to Par’s products, and the pharmacies needed Par to supply medications in forms that were not subject to Medicaid’s price caps. Thus, Par made money by selling drugs to Walgreens, CVS, and Omnicare, which made even more money by bilking Medicaid.
A whistleblower filed suit against Par in 2006. The federal government and numerous states joined the suit in 2011. However, in August 2017, these cases were dismissed on several technical grounds.34 It remains to be seen whether the plaintiffs will appeal.
Saline and dextrose intravenous (IV) bags are about as low-tech as it gets in health care. A saline IV bag contains salt and water. A dextrose IV bag contains sugar and water. Both cost less than 50 cents to manufacture and both sell for about $2, give or take a few cents. Would it surprise you to discover that Louisiana’s Medicaid program paid $928 per bag for both? Eventually, Louisiana Medicaid wised up and sued Baxter International for fraud.
Louisiana wasn’t the only state taken to the cleaners, and saline and dextrose IV bags weren’t the only products whose prices were rigged. The story of how Louisiana, other states, and the federal government came to pay through the nose for saline solution, dextrose, and many other pharmaceuticals is one of the greatest scams in the history of health care. It centers on something called the average wholesale price (AWP).
For many years, Medicaid paid for drugs using a formula based on AWPs. But AWPs come in two varieties. There’s the real AWP—that is, the amount pharmacies actually pay wholesalers for their products. And there is the phony AWP—that is, a higher number listed in a book that determines what Medicare and Medicaid pay. The real AWP for saline solution was a couple of bucks. But Medicare and Medicaid paid absurdly large amounts because drug companies listed phony AWPs that were far higher. The problem was not limited to saline; phony AWPs were pervasive.
Phony AWPs appeared in several pricing guides, the most prominent of which is called the Redbook, but the same analysis applies to them all. Pharmaceutical manufacturers and wholesalers would send numbers to the Redbook that were supposed to reflect the prices that wholesalers were actually charging pharmacies, but often did not.35 For branded drugs, drug companies inflated the listed prices by roughly 20–25 percent. For generic drugs and other products, the sky was the limit. Because Medicaid and Medicare based their payments for drugs on the prices shown in the Redbook, both agencies greatly overpaid. Patients overpaid too, because their copayments were also based on phony AWPs.
Here’s an example of how the scam worked. In April 2000, vancomycin, an antibiotic made by Abbott Laboratories, had a published AWP of $68.77. Medicare paid 80 percent of the AWP less 5 percent, or $52.26. The patient contributed another 20 percent of the AWP: $13.75. But the vancomycin actually cost the pharmacy only $8.17.36 That was the real AWP. The pharmacy thus made $57.84 in profit on an $8.17 drug, a risk-free return of about 700 percent.
The spread on vancomycin was exceedingly healthy, but the spread on some other drugs was far larger. A class action complaint filed by patient advocacy groups against more than a dozen drug companies contains the following allegation: “In the 2000 edition of the Redbook, Defendant BMS [Bristol-Myers Squibb Company] listed the AWP for a 20 mg vial of injectable Vepesid (Etoposide) as $1,296.65. BMS sold the exact same drug to a group purchasing organization for $70 per 20 mg vial.”37 When “reimbursed” at Medicare’s rate, a $70 vial of Vepesid generated a profit of $1,161.82, a risk-free return of more than 1,600 percent.38
The spreads between real and phony AWPs grew so large in part because many drugs had several manufacturers who competed for pharmacies’ business. To win, manufacturers had to offer larger spreads between their actual charges and the phony numbers they published in the Redbook. The race was actually a contest to see who could squeeze the most money out of the dumbest buyers around: Medicare and Medicaid. Pharmacies kept the competition going by switching to whichever manufacturer offered the largest spread.39 The profits were enormous. According to the director of health care issues for the General Accounting Office, Medicare alone paid pharmacists almost half a billion dollars more than it should have in just one year.40
One can get a sense of the scale of the AWP fraud, and the ways in which phony pricing corrupted everything it touched, by examining the details of an $884 million settlement, which included a $290 million criminal fine, between TAP Pharmaceutical Products Inc. and the Department of Justice. The 2001 settlement was the largest payment in the history of health care fraud litigation at the time. TAP manufactured Lupron Depot, a prostate cancer drug. It gave doctors, primarily urologists, free supplies of Lupron with the understanding that they would bill patients and Medicare for the drugs as if the drugs had been purchased and dispensed. TAP also gave urologists other inducements to prescribe Lupron: off-invoice price discounts; free trips to expensive ski and golf resorts; “educational grants” and “consulting fees” that were really cash payments running into the tens of thousands of dollars with no strings attached; payments of bar tabs and holiday expenses; financial support for advertising expenses; and debt forgiveness.41 The federal investigation commenced after TAP sales representatives effectively offered a bribe—a $65,000 “education grant” plus the opportunity to exploit Medicare—to the director of pharmacy programs at Tufts Health Plan in Massachusetts. The director called the cops. Many other doctors accepted TAP’s bribes, however, and sales of Lupron soared.
Why did TAP stoop to buying physicians’ loyalty? Partly because a competitor, AstraZeneca, was doing the same thing. AstraZeneca produced Zoladex, a drug that was functionally similar to Lupron but significantly cheaper. AstraZeneca was using the same tactics to win business.42 In 2003, AstraZeneca paid $335 million to settle with the Justice Department. The settlement included a criminal fine of almost $100 million and a guilty plea.
TAP and AstraZeneca engaged in shady dealings not only because enormous sums were at stake but also because third-party payment means there is almost never anyone minding the store. From 1991 through 1998, Medicare shelled out more than $2.5 billion for Lupron treatments plus another $513 million for Zoladex.43 Private insurers and patients contributed about $1 billion more.44
The lure of easy money seduced many physicians. By the time the Justice Department concluded its prosecutions of TAP and AstraZeneca, six practicing urologists had pled guilty to crimes and two more faced prosecution.45 Altogether, hundreds of urologists pocketed millions of dollars by charging for thousands of doses of Lupron and Zoladex that TAP and AstraZeneca gave them for free and by receiving AWP-based payments from Medicare and patients that greatly exceeded their actual costs.
In market economies, producers profit by selling products more cheaply. Lower prices pull consumers away from competing products that cost more. Medicare and Medicaid reversed the normal relationship between price and quantity, enabling drug manufacturers to increase sales to doctors and pharmacists by charging government programs more. Higher prices brought higher profits, instead of the reverse. Companies competed for market share by offering doctors and pharmacists more and more of the taxpayers’ money. Worse, each company had an incentive to raise its phony AWPs faster than its competitors raised theirs. Only a government spending other people’s money could create so perverse an arrangement and stick with it long after the predictable consequences came home to roost.
Not all drug companies that were involved in the AWP scheme admitted wrongdoing. Most conceded that Redbook prices were grossly inflated, but even so many denied that they committed fraud. They contended, first, that doctors and pharmacies got the extra money, not them, so they shouldn’t be on the hook for any overpayments. Second, they claimed that public officials knew for years that Redbook prices were unreliable and still chose to pay. For example, in 2003, GlaxoSmithKline (GSK) issued the following statement:
Those who designed and administered the New York Medicaid and EPIC [Elderly Pharmaceutical Insurance Coverage] programs as well as the federal Medicare program have known for decades that tying reimbursements to AWP causes the programs to pay doctors and pharmacies more for certain drugs than the doctors and pharmacies paid for the medicines themselves. The federal government has urged state Medicaid programs for years not to reimburse for drugs at AWP (a price calculated and reported by third-party vendors) for that very reason.
Now the Attorney General is trying to hold [GSK] and other pharmaceutical companies accountable for the state’s own conscious decision to reimburse doctors and pharmacies more for drugs than they paid for them.46
GSK is not the only one singing this tune. Michael Greve and the late Jack Calfee, two scholars at the American Enterprise Institute, said the fraud charge is “a striking accusation to make, since the process has been well established, well known, and much debated for more than 30 years.”47 They repeated an old joke in pharmaceutical circles, that AWP actually stands for “ain’t what’s paid.”48
The charge of government complicity raises an obvious question. Did federal and state officials know that Redbook prices were inflated? Yes, they did. In fact, they knew for years, even decades, that Medicare, Medicaid, and the patients they served vastly overpaid for covered drugs. Federal and state program auditors had been investigating AWP-based drug pricing since the 1980s.49 One source reported that at least 15 reports criticizing the use of AWPs by state Medicaid agencies were released between 1984 and 1997.50
Here are some examples of what federal officials knew:
As an article published in 2001 reported, “Repeated federal investigations have shown that the average wholesale prices (AWP) reported by manufacturers to Medicare . . . are way above what they actually charge physicians. The companies inflate AWPs as a way of inducing physicians . . . to buy their drugs.”56 Using the amounts paid by the Veterans Health Administration, which did not rely on AWPs, as comparisons, Medicare and Medicaid overpaid by $1.6 billion and $1.1 billion per year, respectively.57
Even members of Congress knew that drug companies used inflated AWPs as a means of “market[ing] their drugs to physicians and pharmacies based on this windfall profit which in reality is nothing more than a government funded kick-back to the provider.” Rep. Pete Stark, the author of these remarks, which he sent to the president of the Pharmaceutical Research and Manufacturers Association (PhRMA) in 2000, had a chart of examples in which “the Medicare beneficiaries’ 20% co-payment exceeds the entire costs of the drug.”58 Congress, whose members are supposed to assure that taxpayers receive good value for their dollars, knew that AWP-based payments inflated the amounts that Medicare, Medicaid, and the programs’ beneficiaries paid for drugs. But they let the practice continue.
In fact, Congress prevented Medicare and Medicaid from switching from AWPs to any other arrangement that would have brought payments more nearly into line with providers’ actual costs. Despite all the reports critical of AWPs that had been issued before, Congress enacted the Balanced Budget Act of 1997 (BBA), which set Medicare payments for drugs at 95 percent of AWP. When doing so, it ignored pleas from members of the Clinton administration, who protested that AWPs are like sticker prices for cars, which few people actually paid.59 The legislative history of the BBA even notes an OIG report that AWP-based payments by Medicare for 10 oncology drugs exceeded providers’ actual acquisition costs by anywhere from 20 percent to 1,000 percent.60 In later years, Congress repeatedly refused to act on bills that would have based payments on actual acquisition costs.
Congress even frustrated the Clinton administration’s unilateral attempt to stop using AWPs. In mid-2000, Donna Shalala, the secretary of Health and Human Services, informed Congress that the Health Care Financing Administration, which then oversaw Medicare, was preparing a regulation that would switch from published AWPs to AWPs based on providers’ actual acquisition costs. Congress enacted a statute preventing her from doing that later that year.61 A few years later, Congress again mandated the use of AWPs in the Medicare Prescription Drug Improvement and Modernization Act of 2003, although it reduced the baseline from 95 percent of AWP to 85 percent.
Could it be any clearer that Congress insisted upon the retention of AWP-based payments for prescription drugs even though its members knew that AWPs were inflated, often massively? Congress aided and abetted the waste of taxpayers’ dollars and the pillaging of patients, whose copays were inflated to satisfy the demands of big industry players.
One could hardly want better evidence that political control of the health care economy is a core driver of medical spending. But if you do, you need only visit your local drugstore or shop for over-the-counter drugs online. You will see hundreds of real prices, all set as low as possible in hope of gaining your business. When consumers buy medicines in markets without “help” from the government, the only way to profit is by offering them what they want at prices they are willing to pay.
Avastin and Lucentis are two different medicines that contain the same active component and are made by the same company, Genentech. If you think they sell for the same price, you have much to learn. Lucentis is almost 40 times as expensive as Avastin. Understanding how both medications came into existence and came to be priced so differently shows yet another way in which pharmaceutical companies are adept at creating and exploiting marketing exclusivity.
Avastin is a cancer treatment that works by slowing the growth of blood vessels that feed tumors. After it was approved, some enterprising ophthalmologists thought that it might work on an entirely different illness: wet macular degeneration, a vision impairment caused by the excessive growth of blood vessels at the back of the eye. They tried it out by injecting very small doses of Avastin directly into patients’ eyes. (Physicians can use products approved by the U.S. Food and Drug Administration [FDA] as they wish, even if the FDA approved the drug for use with a different disease. We discuss “off-label” use of drugs in Chapter 6.) The results were terrific, and the use of Avastin to treat wet macular degeneration quickly caught on.
Because only a small amount of Avastin was needed to treat patients’ eyes, the drug was very inexpensive when used for this purpose. It cost about $60 per injection. Of course, that meant Genentech didn’t make much money. A large vial designed to treat a cancer patient went a very long way when used in small doses by ophthalmologists.
When Genentech learned that the active ingredient in Avastin worked on wet macular degeneration, it created and obtained FDA approval for a new drug, Lucentis, to treat this condition. Lucentis was far pricier than Avastin. It sold for $2,300 a dose—38 times as much as Avastin. Genentech didn’t try to show that Lucentis worked any better on wet macular degeneration than Avastin, and “when the National Eye Institute tested Lucentis against Avastin, it found essentially no difference.”62 Six randomized clinical trials have found Avastin and Lucentis are largely equivalent.63
Because of the price difference, many ophthalmologists kept using Avastin instead of switching to Lucentis. Genentech countered by discouraging ophthalmologists from using Avastin, raising bogus safety concerns and announcing that it would stop selling the drug to the repackaging firms that were cutting it into eye-appropriate doses.64 When ophthalmologists responded by threatening to sue, Genentech backed down.65
Lucentis is still a big seller for Genentech, however, accounting for more than $1 billion in domestic sales for four years in a row. In 2015, Medicare alone shelled out that much for the drug.66 Why do so many eye doctors use pricier Lucentis when cheaper Avastin is available? You guessed it: Medicare pays physicians a lot more for using Lucentis. A 2013 Washington Post article explained the finances.
Under Medicare repayment rules for drugs given by physicians, they are reimbursed for the average price of the drug plus 6 percent. That means a drug with a higher price may be easier to sell to doctors than a cheaper one. In addition, Genentech offers rebates to doctors who use large volumes of the more expensive drug.67
Got that? Medicare pays doctors far more for administering Lucentis than Avastin to patients with wet macular degeneration because Genentech charges more for the former than the latter. Six percent of $2,300 is $138; 6 percent of $60 will barely buy you a white chocolate mocha at Starbucks. Genentech then sweetens the deal by giving doctors who use large amounts of Lucentis discounts that the doctors get to keep. It’s easy to see how Medicare put taxpayers and seniors on the hook for $1.2 billion in payments for Lucentis in 2012.68 The hard part is explaining why many doctors, to their credit, continue to use Avastin. The cost to taxpayers and elderly patients could be much higher.
If you are wondering why Medicare does not simply pay the same amount for Lucentis and Avastin or require physicians to use Avastin, the answer is that the law forbids the government from doing either. Medicare is a price taker, not a price setter. It pays the prevailing rates for drugs, the prevailing rates being whatever manufacturers want to charge for them. In the case of patented drugs, this means that manufacturers can effectively set prices as high as they want and Medicare has to pay. Medicare also has limited ability to dictate which treatments it will pay for, lest it be seen as preventing doctors from recommending or using whatever medications will work best for their patients. In combination, this means that Lucentis will keep on generating billions of dollars in sales for Genentech for the foreseeable future, even though Avastin is a far cheaper substitute.
If you are wondering how this crazy state of affairs came about, the answer is that political control of health care gives pharmaceutical companies, pharmacists, and physicians the incentive and the power to bend the rules to suit them, while individual taxpayers have little incentive, and even less power, to fight back.
Chapters 1–3 have focused on misconduct involving prescription medications. There are deep, structural problems in this sector, including the proliferation of sales monopolies; terrible incentives created by the payment system and, especially, by government programs; and the impossibility of effective government monitoring of the tens of thousands of profit-seeking businesses and money-grubbing people who are connected to the distribution system. Welcome to the dark side of the American health care system. Unfortunately, there is much more to come. The next three chapters examine the practice of medicine by physicians.