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a scattering of pills

Investigating the generic drug industry and the health care business model

Stanford health economist Kevin Schulman examines how inefficiencies in the health care system affect the nation and individuals — including his own family.

Kevin Schulman, MD, MBA, suspected something was amiss when his child began to experience side effects from medication for attention deficit hyperactivity disorder.

Schulman, a professor of medicine at Stanford, discovered that the pharmacy had provided a generic product from a supplier with a history of quality problems, and the medication his child was now taking was not tolerated. Schulman wrote about the generic drug market and the lack of accountability -- and unreliable quality -- in the global industry that accounts for 90% of prescriptions in the United States.

The resulting perspective piece, recently published in the journal Health Affairs, details what he discovered. It is one of many efforts by Schulman, a health economist with Stanford's Clinical Excellence Research Center, to unpack the complicated -- and often labyrinthine -- workings of the U.S. health care system.

I caught up with him to discuss that article, as well as his work launching a new master's program focused on the technological and business sides of the health care industry. This Q&A has been edited and condensed for clarity.

What did you learn from your family's experience with a generic drug?

It was something that happened over time. Our child began resisting taking the medicine. Then, after I read the book Bottle of Lies by Katherine Eban, I started thinking very differently about the quality of medications. Eban's book details a pattern of fraud in generic drug manufacturing by the company Rambaxy in India.

Asking my own questions, I discovered that the number of foreign drug manufacturing sites has ballooned so much over the past two decades that the FDA has struggled to keep tabs on them all. When I looked into the generic drug my child was taking, I found documents from the FDA signaling concerns about the manufacturer. I also found out that physicians often can't find detailed information about the origin or quality of specific generic products, and large pharmacies don't necessarily conduct their own quality oversight of their supply chain.

Luckily, my child was able to go back to the branded version of the drug, and the adverse symptoms went away. But not everyone can afford branded medicines when generics are available.

From your experience, what do you think other families should consider when their prescription is filled with a generic medication?

I've been asked this question a lot and, unfortunately, I don't have a great answer right now. Once you are on a stable dose of a generic medication, you can contact the pharmacy and ask for your preferred generic manufacturer -- often pharmacies use several different suppliers. The pharmacy may have to order the drug, but it should be available.

Drug costs are a major issue in the United States. What factors contribute to high prices?

Over the last several years, our group has been looking into the retail prescription drug market to try and address this question. We documented the complex relationships among drug manufacturers, distributors, retailers, and organizations called pharmaceutical benefit managers that provide drug benefit programs for employers.

We uncovered the increasing role of PBMs in the market -- how they work to drive up list prices so they can collect more payments from manufacturers as rebates and service fees. They retain a portion of the rebates and the remainder goes to their clients, who are usually insurers or employers. Generally, patients pay the high list price but don't directly benefit from the rebates, though some say that the rebates keep down the cost of drug benefit plans.

Our latest numbers from 2019 show that two-thirds of drug manufacturers' net revenue is being paid out to PBMs as rebates and drug distributors as other fees. In other words, 40% of the price you pay at retail goes to payments to intermediaries and only 60% goes to manufacturers. These payments have been increasing at a rate of 16.4% per year since 2014.

My concern is that this model is significantly distorting the prescription drug market for consumers. 

You're also the founder and director of Stanford Medicine's new Master of Science in Clinical Informatics Management program. Why do you feel this program is needed now?

In the United States, we've made a major investment in health information technology over the past decade. However, we did so without changing the underlying business model of health care delivery. As a result, we haven't seen the productivity gains that were anticipated when we made these investments. It's a striking contrast when compared with technology investments in other sectors of the economy.

We need to use the technology to force innovation and create better value for patients -- higher quality at lower costs. That's the challenge MCiM will take up.

The master's degree is an opportunity to help develop a cadre of leaders who can grasp both sides of the equation -- technology and business -- in the context of health care. My hope is that discussions among students will lead to new understanding of the underlying features of the system and allow them to say, "Aha, I understand. Now I can see a pathway to a solution."

How has the pandemic highlighted the need for digital innovations in health care and programs like MCiM?

As a nation, our response to the COVID-19 pandemic has been heroic -- our ambulatory practice went to majority virtual visits seemingly overnight. This transformation really shows the power of technology when deployed, and patients seem to love the option of virtual care.

Why did it take a pandemic for us to make this change? And can we sustain this change at this magnitude? Also, as we're evaluating our response to COVID-19, did we provide access to everyone in our community-- do all of our patients have broadband, are our services accessible to non-native English speakers, and did we create an ideal virtual visit for all?

There is a lot of opportunity for us to continue to grow in our understanding of the role of technology in health care.

Image by Arek Socha 

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