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Hospitals Launch Nonprofit Drug Company

— September 24, 2018

In a world of price gouging and shortages, hospitals look for solutions by starting a new nonprofit drug company to rein in costs and stabilize supply.

Hospitals have been gaining significant power in the American health care system. In 2010, hospital mergers increased 40% to 59, and they’ve remained at or above that number every year since. With size comes influence, such as the ability of a region’s single hospital system to demand high prices and favorable terms from insurance companies. Power, though, is just a tool, and what matters more is how hospitals wield it. Intermountain Healthcare, a hospital system based in Salt Lake City, is trying to use its power for good by establishing a nonprofit drug company that would produce generic versions of medicines in order to combat high prices and shortages.

A multi-story building backed by a partly cloudy blue sky, with a parking lot in the foreground.
A view of the east side of the Intermountain Medical Center in Utah. Photo by An Errant Knight, courtesy of Wikimedia Commons. CC-BY-SA-4.0

The new, independent drug company, called Civica Rx, has generated immense interest from hospitals and philanthropic organizations. About 120 healthcare companies representing one in three U.S. hospitals has contacted Intermountain to inquire about doing business with Civica Rx. The drug company would require hospitals to sign long-term contracts to buy the medications at fixed prices, even if they become available elsewhere for less. However, that level of buying power is expected to bring stability to a market plagued by price gouging and chronic shortages in recent years. Civica Rx plans to start providing 14 essential generic drugs that rose precipitously in cost in order to start bringing prices to more reasonable levels.

Intermountain’s drug company isn’t the only effort to provide medical needs at a cheaper price. In North Carolina, Dr. Gajendra Singh was appalled by the $1200 price tag for ultrasound services at his local hospital. (Some hospital emergency rooms charge as much as $24,000 for the procedure.) He decided to open his own medical imaging center so he could charge significantly less, around $500 for an MRI. Unfortunately, North Carolina’s “certificate of need” law isn’t friendly to Singh’s practice. If state officials have already issued what they believe to be sufficient permits to other imaging providers in an area (or if they decide that the area doesn’t need such services), they can deny permits to buy further MRI machines. Even if the permit were granted, the law allows for other providers to contest the permit, effectively allowing established hospitals to suppress competition and charge higher rates.

Monopoly is also what enables hospitals to demand friendly contract terms from insurers, even if it would be cheaper and result in better health outcomes for insurers to decline to cover services at those hospitals. According to the Wall Street Journal, health plans that exclude especially costly providers can save consumers 10% or more on insurance premiums, while plans that include them yet steer consumers to less expensive options with better outcomes can save 3-7% or more. Yet these savings are impossible to realize, even for large employers like Home Depot that request the cheaper options, when insurers are contractually obliged to cover treatments at particularly pricey hospitals that have monopolized markets through mergers and dealmaking.

It’s important to remember that hospitals, insurance companies, and pharmaceutical providers are all businesses, and most businesses exist to serve shareholders and owners. The honorable ones will do so by providing the best possible, most appropriate care for every patient, but in the real world, this doesn’t always happen, and the only difference is the level of egregiousness to which patients’ needs are compromised by the profit motive. In a world where “America, the richest country” is charged at the top of the sliding scale for health services, a drug company like Civica Rx promises to be, and doctors like Gajendra Singh, are a breath of fresh air for people of more reasonable means. There are no perfect solutions that don’t cause other problems down the road, but reducing suffering is a noble goal to have.

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