New York Times Doesn't Understand Why Cancer Drug Prices Are Over $100,000

I recently read this New York Times article and was quite irritated. The story is about the high cost of cancer drugs. Even the American Society of Hematology said we need to lower the price of drugs in order to save lives.

The New York Times fails to understand why the drug prices are so high. First, the FDA makes it very costly to get a drug to market to help people. Phase I, II, and III trials have to be done. Even after the drug is approved the drug has Phase IV where the drug company monitors adverse reaction. As I mentioned in this post the number of patients required for cancer trials has drastically increased over the years which has made the cost of doing clinical test extraordinary. According to Tufts Center for Study of Drug Development the cost of developing just one drug has increased from $100 million in 1975 to $1.3 billion (both in 2000 inflated adjusted dollars). Meanwhile the number of patients required for clinical trials has increased over 160% (between just the 1970’s and 1990’s). Avik Roy from Forbes pointed out that 90% of the costs occur in the final phase (Phase III) of the clinical trials. A drug once it gets into Phase I has about less than a 16% chance of getting approved (note that drug companies test thousands of different compounds before the drug even goes into Phase I trials). So drug companies are spending $1.3 billion and have an 84% chance of their drug not getting approved. This is why they have to charge more for the drugs that do actually get approved. 

Dr. Brian Druker of the Knight Cancer Institute at Oregon Health and Science essentially does not like the profits drug companies are making and asks the question “if you are making $3 billion can you get by with $2 billion”. The profits drug companies make are used to research and develop other drugs. The reason why drug companies have profits are because they invested billions of dollars to develop drugs. Drug companies can’t sit idle with just a few good patents they have to constantly be innovating and developing newer drugs. Actually the FDA makes this worse because the general patent on a drug once it is approved is 10 years. I would be okay with shortening this patent life to say 5 years if the FDA allowed drugs to be marketed once they passed Phase I clinical trials. Phase I looks to see whether the drug is safe (which is what doctors and patients care about most). Researchers, individuals, and doctors can on their own figure out if the drug is effective (given everyone has a different body, different cells, and different DNA). If you shortened the patent life to 5 years and allowed drugs on to the market after Phase I clinical trials you would see a sharp decrease in the price of drugs. In an odd way the FDA does make drug companies riskier. If the FDA were to increase the number of drugs approved, and also shorten the patent life then drug companies would have a more diversified portfolio since they would have more products on the market (and not have to rely on just one or two drugs).

Doctors and the New York Times forget many horrible conditions have at least some form of treatment that is much cheaper than the $100,000 drugs. Many drug companies offer assistance programs to patients who can’t afford their drugs. True the alternative may not be as good as these new drugs but until the drugs go off patent they will be high. Somehow people want to live in world were we have first class health for a low price. I suggest the New York Times take an economics class at George Mason University.  

David Koch on Shen Yun and Giving to New York American Ballet Theater

So in a recent video interview with NTDTV David Koch called the work of Shen Yun "inspirational and put him in a good mood". David Koch donated $100 million to the New York State Theater (which they renamed after him). David Koch has been attending the theater for 45 years (he is now 72). Koch has always said he loves the athleticism of the ballerinas, good music, and attractive women. Speaking of women David Koch was quoted saying "When you have spent as many years as I did begging girls for favors you'd have bad knees too". David Koch has had his knees artificially replaced, his prostate removed, in addition to having 10 surgeries at the New York Hospital of Special Surgery (he also donated $25 million to them). 

Speaking of dancing the only dancing David Koch did was at discotheques according to this Bloomberg story. Koch for years was giving $500,000 to the New York American Ballet Theater. He was so generous he gave $2.5 million for the Nutcracker production. Even Koch's daughter was taking lessons at the School of American Ballet in New York.

I am not really sure why so many people think David Koch is such a bad person. He is a prostate cancer survivor, father, generous donor to the arts, sciences, and cancer research. Although, people may disagree with his policies does David Koch really seem that evil?

President Obama $3 Million IRA/401k Limit

Since I work in the financial industry when President Obama recently announced that he would cap the amount you could have in an IRA/401k plan to $3 million. The $3 million dollar amount was calculated by saying if you received a $205,000 annuity from the time you retire until you die how much money would be needed. However, there are a few problems with this calculation. First, as interest rates change the annuity required would also change. Second, as people live longer the amount required may substantially increase as people require more funds to live. This boneheaded proposal would only bring in $9 billion over 10 years which is not much given the budget is over $3 trillion. According to data from, Employee Benefit Research Institute as of 2011 only 0.03% of IRA accounts were greater than $3 million. By the end of 2012 .0041% of 401k accounts held more than $3 million.  

What is really insane is that this would hurt just regular people who save on an annual basis. Assume someone started an IRA with just $1. Then assume they invested $10,000 in their IRA every year for 45 years. Assuming they earned just 8% per year they would end up with $3.8 million. What also is forgotten is that required minimum distributions force people with an IRA/401k to take out distributions every year after a person reaches 70 1/2. The person is then taxed on that income at ordinary rates. So once Mitt Romney turns 70 ½ he will have a huge tax bill (he will pay ordinary income on all of that income as well-no capital gains).

Honestly, I don’t even know how this would be implemented. If someone had $2,999,999 million dollars and they get a $2 dividend check will you be denied $1? This truly is a confiscation of wealth. If people work hard and voluntary save their own hard earned money why should the government limit how much they can save?  

Koch Brothers: Annual Retreat and Why They Are Decent People

This upcoming week (April 28-29, 2013) Charles and David Koch will be holding their annual retreat in an undisclosed location in Palm Springs, California. Personally I wish I was going.  This will be the 10^th anniversary of holding such retreats. Normally the retreat is held in January however Charles Koch announced he wanted to push it back until April in order to review the election data. I like reading reports about how this is the Koch brothers “secret” retreat. For one the Koch brothers are private citizens and can do as they please. If people want to get together and talk about how to give everyone more liberty, freedom, and in the long run make everyone wealthier I see no problem with that.

ThinkProgress linked the agenda for the 2011 meeting here. I must say I would actually pay to go to this meeting. Speakers include Charles Koch, Peter Schiff, EconTalk host Russ Roberts, AQR Capital Management Cliff Asness. Really this event is more of a free market rally than a secretive meeting. The schedule looks like Monday and Tuesday were filled with free market thinkers that go from 7:30 A.M. to 9:30 P.M.

On the agenda this year is to discuss how to get more Latino voters involved as well as women. Also younger people are also going to be targeted.  At least Charles and David Koch are trying to understand why Republicans lost and figuring out how to fix it. The message of personal responsibility, free markets, and individual liberty shouldn’t be too hard to sell. However, when people get transfer payments from the government in the forms of subsidies, welfare, corporate welfare, or other sources it makes them dependent on government.  

The criticism of the Koch brothers is usually nonsensical. It usually goes something like this…”The Koch brothers pollute, are greedy, and buy politicians government”. Let me take this point by point. If the Koch brothers really did pollute why have they a) been receiving environmental safety awards  (most of these awards were granted by government agencies and not outside parties, b) the pollution data from even the EPA has shown a decrease in pollution for multiple decades. In fact carbon monoxide has decreased 61% (from 1980 to 2009). Sulfur dioxide between the same period decreased 65%. Lead decreased 97% as well. The evidence is against people who claim pollution has rapidly increased. Also do people realize Charles and David Koch breathe the same air as the rest of us? Now let me move on to the next point of greed. Charles and David Koch most likely work more than 60 hours per week based on everything I have seen. As I mentioned in this post David Koch works 10 hour days (it should be pointed out he is also in his 70’s). As I mention in this post Charles Koch was known to work all the time and once had a meeting that started at 4 P.M. and didn’t end until after midnight. Everyone was happy once Charles got married because it meant they had to work less on the weekends. I know people have an image of the Koch brothers as Scrooge McDuck swimming in money. However, they are men that run a multi-billionaire company. For the Koch brothers to say they are for free markets really means even the Koch brothers want more competition (which would actually reduce their profits). However, the reason why I believe the Koch brothers are in favor of free markets is because they understand what creates prosperity and an improved condition for human life. The last time I checked too more countries were trying to orient themselves towards free markets. My post on Market Based Management explains this more.  To answer the last point, no one can purchase a politician. You can give infinite amounts of money to politicians and they can buy the best ads, hire the best consultants, and still lose. People forget Republican Bob Doll in the 1990’s spent an extraordinary sum of money and still lost. At the end of the day millions of people are voting for who they prefer. However, as we saw in this last election cycle politicians are in the business of granting favors. If the 2012 election were held in the 1990’s there would be less of a chance we would have had the same outcome. The rising dependency of government explains the outcome we received.

Personally I hope the Koch brothers each publish an autobiography to explain to people what their lives were really like instead of history writing its own story. The Koch brothers are decent human beings who created  and grew a company, have given hundreds of millions of dollars to the arts, sciences, and cancer research, and have tried to sold their fellow man/woman on why free market capitalism is truly the best path to prosperity. 

Koch Industries, Chicago Tribune, and Market Based Journalism?

So for some reason the Koch Industries can’t seem to stay out of the news. The story was first broke here by the New York Times (I still can’t believe Paul Krugman is on that payroll). As you may know I have covered the Koch brothers extensively as I did a historical net worth analysis from 1984-2013 here, an extensive three part series on them here, here, and here. I always find it mysterious when people say that the Koch brothers are secretive when they agreed to this 37 pages profile in the Wichita Eagle from 1994 and this recent extensive series from the Wichita Eagle from last year, and this Forbes cover story last year. Charles and David Koch are American heroes in my book for building a company that employees 60,000 people, preaching how the free market can help people, and becoming billionaires by offering people products and services at high quality, and low prices. 

Basically as the story goes the Tribune Company which owns papers such as the Los Angeles Times, the Chicago Tribune, and other newspapers is expected to release their financial data. There are rumors that Koch Industries is interested. The total value of all the papers is $623 million (the Tribune itself is an $7 billion company). Daniel Fisher of Forbes estimated that Koch Industries has around $11 billion per year in cash flow (before taxes and depreciation). Koch Industries has revenue of $115 billion per year. Clearly, Koch Industries could purchase the Tribune Company. The question is what would Koch Industries do with it?

Koch Industries recently provided $240 million to American Greeting to take the company private. The investment was made by a subsidiary of Koch Industries which actually tends to invest companies (however they don’t operate them).

I honestly don’t believe Charles and David Koch will buy the Tribune Company and turn it into some Fox News themed newspaper. Koch Industries has a history of investing in companies for the long term as was pointed out in the December 2012 Forbes article. It may actually surprise people that Koch Industries doesn’t just milk companies for profits and turn them around to resell them. The company often invests for growth and profits over the long term (which one could make the argument is the morally right thing to do). Market Based Journalism would be interesting though. 

Dr. Devi Shetty: Higher Quality Heart Surgery, Low Prices, and Making a Profit

I was thrilled to see this article showing for only $800 you could get heart surgery in India. However, the article is a little misleading since the average price people pay is $2,000. The average cost for doing a heart bypass operation varies around the world. In the United States the cost is $144,000, while in Mexico the cost is $27,000, and just $14,000 for the same procedure in Colombia.  You might be surprised to know that an actual individual entrepreneur doctor is able to do this. His name is Dr. Devi Shetty. Dr. Shetty runs a hospital named Narayana Hrudayalaya in India. The hospital has 5,000 beds and Shetty wants to expand this to 30,000 beds.  What is interesting is that the hospital performs more surgeries than first rate hospitals in the United States and still maintains high quality. For instance Narayana performs twice as many surgeries as the Cleveland Clinic. The mortality rate is very low at 1.4% which is less than the United States rate of 1.9% (and even less since the hospital doesn’t adjust for risk factors like the United States does). The heart facility in Bangalore does 30 cardiac surgeries a day (more than any place else). The same place also handles 1,000 walk in patient per day.

What is really interesting is that the hospital is for profit. The company has a profit margin of 7.7% profit after tax which is higher than the average profit margin in the United States of 6.6%. It always amazes me that people claim hospitals are greedy. If hospitals are so greedy why are they only making profit on less than 7 cents out of every $1? Dr. Shetty finds ways of reducing his costs like using cheaper sutures which saved him $50,000. He points out that you have to find many different things to cut.  He pays nurses to watch over patients in 8 hour shifts but doesn’t allow them to sit down. He claims that nursing efficiency decreases 30% if a nurse is provided a chair. He even hires people with a college degree to read radiology charts. What is fascinating is that Shetty has real time performance measures. Every day doctors can see the profit and loss statement from the prior day which would be unheard of in an American hospital. Not only can Shetty see the profit and loss statement he can also see how many surgeries were done the prior day in addition to how many surgeries were done for the month. If earnings fall below a certain amount they tell the people with free surgeries to come back until they get more paying customers.

It is too bad that Dr. Shetty couldn’t set up shop in the United States. For one his hospitals don’t have air conditioning in most parts of the hospital which would not even be allowed in the United States. Shetty plans on building a hospital in the Cayman Islands.  The United States would greatly benefit from hundreds of hospitals like the one Dr. Shetty has created. The cost of heart bypass in the Cayman Islands will only be $10,000 in the Cayman Islands.

The United States should recruit Dr. Shetty on how to reduce healthcare costs. I actually think many people would be open to business model of charging people with money for surgery and using that money to provide for those that can’t don’t have the means to pay for surgery. While at the same time on the whole the hospital would be making money which would allow them to grow and provide care to even more people in the future. I have feeling some people would still object to this.

Bill Koch CommonWealth Interview: Fat Contracts, Global Warming, and Economics of Alternative Energy

It seems as if Bill Koch can’t stay out of the news. He recently did this lengthy interview with CommonWealth news which led to this story. One thing I did notice was that Koch used the phrase “fat contracts”. In fact he used that phrase ten times. It makes more sense if you read the story first before the interview. I have did a lengthy profile of Bill Koch here, talked about his battle with brothers Charles and David here, even his school days here. I also did a three part series on all the Koch brothers: here, here, and here.

    

Bill Koch for years has opposed a wind farm known as Cape Wind. Koch himself put in $5 million to stop the project. On the other side of the debate is Jim Gordon who spent $65 million to try to bring wind power to Cape Wind. Gordon is worth around $150 million while Bill Koch is worth around $4 billion. Koch invited Gordon over to this place for dinner and Gordon was able to pitch the idea of wind farming. One quote that Koch has for Gordon is “He’s done a masterful job and he’s sold a great line of BS”. Another problem that Koch had with the project was the amount of “visual pollution” he would see from the wind mills. I can attest to this as I have driven through west Texas and seen hundreds of windmills only to learn later that it only supplied 1% of all the energy needed. Koch was honest with Gordon and said that the project wouldn’t work without the help of a government subsidy. What is interesting is that Bill Koch then published this op-ed in the Wall-Street Journal on May 22, 2006. In the op-ed Koch discusses the economics of the project and explains the subsides would actually increase the cost of energy to Cape Code residents by having by seeing a $1,300 increase because of subsidies. Koch calculated the return on the project to be 3% (with government subsidies) and negative (without the subsidies). When Gordon told Koch that the environmentalists were coming after him Koch responded by saying he had the IRS after him, a $50 billion a year company after him, and the Turkish mafia after him so bring it on. Bill Koch also understands that no one should relying on the government for contracts saying “Don’t rely on the federal government, except with taxes. They’ll tax you to death but relying on government to help you make a lot of money is a fool-hardy thing unless you’re a politician and take graft”. Koch himself got into a tax lawsuit with Governor Michael Dukakis (that he won) when Dukakis was trying to retroactively tax him when Koch used subchapter S laws to reduce his tax bill. This caused Koch to move out of Massachusetts in the late 1980’s and move to Florida (which doesn’t have a state income tax).

Bill Koch is a businessman. In the past 15 years he says he has sold zero green energy. He makes the interesting yet true point of how people in California want green energy yet people don’t want to pay for it (given people want something for the lowest price possible). In order to answer environment fears Koch suggests that we just plant a bunch of trees that will take CO2 and convert it into oxygen.  People often say other people are not qualified to offer their views on global warming because they are not scientists. However, Bill Koch is a scientist by nature. He has a PhD from MIT in chemical engineering. When shown a presentation of how global warming was going to impact the earth Koch raised some questions about what their models took into account. Koch also discusses the Wood’s Hole theory of global warming which I won’t even try to explain. In addition to this he also talks about Gaia which just basically says the earth is always in a mode of self adjusting (similar to homeostasis in the human body). The economics of trying to do something about “climate change” (interesting how it use to be global warming” show that sequestering CO2 would cost $60/ton of CO2 while planting a tree would cost 10 cents/ton of CO2.

Koch wraps up the interview talking about his own western town in Colorado. I wasn’t aware of this by Koch’s wife has 43 immediate family members. Koch also wants to use the town for entertaining customers and suppliers. The main purpose of the town is for his family though. Koch does have a lot going on with running Oxbow Energy, fighting wind mills, having lawsuits over fake wine, building his own city, and having six kids. He says he wants to allocate his time to where he gets an economic and emotional return.

As I have mentioned before on my blog. Bill Koch is interesting, fascinating, and quite a character. I find it amazing that age 72 is is able to recall the economics details of all these deals that he has done in the past. Koch seems to have a photographic memory as he was able to recite a poem to Mitt Romney (even though he probably hadn't looked at it in over 50 years. Although, he has a PhD in chemical engineering it is rare to find someone with a PhD in anything who is also a decent business person, who is also a character, and interesting. 

Milton Friedman on Tax Reform 1978

Bloomberg Article: Medical School $278,000 Debt (Because Lack of Free Markets)

This recent story from Bloomberg got me somewhat irritated today. The story discusses how medical school students are burdened with medical school debt. Going to a private medical school for 2012-2013 is over $50,000 according to the AAMC. What is really shocking is that 79% of medical school students will have more than $100,000 in debt. Note this is just for going to medical school this doesn’t even begin to look at overall debt (mortgage, car payments, credit card debt, etc).

I examined the 2012 physician compensation report (by Medscape) which can be found here. Salaries range on the low end of $156,000 for pediatrics to $315,000 for radiology. Specialties like gastroenterology can make over $300,000 while plastic surgeons make $270,000 and internal medicine doctors make $165,000. What I found it interesting that 9% of doctors don’t discuss the cost of treatments considering they don’t even know what the costs are. In the business world you would be out of business if you had no idea what the costs were.

The question is why is medical school become so expensive? Medical knowledge has only grown exponentially over time and you could argue doctors know actually face competition because patients can often Google their symptoms and figure out what they have (doctors also use Google as well). This surgeon discusses what practicing surgery was like in the 1970’s.

Supercomputer Watson (made by IBM) can analyzed 1.5 million records in seconds, attend medical school under a minute, in just two years researchers at the for-profit IBM have reduced the size of Watson from a master bedroom to a pizza box while increasing the speed by 240%. Conventional medicine can get diagnoses right only 50% of the time while Watson can get around 90% of cases correct (less for cancer given how complex they are). Of course, these percentages will only improve over time.

What is interesting is that the average MCAT and GPA scores of the people who get accepted into medical school has steadily risen since 2001. According to this medical journal from 1911 there were 129 medical schools which is roughly the same number of medical schools in 2013! Granted since 1911 the population has exponentially grown exponentially so by definition there are fewer people per doctors.  This may be why so many doctors don’t spend much time with patients.

A no-brainer would be to allow more medical schools to open to allow let more people become physicians. Starting a medical school is no easy task either. Another no brainer is allowing nurse

practitioners and physicians assistants as I mentioned in this post. The empirical evidence I have seen shows nurse practitioners and physician assistants as just as effective as doctors and cost a fraction of what doctors cost.  The cost of medical education falls is yet another example of the Peter Rule. The Peter Rule which states that: over time if prices rise and qualify suffers look to government intervention as the culprit. 

Blog Roll

So I read many different things on a daily basis. However there are only 24 hours in a day and only so much can be done. Sometimes researching one thing leads to learning about a whole new subject you never even knew about.

Drudge Report-changes every hour

CARPE DIEM-because things are better than people tell us

Café Hayek-A blog by Donald Boudreaux who writes fantastic letters to editors (who are usually economically ignorant)

Grumpy Economist-University of Chicago’s John Cochrane on what irritates him

Richard Epstein’s at Hoover Institution Defining Ideas-this man is a genius!

EconLib-Various bloggers David Henderson, Bryan Caplan, Garett Jones

Greg Mankiw-probably one of the first blogs I ever read

Marginal Revolution-done by blogger Tyler Cowen and Alex Tabarrok (although I am curious how Cowen teaches at George Mason..however Walter Williams says he is keeping his eye on Cowen…

EconTalk-hour long podcast that is released every Monday morning at 6:30 A.M. (archives go back to 2006 and there are literally hundreds of episodes on a wide range of topics)

Supply and Demand-blog by University of Chicago professor Casey Mulligan-focuses on labor economics/subsidies/welfare

Economics One-Stanford economist/monetary guru John Taylor

John  R. Lott-serious academic who has done great empirical work on gun control

OverLawyered-pointing out how ridiculous regulation has become

Walter E. Williams- one of the few people who can explain economics clearly (every article since 1995)

Thomas Sowell -smartest person of any color (every article since 1998)

CATO Blog-good policy analysis on variety of subjects

John Goodman Health Policy-great info on free market health policy

Wealth Report-Robert Frank from CNBC covers the 1%, what they do, how they invest, studies on them

Avik Roy-former Romney adviser, Yale trained doctor,

Houston Clear Thinkers-use to have great analysis on libertarian ideas (now has YouTube videos of interesting ideas)

Professor Bainbridge-perhaps the only law professor who makes a good case for insider trading.  

Skeptical Scalpel-a surgeon skeptical on robotic surgery and feel good health data  

TaxProf Blog-good resource for tax information/tax related studies  

Daniel Fisher-amazing writer at Forbes who covers law and finance 

David Koch $100 Million To New York Presbyterian and $600 Million to Charity

It seems as if David Koch is getting greedy with his charity giving. It was announced recently that Koch would donate $100 million to New York Presbyterian Hospital.  This is still a lot given his net worth (1984-2013 net worth here). As I pointed out here David Koch so far has given away $435 million. This donation would mean he has given away $600 million (including the $65 million given away in January to The Metropolitan Museum of Art) during his lifetime. This gift was the largest gift the hospital ever received. The donation will help build a 450,000 square foot ambulatory care center. As a result of the generous donation nine floors will have ambulatory surgery, cancer infusion services, radiation and oncology, along with a floor for gastroenterology. In addition to all of this, treatment rooms will be large and allow family members to stay together during a procedure. David Koch himself said he would rather give his money to “outstanding institutions” than give purchase a “bigger house or $150 million painting or things of that nature”.  Koch also said he will continue to give his money to great institutions as long as he is living.

What is interesting is that people decades from now will claim David Koch was a modern day robber barron. He and his brother Charles Koch expanded Koch Industries as I mentioned here. What people don’t realize is that David Koch help create jobs, helped employees put their children through college, helped employees put food on the table, and help employees purchase cars. In addition to this Koch Industries creates products that people use on an everyday basis (toilet paper, water, fabrics, etc) by selling those products at a lower price and higher quality than the competition.  People always seem to think that wealthy people owe something to society. The people who got rich only got rich by figuring out the wants and needs of society and giving it to them at a reasonable price.  One criticism you also might here is that David Koch is trying to buy good publicity. This is utter nonsense as David Koch has been giving to charities (hospitals, theater, arts for many years). One perfectly good reason he might give money to medical institutions is because he himself was is a prostate cancer survivor. The odd thing is because David Koch is self interested in his own health and gives money to these medical institutions he is not only benefiting himself but anyone else who uses these medical institutions.