Pharma: Cancer drugs (Avastin)

Somewhat interesting NYTimes piece on the Avastin, a relatively new drug for treating cancer that was developed Genentech. The most interesting elements are:

Medicare requires that the doctor or hospital buying Avastin be paid an amount equal to Genentech’s average selling price plus a markup of 5 to 6 percent. Of that amount, Medicare pays 80 percent and the patient pays 20 percent. Doctors and hospitals typically do not make much money on Avastin for Medicare patients, and can even lose money if they buy the drug at a price that is higher than average. But patients can end up paying thousands of dollars a month. Some have supplemental insurance to take care of it; others do not.

But private insurers sometimes pay several times as much as Medicare pays for Avastin. Doctors and hospitals have at times charged as much as $35,000 a month for the drug, said Dr. Peter Dumich, who reviews claims for cancer patients for AWAC, a company that helps employers contain health care costs. The insurers have little choice, Dr. Dumich says, when their contracts say they must pay a portion, like 80 percent of the charge, whatever the charge actually is. “Providers have them over a barrel,” he said.

And, like Medicare, private insurers may in turn require patients to pay a percentage of what can be hefty bills.

Whats interesting here is that the drug is actually purchased by the hospital or the doctor and significantly marked up (assuming medicare isn't paying). This is hugely different than out-of-hospital drugs where the patient is merely given a prescription that he fulfills on his own.

One would think that the way that in-care drugs are sold creates a rather large and nasty Agency problem. The doctor/hospital recommends the drug knowing full well that a patient is highly unlikely to not take the drug, while at the same time the doctor/hospital stands to make a large profit off of the transaction. Its a very similar problem as to what occurs with over-recommended medical tests - but one would think it hurts patients far more since they're often forced to foot upwards of 20% of the Avastin bill. And Avastin's bill is incredibly high...

I imagine Avastin has to be administered in a hospital since its taken intravenously