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Fair Pharma? Intermountain’s New Generic Drug Company

Interview · February 1, 2018

Marc Harrison and Leemore Dafny head shots


Leemore Dafny, PhD, interviews Marc Harrison, MD, President and Chief Executive Officer of Intermountain Healthcare.


Leemore Dafny:  This is Leemore Dafny from NEJM Catalyst, and today, we’re speaking with Dr. Marc Harrison. He is President and CEO of Intermountain Healthcare, speaking to us from Davos, [Switzerland] from the World Economic Forum (WEF). Marc, thank you for taking the time today.

Marc Harrison:  It is my pleasure to talk to you. Thanks.

Dafny:  We’re here to talk about this new initiative that you are spearheading to create a new generic manufacturing company for pharmaceuticals, and I want to start by saying that we’ve seen a lot of vertical integration in health care, typically different health care providers merging, or providers and health plans. But integration of providers into pharmaceutical manufacturing — setting aside a little compounding — is pretty unprecedented. So I just want to start our conversation by asking, why are you doing it?

Harrison:  Well, I guess I’d say necessity is the mother of invention, right? This is not an ambition that Intermountain, nor I suspect the other systems, have had, but as organizations that really try and put our patients at the center of everything we do, some of the issues we’re having around shortages and then secondarily around pricing — they’ve changed the way we’ve thought about things, and so I guess the very few folks in the generic drug industry who are creating these issues, we owe them some thanks because it’s caused us to think creatively.

Dafny:  Necessity is the mother of invention, I follow, but now you’re having to invent your entry into a business that you haven’t been active in. Can you describe for us a little bit about what that involves? What exactly are you going to be doing?

Harrison:  Absolutely. When you said that I am spearheading this, it’s really a “we” — I certainly don’t work on my own — and we’re incredibly grateful for the support of the other systems. There’s a gentleman named Dan Liljenquist, who’s a Vice President at Intermountain, and he runs our Enterprise Initiatives Office. Dan has an interesting background. He’s been a consultant. He’s been a state senator. He’s been a very successful businessperson and entrepreneur, and this is really his idea.

What we’re doing collaboratively is we’re using the principles of how to start a great business, and we’ve put together a super advisory board, and we’re starting to collect CVs for people who have done this multiple times, and we will set up a very independent company that will serve these systems. So I personally don’t need to become an expert in pharmaceutical manufacturing and generic drugs, but we collaboratively need to understand how to run a great business, and I think we know how to do that.

Dafny:  It’s music to the ears of a business school professor and an economist to hear that you’re planning to run a successful business and building a team to do that, but I have to ask the question — if this is such a great business opportunity, why do the buyers need to integrate into supplying? Why doesn’t the market itself create this venture?

Harrison:  Well, first of all, nothing would make us happier than if we didn’t have to make a single pill or a single sterile injectable. Again, this is not our ambition, but we do serve these patients. I would say it’s probably non-competitive activity that has led to the position we’re in where people have engaged in becoming a sole supplier for a drug, and then driving the prices way up, and then sometimes abruptly exiting that production to go find another targeted opportunity, leaving enormous shortages in their wake.

It’s not how a good market works, and what we aim to do is to create something akin to a public utility that is going to put public good first, and we think we’re going to be successful because we don’t have an inordinate profit motive. We need to make enough margin for this business to be sustainable and to reinvest in it, but we don’t have shareholders, and no money’s going back to the systems. I think that the imperatives are just going to be somewhat different.

Dafny:  I hear you, you’re fed up with short-term profiteering, but Valeant aside and Turing Pharmaceuticals aside, most generic manufacturers don’t make that much money. We don’t think of it as a high-margin business. So are you planning to lose a lot of money on this venture, and are your partners okay with that, too?

Harrison:  First of all, we don’t plan on losing money on this. If we’re very selective about the parts of the market that we play in, places where there has been or is enormous profiteering, through long-term contracting with these systems, we think we can save the systems money and provide enough money back to the company that it remains viable. So our aim isn’t to be the sole generic drug manufacturer. We want to very selectively send messages in this market that if profiteering occurs, then there’ll be a strong and organized response that puts it to death.

Dafny:  So, in theory, if you can basically pose a credible counterweight to that threat, then other suppliers may no longer engage in that practice, and then maybe you won’t have to do this anymore?

Harrison:  That’ll be just fine. Like I said, it’s not our ambition. Look, other systems have been coming out of the woodwork. I can’t tell you how many folks gave me their cards this week at WEF, and want to be part of the team. I can’t tell you how many people in the pharma industry said, “Hey, this is interesting. This feels like the right thing. Be careful, because this is not an easy business, but we’re here to help you.” So on the side of folks who are trying to do the right thing for patients, this is making a lot of sense. We started with about 450 hospitals. We’ve added well over 100 hospitals in the last couple weeks, and I think we’re going to top out at over a thousand hospitals.

Dafny:  You mentioned something, Marc, that caused my ears to perk up. You said long-term contracts. I have two questions about that. One question is, I have often wondered why hospitals haven’t addressed this problem by having long-term contracts with the group purchasing organizations who, in turn, should have them with the suppliers and have failure-to-supply clauses that make it costly for a manufacturer to not have access to alternative supply sources. I guess the first question, is why can’t contracts fix this problem?

Harrison:  You know, I honestly don’t have the answer to that. You’re catching me on the edge of my knowledge base. What you say makes sense. I bet you’re not the first person who’s thought of it, either, but I don’t know why it hasn’t happened.

Dafny:  Yeah, I’m definitely not the first person who’s thought of it, and if you try to ask me any medical question, you would far exceed my knowledge base.

Harrison:  But generally, when people ask a more insightful question like that, they have an idea of their own. So why don’t you think it’s worked?

Dafny:  That’s a great question. I think, and it’s why I asked it — I’m worried about the shortsightedness of buyers. Specifically, in your case, I’m worried that the hospitals will all sign up and that the prices of your drugs will be higher than the spot price in the market, and that will ensure them access to a more reliably supplied product, but that they might defect when margins are low. They’ve got to cut somewhere — they like being part of the collective effort, but it’s just costly for them. That’s what I’m worried about, and that’s when buyers don’t pay extra for these kinds of assurances, because you know what it’s like to balance a budget.

Harrison:  I do. Believe me, I know what it’s like to balance a budget. You’re right. I’m actually really hopeful about that — I tend to be more of an optimist, as you probably figured out. The absolute dollars for a health system are not gigantic in this role. When I talk to my colleagues, they’re more worried about the shortages than the dollars, to be honest, and some of the pricing is referred to as profiteering. I guess I’d agree with that, but the thing that really worries them is when people can’t get their first-choice drug because it’s not around. I’m pretty hopeful, but if [the hospitals decide to cut], they’ll lose the opportunity to participate in the future.

Dafny:  Right. So that’s the thing. There’s got to be some kind of incentive to stay involved and not necessarily be able to benefit later on if you’re not able to commit or willing to spend a little more money, because, arguably, it’s going to cost something to have backup sources of supply, unless you can be more efficient. That would be fantastic if your team can come up with that.

Harrison:  I do think that we have big efficiency opportunities. As we get large numbers of hospitals on board and we have relatively long-term contracts, then we can have scaled operations and modern plants that allow these drugs to be made in large volumes and at relatively low costs, and I think that’s going to work.

Dafny:  So, Marc, let me ask this question. Industry must be reacting to this, and one way [the] industry could react is: “You know what, hey, this isn’t a level playing field. You’ve got access to cheaper capital than we have. How is that fair?” Do you have a response to that?

Harrison:  I haven’t thought about that specifically. This is not the entire industry we’re talking about. We’re talking about a real subset of the industry, and we’re not trying to go ahead and corner the generic drug market. As I said before, if people from a conventional part of the industry want to go ahead and stay away from the profiteering practices, we’ll just back away straight away. So I guess in the absence of their playing field, I feel comfortable with leveraging everything we have at our disposal to put our patients first.

Dafny:  That’s a good response. I definitely hear that response. You’ve got a nonprofit objective and different assets at your disposal to deploy in serving your patients. Two more questions for you. One is, when is day one? When do you expect to start? And I’m going to ask, and I know others have, what are you going to start with?

Harrison:  We expect to go dark for about a year as we’re getting things set up, and you will [probably] hear from us in the first quarter of 2019 as we get rolling. Of course, I can’t tell you what we’re going to start with because that will provide too clear a signal to folks who are engaging in profiteering. I suspect that they know who they are, and what I’d say is just go ahead and stop what you’re doing and put in fair pricing — stop creating shortages and get fair pricing back in play, and you’ll never hear from us.

Dafny:  What about the VA? I’ve heard that you have participation from a large government agency. That is pretty exciting. Can you tell us anything about the role they’re likely to play, and do you think the FDA is going to also look favorably on your new facilities?

Harrison:  I’ll start with the VA. They’ve provided us with a lot of help in thinking through the proposition. We also understand that they have very strict, and in my mind, very appropriate government purchasing regulations that they need to stay within, and we wouldn’t expect them to do anything other than adhere to those. My most sincere hope and my expectation is that we’ll make it through their [procurement] process — when I say we, [I mean] this independent company — and be able to sell generic drugs to the whole VA system.

As far as the FDA goes, I don’t know how they’re going to view us. I had the opportunity to hear the FDA leadership here at WEF and boy, was I impressed. Very thoughtful. Very nimble. Very patient-centered. But in the same breath, let me just say, we’re not asking for any special dispensation from the FDA. They need to do their job. We respect what they do in terms of keeping patients safe, and we’ll play by all the rules.

Dafny:  Very good. Those rules are going to cause a bit of a delay, so I understand you’ll be going dark, and hopefully for not too much longer than you have intended. Last question for you: Will you take a nomination for a name for your new entity?

Harrison:  Please. What do you want to call it?

Dafny:  Fair Pharma.

Harrison:  I love it, and how would you spell fair?

Dafny:  That’s the question.

Harrison:  I love it. Okay. You know, you may have just saved us a lot of money with one of those naming marketing firms. I think it’s fantastic. Fair Pharma. Maybe that’s it.

Dafny:  Maybe that’s it. Call off the branding agency, and I will feel I have made a minor contribution to this very, very impressive and important effort. Dr. Harrison, thank you very much for talking with us today.

Harrison:  Take care, and thank you for this opportunity and great conversation.

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