Test strip reveals a big profit motive

The nights are long this time of year in Kasilof, Alaska, a small community of about 500 people south of Anchorage. And for Keith Laurie, they’re just a little bit longer.

His 15-year-old son was diagnosed with Type 1 diabetes five years ago. A year later, Laurie, 56, lost his job with a chemical manufacturer.

Because of the high cost quoted for an individual insurance policy -- $1,300 monthly -- they’ve been without insurance for four years. Laurie estimates his son’s medical costs at about $400 a month, all of which he pays out of his own pocket.

“It feels like we’re being gouged,” he told me. “The costs to the drug companies can’t be that high. But what choice do we have? We’re a captive market.”

The economics of chronic disease are worth considering in light of California lawmakers’ proposal Tuesday to require all state residents to either receive health coverage through work or to buy it on the open market.

Under the Democrats’ plan, state taxpayers would largely subsidize coverage for low-income people. Middle-class people lacking insurance, meanwhile, could be forced to spend thousands of dollars annually for individual policies.

Chronic diseases represent a steady strain on healthcare resources and a steady revenue stream for the $600-billion global pharmaceutical industry.

Diabetes is illustrative of the dynamic, but we could just as easily be talking about heart disease, AIDS or any of a number of disorders for which people become reliant on healthcare.

Also, having been recently diagnosed with Type 1 diabetes myself, I have a selfish interest in understanding why supplies such as insulin and needles costs as much as they do.

Take the test strips.

San Francisco Bay Area resident Amy Tenderich, 41, was diagnosed with Type 1 diabetes several years ago. She checks her blood-sugar level at least a dozen times a day by jabbing herself in the finger and applying a thin test strip to the drop of blood that emerges. The strip is inserted in a small glucose meter, which provides a numeric reading of her blood-sugar level.

Each strip costs about $1. That’s at least $12 a day, or more than $4,300 a year. Tenderich’s insurance covers a significant portion of that cost but not all.

She’s one of about 21 million adults and kids diagnosed with diabetes nationwide.

“One dollar apiece?” Tenderich asked. “When the pharmaceutical companies have such economies of scale? No way.”

She writes a blog called Diabetes Mine and said she routinely hears from other people with the disease who can’t fathom why they’re being charged $1 per strip for a test that millions of people have to perform multiple times daily. “There’s a lot of anger,” Tenderich said. “We understand that these are businesses and they have to make profits. But these profit margins are too much.”

Market researcher Frost & Sullivan estimated the worldwide market for glucose monitors and test strips at $6.3 billion as of 2005. That market is forecast to be grow 8% annually in North America and 16% a year elsewhere.

I contacted some of the leading players in the diabetes management field, and not one would discuss the precise costs involved to make test strips.

“That’s proprietary,” a spokeswoman for Bayer HealthCare said.

Dave Detmers, a spokesman for Johnson & Johnson’s LifeScan subsidiary, said the cost of test strips reflects not just research and development but also the practice of frequently giving away blood-glucose meters. “Right or wrong, that’s how it’s done,” he said.

The business model is pretty clear: Companies swallow the under-$100 cost of supplying a typical meter to diabetics because test strips can run hundreds of dollars monthly -- for the rest of a diabetic’s life.

That’s basically the same as shaving-cream companies giving away razors so they can get you on replacement blades. Except that people don’t die if they stop shaving.

“Fortunately, the majority of people have health insurance, which helps offset costs,” Detmers said.

Unfortunately, this could jack up premiums for all other policyholders.

The Advanced Medical Technology Assn., an industry group, declined to comment on the economies of scale that should exist for a marketplace of 21 million steady customers.

Teresa Lee, the group’s vice president for payment and policy, noted only that “manufacturers invest significant resources into research and development and quality assurance activities to continually improve their products and to make sure they meet manufacturing specifications.”

David Kliff, a financial analyst who specializes in the diabetes marketplace, has estimated the cost of producing a test strip at 8 to 12 cents. If so, that means a strip that retails for $1 represents a roughly 900% markup.

At what point do such profit margins stop being a fair return on investment and start becoming something more insidious: the fleecing of millions of people who just happen to have a life-threatening, chronic disease?

The high in Kasilof on Tuesday was 33 degrees. But the weather outside wasn’t as chilly as Keith Laurie’s feelings about his teenage son being economically beholden to the pharmaceutical industry.

“They give you the meter to get you in the door,” he said. “Once they have you, they have you. You have to do the tests.”

Fair is fair. This is something else.

Consumer Confidential runs Wednesdays and Sundays.

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