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A Modest Health Care Economics Experiment to Fight Rising Costs

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Healthcare providers, medical institutions, local pharmacies and pharmaceutical companies generally set the price of their products/services well above the payment they expect to receive from all insurers. These healthcare vendors set their fee schedule at 150%, 200% or 1,000% of the maximum payment they expect to receive from their most generous payor.

Here in Massachusetts, when a healthcare product or service is consumed and the patient has health insurance, the vendor submits a bill to the insurance company who specifies the “allowed fee,” which is considerably less than the “billed fee,” and the vendor “writes off” the balance of the  “billed fee” from their books.

For example, I recently had some blood tests done at Quest Diagnostics. Quest Diagnostics sent a bill to my insurance company for $660. The “allowed payment” was $110, so Quest wrote-off $550 and the “allowed payment” of $110 was divided between me and my insurance company.

“Value-Pricing” of Drugs and Pharmaceutical Innovation

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In a fascinating paper on drug pricing, Ana D. Vega and her five co-authors trace increases in the price of brand-name and generic drugs in the U.S. during the period 2012-15, using the national average drug acquisition costs (NADAC) data made public by the Centers for Medicare and Medicaid Services (CMS). These acquisition costs are the prices that retail community pharmacies pay to acquire medicines, usually from a wholesaler.

The tables in the paper show that the top 50 increases in the price of generic drugs over the three-year period ranged from a “low” of 448% to a high of 18,808%. For branded drugs the increases over the period ranged from a “low” of 63% to a high of 391%.

The paper also presents data on the wholesale acquisition costs (WAC) differences between first-in-class drugs and subsequent me-too-drugs, the latter usually costing much more than the first-in-class drugs, although they typically involve only small molecular changes. Here the price differentials varied from a low of -2.3% (the sole case me-too-drug actually being cheaper than the first-in-class drug) to a high of 61,259%.

It is rare to find such transparency on drug prices in this country, presumably because the data are in possession of a public agency, the CMS. By contrast, the private sector usually confronts both patients and researchers with contemptuous opacity. The pharmaceutical benefit management industry (PBMs) is particularly opaque on drug pricing, and private insurers and employers have gone along with it.

Price increases of the sort reported by Vera et al. usually are defended on two distinct grounds.

The first is what has come to be called “value pricing’ the idea that the price of a drug should be pegged on the value that drug has to patients or to society at large, in their eyes. For life-saving drugs or pain-killing drugs, that value can be very high.
Another defense of the ever rising prices of drugs is that they are needed to provide the incentives for new drug development.

Value Pricing

In my presentations on drug pricing, I often use the following metaphor to convey the central point of this concept.
Picture, then, a man somewhere in the Sahara desert close to dying of thirst.

Along comes a camel caravan for tourists, loaded with bottles of water. Assume the chap on the first camel is a private equity manager who knows a thing or two about “value creation” through “value pricing.” Assume the lady on the camel behind the first is a corporate lawyer.

Jumping off the camel, the private-equity chap approaches the dying man and, water bottle in hand, queries the dying man thus:

“How much would you pay me for this fresh bottle of water?”

Purging Healthcare of Unnatural Acts

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Everyone knows (or should know) that forcing a commercial health insurer to write for an individual a health insurance policy at a premium that falls short of the insurer’s best ex ante estimate of the cost of health care that individual will require is to force that insurer into what economists might call an unnatural act.

Remarkably, countries that rely on competing private health insurers to operate their universal, national health insurance systems all do just that. They allow each insurer to set the premium for a government-mandated , comprehensive benefit package, but require that each insurer “community-rate” that premium by charging the company’s individual customers that same premium, regardless of their health status and even age (with the exception of children).

American economists wonder why these countries do that, given that in the economist’s eyes community-rated health insurance premiums are “inefficient,” as economists define that term in their intra-professional dictionary. 

The Affordable Care Act of 2010 (ACA, otherwise known as “ObamaCare”) also mandates private insurers to quote community-rated premiums on the electronic market places created by the ACA, allowing adjustments only for age and whether or not an applicant smokes. But within age bands and smoker-status, insurers must charge the same premium to individual applicants regardless of their health status.

As fellow economist Mark V. Pauly points out in an illuminating two-part interview with Saurabh Jha, M.D., published earlier on this blog, aside from the “inefficiency” of that policy, it has some untoward but eminently predictable consequences. It happens when healthier people disobey the mandate to purchase insurance, leaving the risk pools of those insured in the ACA market places with sicker and sicker individuals, thus driving up the community-rated premiums. As Pauly points out at length, a weakly enforced mandate on individuals to be insured can become the Achilles heel of community rating.   

Price Transparency and All Its Very Large Warts

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Transparency – including price, quality, and effectiveness of medical services is a vital component to lowering costs and improving outcomes.  However, it is imperative transparency go hand-in-hand with financial incentives for patients and consumers; otherwise the quest will be in vain.  The single best way of reducing costs while not worsening health outcomes is to redistribute resources from less cost-effective health services to more cost-effective ones.  Americans are extremely uncomfortable with the idea of making decisions based on cost but we must become fluent in the language of cost and more comfortable making decisions based on price information for healthcare expenditures to stabilize. 

Legislators in more than 30 states have proposed legislation to promote price transparency, with most efforts focused around publishing average or median prices for hospital services. Some states already have price transparency policies in place. California requires hospitals to give patients cost estimates for the 25 most common outpatient procedures. Texas requires providers to disclose price information to patients upon request. Ohio passed price transparency legislation last year; however a lawsuit filed by the Ohio Hospital Association has delayed implementation.  The cost of a knee replacement is $15,500 at the Surgery Center of Oklahoma, whereas the national average is $49,500

Failure to Translate: Why Have Evidence-Based EHR Interventions Not Generalized?

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The adoption of electronic health records (EHRs) has increased substantially in hospitals and clinician offices in large part due to the “meaningful use” program of the Health Information Technology for Clinical and Economic Health (HITECH) Act. The motivation for increasing EHR use in the HITECH Act was supported by evidence-based interventions for known significant problems in healthcare.

In spite of widespread adoption, EHRs have become a significant burden to physicians in terms of time and dissatisfaction with practice. This raises a question as to why EHR interventions have been difficult to generalize across the health care system, despite evidence that they contribute to addressing major challenges in health care.

The Arc of Justice in Healthcare

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We all fear that phone call.  A medical report turns out the wrong way and life may never be the same.  When that call arrives we all have the same needs:  A doctor who cares, a place to go for treatment and the finances to afford what’s needed.  Starting on January 20th, some of my patients will join the 20 million whose lifeline to those fundamental needs becomes jeopardized.  

One of my patients facing this threat lost his job and health insurance during the 2008 recession.   Because he’s a diabetic and has a special needs son, no insurance company would sell his family a policy.   Why would they?   Diabetics and others with serious illnesses pose high risks for future health expenses.  Insurance companies make money by avoiding such risk.   After exhausting all the options, he sweated out 18 months with no coverage.   Finally, the roll-out of the California Exchange, funded by the Affordable Care Act (ACA), allowed him to buy an Anthem Blue Cross policy for his family.  

Do we really want millions of our fellow Americans to relive those nightmares?  We all benefit from the ACA’s fundamental commitment: That everyone deserves access to healthcare regardless of their ability to pay.  The policies guided by this principle moved us toward the achievement of universal coverage without changing the existing care of the majority of working families with employer based plans nor those with self-funded coverage.   

Paying Doctors For Outcomes Makes Sense in Theory. So Why Doesn’t it Work in the Real World?

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For decades, the costs of health care in America have escalated without comparable improvements in quality. This is the central paradox of the American system, in which costs outstrip those everywhere else in the developed world, even though health outcomes are rarely better, and often worse.

In an effort to introduce more powerful incentives for improving care, recent federal and private policies have turned to a “pay-for-performance” model: Physicians get bonuses for meeting certain “quality of care standards.” These can range from demonstrating that they have done procedures that ought to be part of a thorough physical (taking blood pressure) to producing a positive health outcome (a performance target like lower cholesterol, for instance).

Economists argue that such financial incentives motivate physicians to improve their performance and increase their incomes. In theory, that should improve patient outcomes. But in practice, pay-for-performance simply doesn’t work. Even worse, the best evidence reveals that giving doctors extra cash to do what they are trained to do can backfire in ways that harm patients’ health.

It’s Up to Clinicians, Not the Government or Payers, to Control Health Care Costs

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Behind many of the economic and political tensions of our time lurks the growing burden of health care costs. Does that claim sound inflated? Consider: when the public complains of stagnating wages, we can put our finger on health care costs as the monster that gobbles up employee compensation. When economists fret over the future burden of Social Security and Medicare (a cry echoed across the world as populations age), we have to recognize the scourge of increased health care costs. Most of the current debates over the Affordable Care Act–a recurring issue during the presidential campaign–touch explicity or implicity on health care costs.

The upward curve in costs became less of a run-away trend during the recession. Although the ACA might take a bit of the credit, most observers attribute the softening of the cost rises to belt-tightening by patients, and perhaps also to lower inflation. Inexorably, though, costs do rise. Small businesses and people on individual plans suffer most–a burden for which the ACA is not responsible, but that it brought to public attention–and the rest of us are bedeviled by rising premiums and deductibles as well. A study found spending increases across the board in 2015 by individual households, businesses, and governments alike. A number of people give up on health insurance because it’s still too expensive and does not end up covering their needs.

Insurers are suffering too, which is why even major companies such as Blue Cross and UnitedHealth are abandoning some markets.

Universal Coverage Means Less Care and More Money

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The reported success of the Affordable Care Act (ACA or ObamaCare) is based on enrollment numbers. Millions more have “coverage.” Similarly, the predicted disasters from repeal have to do with loss of coverage. Tens of thousands of deaths will allegedly follow. Activists urge shipping repeal victims’ ashes to Congress—possibly illegal and certainly disrespectful of the loved one’s remains, which will end up in a trash dump.

Where are the statistics about the number of heart operations done on babies born with birth defects, the latest poster children? How about the number of babies saved by this surgery, and the number allowed to die without an attempt at surgery—before and after ACA? I haven’t seen them. Note that an insurance plan doesn’t do the operation. A doctor does. The insurer can, however, try to block it.

Something Not So Terrific

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The brand new President Barack Obama, whether wittingly or not, invested his entire political capital in reforming health care in America. He gambled and he lost, not because he had nefarious intentions, but because he left the gory details to a corrupt Congress and a shady cadre of lying and conniving technocrats, ending up with something vastly different from what he campaigned on. From everything I’m reading now, Mr. Trump is about to walk in Mr. Obama’s footsteps, and if he does, the results will be unsurprisingly identical.

On the campaign trail, Mr. Trump repeatedly stated that Bernie Sanders forfeited his place in history when he “made a deal with the devil” and embraced the corrupt Democratic Party establishment that fought his candidacy in most abject fashion. Guess what? Mr. Trump seems to be making the same deal with the red version of the same devil. Mr. Trump’s cabinet choices indicate that he is now embracing the ultra-conservative factions of the Republican Party, the same people who actively or passive-aggressively opposed his candidacy. Nowhere is this peculiar and completely unnecessary capitulation more evident than in the beleaguered health care sector.