POLICY: Breakfast of Champions By Brian Klepper

THCB welcomes back frequent contributor Brian Klepper. Brian is the president of the Center for Practical Health Reform in Baton Rouge Louisiana. Brian has something to say about economist Daniel McFadden’s recent OP-ED piece in the Wall Street Journal.  If you like this post, you may enjoy his most recent post: "Can Consumerism Save Healthcare?"   

Several people dropped me notes last Friday, asking for comments on a WSJ piece
by Daniel McFadden, a Nobel Laureate in Economics at the University of
California Berkeley. Dr. McFadden provided an eloquent view of the
crisis and its necessary solutions, and also argued that Medicare D
was, according to his research, working well.


is an interesting problem. After all, Dr. McFadden IS a Nobelist and,
well, I’m not. And he’s a formally trained and obviously highly
respected economist while, again, I’m not.


the other hand, he’s not really a health care professional. So it may
not be unreasonable to point out that some of his assumptions are naïve
and – how do I say this – exactly wrong.

As Dr. McFadden notes, our
system is far more costly and has weak and inconsistent incentives for
quality control and cost containment" (a wonderfully succinct summary
statement). And yes, it is grossly inefficient, EVEN MORE SO than the
grossly inefficient health care systems in other countries. He is also
right that, without more available and accurate pricing/performance
information, health care cannot become a marketplace, with all a
marketplace’s attendant characteristics.


But there’s a place in his piece where I began to get uncomfortable. It was the paragraph that read:


are a number of reasons for this gathering storm. First, the U.S.
population is getting older, and the old require more medical
maintenance. Second, we are getting wealthier, and staying alive is the
ultimate luxury good. Third, we demand expensive medical innovations,
such as dialysis, MRIs, transplants, stents and biotech. About a third
of all medical costs are incurred in the last year of life, and are at
best marginally effective. The incentives in the system do not force


statement suggests that, for the most part, the care received through
the American system is generally correct or, at worst, the system’s
structure rewards using some services more than others. But there’s
very strong evidence that we’re not in this fix because the population
is getting old and needs more care. We’re not there because we’re
wealthy and (consciously) have chosen to spend more money on care. And
we’re not there because we demand expensive medical innovations,
although we certainly spend a great deal of money on them. "


American health care is in crisis because it has structural flaws that
encourage, rather than discourage, a combination of greed and ignorance.


are there because 1) It has served the health industry’s interests to
use a fee-for-service reimbursement system that rewards more care,
independent of the relationship of services to quality or safety, 2) A
lack of transparency has made it very difficult to see the excesses
that have occurred and have, indeed, cultivated an opportunistic
marketplace, because the vendors at every level know they won’t be
spotted, and 3) A percentage of the sizable largesse has been dedicated
to politically maintaining the status quo.


other words, Dr. McFadden’s argument suggests that we make conscious
decisions on these expenditures. I submit that, to an extraordinary
degree, we have allowed ourselves to become victims of
institutionalized excess, and that this far outweighs any other


The evidence clearly supports this. While it has made relatively little difference in the marketplace, John Wennberg MD at Dartmouth’s work on practice variation
has made it clear that the resource utilization of clinicians is all
over the map, even when they obtain the same outcomes. The attached
graphic from Jerry Reeves MD, a former national Humana Medical Director
and now the national Chief Medical Officer of the UNITE HERE union,
show resource consumption to get the same outcomes by physicians in the
Las Vegas market. What’s striking is that they typically vary 7-8 fold
across conditions.



Dr. McFadden is correct that administrative overhead, legal costs and
defensive medicine contribute to tremendous waste in the system, these,
like the excesses, are institutionalized in American health care. A
clear example is the fact that America’s single payer system, Medicare,
has had cost growth only a shade less pronounced than commercial
coverage. Private sector health plans ramp up cost through
administrative complexity in the operations of their own organizations
and those of their providers. Medicare has less administrative waste,
but has utilization that is through the roof, both because of a lack of
oversight and the perverse influence of Congressional lobbying that is,
again, difficult to discern. All these issues are involved.


On the issue of Medicare D, I also disagree with Dr. McFadden’s findings. Last year, I conducted some research with CARxE,
a San Francisco group dedicated to helping seniors identify the best
priced plans, given their drug needs. Using the pricing data submitted
to CMS by each plan, we calculated total out-of-pocket requirements for
each plan in 24 different markets, given different typical drug bundle
scenarios associated with different chronic illnesses.


We found that health plans developed three different strategies for their participation. There
were those, like Humana last year (I don’t know what their numbers look
like now) that had very competitive drug pricing. Most other plans fell
into a range of higher cost. And then a few were clearly predatory,
charging outrageous amounts in deductibles and co-pays, knowing that
some seniors would pick them by chance, and knowing that dual eligibles
would be distributed equally to all plans within a region. As far as we
could tell, there is no monitoring of these plans’ behaviors, and no
constraints. Drug bundles for common diseases, like diabetes and
osteoporosis, typically showed 300-1,200 percent differences in pricing
within the same market.


recently published a paper in the medical journal Community Oncology
detailing a flagrant example of these predatory pricing disparities. We
looked at seven oral cancer drugs in 3 markets. In cases when drugs
were on all plans’ formularies – there is no "standard formulary" for
Medicare D plans, so with complicated or rare drugs, patients face the
luck of the draw on coverage – there might be terrific pricing
differences. For example, a patient on the highest priced plan would
pay $4,490 more in out-of-pocket costs for Tarceva than a patient on
the lowest price plan, a 337% difference within the same market.


when drugs were both on and off formulary, the differences were
astounding. In Portland OR, for example, a senior on a plan for which
Thalomid is not on formulary would be required to pay $73,300 more (56 times)
what he/she would on a low-cost plan in the same market where the drug
is on formulary. Of course, for the senior suddenly diagnosed with
cancer and needing this drug, there is no way to predict this.


the absence of real transparency information (as well as responsible
governance), it is difficult to come to any conclusion except that
Medicare D is set up so loosely as to allow unprincipled health plans
to take advantage of seniors. Those plans do so with extraordinarily
heavy subsidies from a government that is presumed to be more an
advocate for patients than for corporations.


my interpretation of the health care crisis is different than Dr.
McFadden’s. I do not believe that niche fixes will work. The most
important thing we can do to make headway on meaningful reforms is to
move toward public reporting of comprehensive pricing and performance
transparency information. When purchasers – and here I mean employers
and government – see the outrageous excesses that are considered common
and acceptable, their astonishment will organically precipitate
performance-based reimbursement.


cringe to suggest that Dr. McFadden’s work on this point is not sound,
but surveying seniors to assess the efficacy of the Medicare D program
strikes me approximately as revealing as surveying car owners on their
safety of their vehicles. Most have had uneventful experiences and
don’t know much, if anything, about the mechanical dynamics lurking
internally. They’re happy as larks until something doesn’t go their
way. It is not partisan to say that Medicare D was developed in a
political context and was designed to benefit its designers. (I’ll be
happy to refer Dr. McFadden to the people who actually orchestrated the
program’s design and passage.) One need only look a little more closely
to become more intimate with its failings, which are that American
taxpayers pay way too much for what is delivered, seniors are in a
program that is capricious in its coverage, and that American seniors
too pay too much and receive much less than they might if our
government were not so susceptible to special interests.


of us who have been close observers of legislative and Congressional
politics know well that most laws are now shaped by corporate lobbying.
Until major health care organizations can’t easily get legislation
through that gives them favorable access to the $2.2 trillion largesse
that flows through American health care, our largest economic sector
will continue to become more unstable, a circumstance that bodes
extremely poorly for the larger economy.


this obviously great economist failed to distinguish these issues is
disappointing, though not surprising. That the WSJ published it is not
surprising at all, since it aligns with a corporate philosophy that is
often partisan on this and related issues.

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8 replies »

  1. Thank you W. And those tax breaks were sure worth it too.
    Part D was a pure, unadulterated special interest giveaway, thanks to our moneyed political system.

  2. Ultimately here is what you need to know about Medicare Part D straight from the horse’s mouth:
    U.S. Comptroller General David Walker states, “The prescription drug bill is probably the most fiscally irresponsible piece of legislation since the 1960s,” says Walker, “because we promise way more than we can afford to keep.”
    He argues that the federal government would need to have $8 trillion today, invested at treasury rates, to cover the gap between what the program is expected to take in and what it is expected to cost over the next 75 years and that is in addition to more than $20 trillion that will be needed to pay for other parts of Medicare. “We can’t afford to keep the promises we’ve already made, much less to be piling on top of them.”

  3. Sorry Jim. The president’s plan, and virtually everything else the president does, lacks public trust. Though I voted for him twice, I have not seen him once respond to public need. As an ex-lobbyist I am sure you understand the situation.

  4. Brian:
    I fully and wholeheartedly agree with your comments:
    >>>>> ”I do not believe that niche fixes will work. The most important thing we can do to make headway on meaningful reforms is to move toward public reporting of comprehensive pricing and performance transparency information. When purchasers – and here I mean employers and government – see the outrageous excesses that are considered common and acceptable, their astonishment will organically precipitate performance-based reimbursement.” (Emphasis added)
    However, I think you might well:
    The Bush Health Plan (even if not passed by Congress) would appear to provide all the leverage necessary to expose the “outrageous excesses” to which you refer. This is because W’s HEALTH PLAN = two new Ws’ (Germs?)WINDFALL(W1)and/or WHEREWITHALL(W2) as explained in my prior (Feb 25) post re Matt Holt’s slumber interruption during the January 25, state of the nation address in THCB – Bush Health Plan.
    The Bush plan is really quite novel and interesting. By the ides of April all tax authorities (Federal, State and Local) and taxpayers (businesses and voters) will be able to determine in dollars and cents how the Bush Plan would affect their treasuries and pocketbooks. No more pig in a poke proposals or “we’ll work that out after I’m elected or reelected” excuses. The recurring questions will be:
    • Senator, Congressman or Candidate: How in $$$ is your reform plan better or more generous or efficient than the President’s plan?
    • If you have no better plan at present would you support passing the President’ now and work to improve on it later?
    Another outstanding feature of The Bush plan in my view is that these new dollars (taxable value of the Federal tax exclusion) will flow directly to the states without going through the expensive and uncertain Congressional appropriations process. Rather, the funds would be generated through existing state and local taxes. How much?
    Eric noted in a post on another thread that the value of the Federal tax benefit exclusion in 2004 was $190 Billion. Today, it seems the exclusion value would be closer to $240 Billion or about $20 Billion per month of taxable and recurring revenue enhancements-new taxes. The 240 billion value is probably only a floor since the Congressional
    majority and all presidential candidates may be expected to try to up the ante and put their imprimaturs on whatever plan is finally enacted.
    Tick Tock Tick Tock Tick Tock – the clock is already running and state and local revenues are being forgone. It is this facet of the Bush plan that should sharply curtail prolonged Congressional dithering. The Governor’s (and state legislatures) will surely support any proposal whereby they can enjoy a substantial new revenue streams without increasing taxes, and the more dollars the better. Thus, perhaps we should all BEWARE THE IDES OF APRIL! You can bet we will all be attentive to what’s happening.
    For more background on the Bush plan, edited excerpts from my post last Sunday, February 25th on THCB re the Bush Health Plan follow.
    W’s HEALTH PLAN = two new Ws’ (Germs?)WINDFALL(W1)and/or WHEREWITHALL(W2)
    At least that is my conclusion re the following excerpt (of Matt’s comments) from THCB dated January 25, 2007 POLICY/POLITICS: Bush’s Health Plan:
    “The Bush proposal that woke me up was the creating a tax deduction
    for health insurance that would apply to everyone. Potentially this
    really matters, and inside it is the germ of the right idea. But I
    guarantee you that most Americans won’t have a clue where this came
    from, and why it made it into the president’s speech.”
    Initially, Kudos’ to you and THCB for being a terrific resource for
    those involved or interested in health care issues. I believe THCB will
    prove indispensable for tracking and discussing health care
    developments in the future.
    I agree with you a) that the Bush plan contains a germ of the right
    idea and b) that most Americans don’t have a clue as to where (the Bush plan) came from or why it was included in the state of the union
    address. Further, I suspect we might agree that the mere fact that
    President Bush proposed the plan is likely to generate most of the
    resistance to it. I think we might also agree that at this point most
    Americans don’t (at least yet) understand, care or appreciate the
    impact of the plan. Do these issues really matter? I don’t think they
    do. My experience suggests a good idea will prevail, and often will
    take on a life of its own, regardless of who suggested it. With the
    internet and blogs like THCB, ideas, good, bad or even ugly are not
    easily suppressed.
    So, does the Bush tax deduction proposal have merit?
    I think the Bush plan has a great deal of merit, more merit and the
    potential for implementation of sound health care policy than any
    proposal I’ve observed in some forty years of dealing with insurance
    and health care issues as an attorney in private practice and in both
    state and municipal government, as a health care lobbyist, and one shot
    as political candidate (unsuccessful). Currently, I’m a 67 year old
    seasoned citizen in a state of job lock (for the pay and benefits) and
    fearful of retirement. This personal stuff is not to elicit sympathy
    but is offered to afford some background on those experiences which
    might affect my views. Now, as to the merits, or at least my personal
    view based on the rather limited information currently (available). Clearly new information, congressional modification, amendments etc. might change my views on any of these points from a plus to a minus.
    Plus Side:
    1. The plan places primary responsibility for health care spending
    decisions on the individual or family subject to state and local
    government regulation. The federal government role is more limited but
    is still significant and of course is always subject to change via
    Congressional action. I view this as a positive but I realize that many
    might disagree.
    2. States would appear to have broad discretion on how best to
    deliver, regulate or provide healthcare. ERISA issues aside, insurance
    regulation would continue at the state level.
    For example, it seems that a federally based one size fits all single
    payment system would not be possible. On the other hand a state based
    or regional or even local based single payor systems would be possible
    if permissible under state law. Multi-state or regional plans involving
    more than one state appear problematic without additional Congressional
    Again, I would anticipate that some will consider this attribute as a
    negative and agree that in some instances such views might be well
    founded given the power and resources of the insurance industry.
    3. The Bush plan is simple and easy to compute.
    I think most would agree that this aspect should appear as a plus. We
    will soon find out since every taxpayer should know by April 16 or be
    able to calculate a ballpark figure of how the proposed changes will
    affect them.
    4. At the Federal level, the Bush plan would tax the rich – the rich
    being those whose healthcare expenses exceeded the proposed (generous)
    exemptions – $7500 for single taxpayers, $15000 for joint taxpayers.
    Everybody but the rich is likely to agree that this is a positive.
    5. At the State/Local Level the “Germs” dubbed WINDFALL(W1) and/or
    WHEREWITHALL(W2) kick in and taxpayers will be impacted in accordance
    with their state & local tax structure.
    a. The WINDFALL(W1) germ impacts those (relatively few) states with no
    state or local income taxes. In these states, as I understand it, the
    working poor will receive tax relief from payroll taxes including
    social security for health care expenses. With no state/local taxes,
    this new “income” spending on health care should have a positive
    impact. I dub the W1 germ WINDFALL because state and local economies
    would benefit from this additional spending power upon the effective
    date of the plan with no legislative action on their part. It appears
    that withholding amounts would simply be adjusted downward and fatter
    paychecks would follow. It is not clear how it would be assured that
    such amounts are spent on health care. I suspect significant penalty
    and interest charges would be applied.
    b. The WHEREWITHALL(W2) germ would impact the substantial majority of
    states, those that have state and/or local income taxes . Unlike W1
    states, the W2 impacted states would need to take prompt state
    legislative action to offset the highly regressive impact of their
    income taxes on the new non cash but taxable income – the value of a
    taxpayers health care benefits or expenses. Even after adjusting the
    for the regressive effect (presumably by exemptions or credits), there
    should still be plenty of money left for states to design and implement
    more efficient health care plans to meet the needs of their citizens
    and perhaps other needs as well. Dubbing the W2 germ WEREWITHALL seems
    appropriate since it addresses the most serious and most frequently
    omitted issue in most health care proposals – how are we going to pay
    for it.
    Though the answer to who or how do we pay for it is always we all do,
    the Bush plan has a quite novel wrinkle. This because Congressional
    action taxing and exempting health care benefits or taxing the rich
    actually generates substantial increases in state and local taxes in
    the W2 states. The state legislatures then have to correct the
    regressive effects, carve out sufficient amounts for their health care
    reforms and stave deal with all other interests who might wish to share
    in any unallocated balance of the WHEREWITHALL.
    Just imagine how many blogs will be generated during this process. Is
    THCB ready for this?
    To sum up, my take is that both W1 and W2 are good “germs” and there
    appears no urgent need to find or administer a vaccine. All states and
    local governments and more importantly the people could benefit from
    this plan. The plan clearly places the ball in the states court with
    what appears to me to be an adequate and appropriate financing
    mechanism, which in itself is a remarkable feat. I believe President
    Bush has presented a serious and well thought out plan for health care
    Surely the Presidents plan is worthy of further discussion and debate.
    I certainly hope we can agree on this last point and further that you
    and THCB make it possible. Imagine THCB reporting on the progress of
    the 50 little crucibles of democracy hard at work fashioning health
    care reforms appropriate to their citizens.
    Thanks for taking the time to read this post. I urge and will be
    pleased to reply to any comments or criticisms … …
    Jim Newcomer
    Posted by: Jim Newcomer | Feb 25, 2007 7:39:57 PM

  5. After reading the fraud articles that jd linked to, my thoughts turned to a robust ID with a picture and a fingerprint, this time for providers. This would include doctors, nurses, therapists, technicians, aids, health care related business owners, and people involved in billing. Medicare should also be given more time to pay its bills – at least 15 days, I think. More auditors and stiffer penalties for those caught would also be in order.
    If it were up to me, we would all have the robust ID, but I know the civil libertarians have a problem with it. When I worked for a bank and a brokerage firm, I was fingerprinted as a condition of employment. I was also fingerprinted when I was drafted into the army in the 1960’s. I just don’t view it as that big a deal. For people who are tapping into government money, however, whether it’s business owners and medical providers billing Medicare or Medicaid or people applying for food stamps, welfare, Medicaid, or Medicare, I don’t think it’s too much to ask that they prove that they are who they say they are. If they are inclined to cheat taxpayers, the faster and easier we can find and prosecute them, the better.

  6. Excellent pieces all.
    jd, there are many facets to this, and the middleman is just one of them. I am leaning toward a Medicare-for-all system, which is 20% co-pay or Gap insurance, but with 100% vouchers for those under the poverty level and perhaps a 50% voucher under twice the poverty level. I also favor 100% relief on catastrophic illnesses, and agree with Barry on a reasonable end-of-life solution (ie, automatic no-code on people over 90 unless the family is able to and agrees to absorb all costs).
    But there is serious overbilling on the physician side, and I believe we need to retrain those displaced from the insurance industry to Medicare oversight. Okay, let the private insurers bid on that since they are no longer able to reap benefits from the current inefficiencies. I also believe we need medical courts. I’d keep Medicare Advantage, even though it costs 12.5% more than Medicare. It gives patient choices.
    The rampant fraud in nursing homes and even private home health agencies must be curtailed and prosecuted, and we should implement a law that requires employees to be educated on the whistle-blower statutes and rewards. Let the employees provide the oversight, though with such a law I assure you that the owners will clean up their act fast.
    I do believe that Medicare reimbursements should be increased and doctors should be paid very well, and we must take more advantage of PAs and nurse practitioners than we have in the past.
    I support a national patient database for transparency of utilization, best practice and practice variations, medication conflicts, and etc, though with patient names remaining local unless released by the patient for travel purposes. The VA VisTa system is well suited for that because it is open source (and free), but if another company with something well designed comes along I’d have no problem if they agreed to sell it to the government and make it open source.

  7. Brian,
    I am in complete agreement on the need for robust price and quality transparency tools as I’ve said many times. I’ll make the following additional points:
    1. A move to health courts to settle malpractice disputes could help to reduce diagnostic testing. Under the current jury based system, many docs are afraid of suits that relate to a failure to diagnose, so they think they need to rule everything out regardless of cost.
    2. To minimize expensive and often unwanted care at the end of life, everyone should either be required to execute a living will or advance directive for healthcare as a condition of insurance and/or every doctor that has an ongoing relationship with a patient should address end of life wishes early on, get it in writing, and make sure it is part of the patient’s record. This is especially true for doctors who treat patients with terminal illnesses (Stage IV cancer, ESRD, etc.).
    3. With all the advances in information technology, we should be able to develop a system that scores doctors for cost effectiveness either on a curve (1-5, for example) or based on some absolute relationship to best practices. Such a system would be especially useful to PCP’s and other doctors who make a lot of referrals. Ideally, a doctor should be able to key in a specialty and a zip code and get a list of the specialists within a given radius, along with their cost-effectiveness scores. Perhaps doctors who score well for cost-effectiveness could receive semi-annual or annual bonuses on top of their regular fees as a reward for efficient use of healthcare resources.
    4. Drug pricing transparency tools are already decent but could be better. Doctors should know or be able to easily find out which drugs for a given purpose are the cheapest, and, unless there is some reason why the patient can’t tolerate it or won’t do nearly as well as with another drug, gravitate toward the lowest cost option. At the same time, patients should be able to learn which local pharmacy charges the least for the drug they need unless their plan has a flat dollar co-pay. Health plans should move to percentage of the cost co-pays to give patients an incentive to find the retailer that will provide what they need at the lowest cost.
    If Medicare showed any willingness whatsoever to embrace some of these technologies to reduce utilization of services without adversely affecting health outcomes, it might have more credibility as a potential health insurance plan for the rest of the population. So far, they haven’t earned that credibility, and they have a long way to go before they do. I would rather take my chances with a taxpayer funded voucher and lots of private insurance choices, along with the ability to buy a supplemental policy to cover what the basic plan doesn’t (if I want to).

  8. Brian,
    Excellent criticism of the nonsense that passes for analysis of our health care mess in the popular media.
    As for poor cost controls in Medicare, there was a recent article on the new fraud mills that exploit the requirement by Medicare to pay claims immediately rather than review the claims first. Estimate just for fly-by-night fraud mills: $20 billion lost. That’s on top of code creep and dozens of other “revenue enhancement” and <a href="http://www.ncpa.org/health/pdh5.html"more traditional fraud strategies.
    Everyone complains about how insurance companies handle claims. Some of it is justified, but most of it is not. When you don’t scrutinize claims, providers will take immense advantage of the system in a fee for service world. Health care fraud is conservatively estimated to be in the ballpark of 10% of total costs. That’s $200 billion in 2006.
    And yet, what do people think is the solution to our troubles? Get rid of the insurance “middle man.” You can certainly do that and save money, but only on one condition: that you simultaneously transform the incentive structure for providers and lower what you pay them. This is what will provide the vast majority of savings. This must be done by government, but it can be done with or without a significant role for private insurance.