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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MGJim NewcomerJack LohmanBarry Caroljd Recent comment authors
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Jack Lohman

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.


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… Read more »

Jack Lohman

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.

Jim Newcomer
Jim Newcomer

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: BEWARE THE IDES OF APRIL – YOU ARE ABOUT TO GET WHAT YOU ASK FOR PLUS THE 50 COMMUNITIES… Read more »

Barry Carol
Barry Carol

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… Read more »

Jack Lohman

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… Read more »

Barry Carol
Barry Carol

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… Read more »


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… Read more »