Neither the Republicans Nor the Democrats Want to Face the Provider Cost Problem

A key piece of Paul Ryan’s deficit reduction plan is to change Medicare as we know it. It appears his bold Medicare premium support proposal is failing to gain traction–it is dead as part of any deficit reduction deal this year. Worse, his Medicare proposal looks to be giving Democrats lots of political ammunition for the 2012 elections.

What lies at the heart of Ryan’s Medicare difficulties is that he would all but abandon future seniors (those now under age-55) to a health care system whose age-adjusted premium support would increase each year only at a rate equal to the increase in the consumer price index while their health care costs would likely continue to increase far faster.

Simply, Ryan just shifts the future burden of uncontrolled Medicare health care costs from the federal government to the senior. That will solve a big part of our federal deficit problem but hardly help people.

Yes, he offers a defined contribution health care solution with the promise of invigorating the markets and making costs lower. But we have had a form of Medicare premium support and private competition for years (Medicare Advantage) and there isn’t a lot of evidence the market can get the cost control job done on its own. (See: Defined Contribution Health Care—The Conservatives’ Silver Bullet)

The Democrats have had a field day scaring people over the Ryan proposal because, quite frankly, the Ryan plan gives them a lot of legitimate ability to do so. I guess the definition of a terrible policy proposal is one your opponents can successfully attack without having to mislead people.

But Ryan isn’t the only one guilty of trying to put consumers into a health care system that limits federal spending by shifting the excess cost burden from the government to the consumer.

I call your attention to Jim Capretta’s recent column at Kaiser Health News. Here is a key paragraph:

Ryan’s critics have focused particular attention on his plan’s indexation of the Medicare “premium support credits” to the CPI in the years after 2022, suggesting that this idea is somehow beyond the pale. But this is sheer hypocrisy on their part because the indexing of government-financed premium credits below cost growth is in the president’’ plan too, and yet not a complaint has been heard about that from its advocates. That’s right. After 2018, if the aggregate governmental cost of premium credits and cost-sharing subsidies provided in the state-run exchanges exceeds about 0.5 percent of GDP (a condition that the Congressional Budget Office says will be met), the recently-enacted health law requires the government’s per capita contribution to health plan premiums in the exchanges to rise more slowly than premiums. The administration actuaries interpret the law to mean that the government’s contributions toward coverage will rise with GDP growth after 2018. CBO appears to have a different interpretation. Still, under all interpretations and projections, it’s clear that the exchange credits in the new law will not keep pace with expectations of rising health costs. And that’s exactly what the president is now saying is so wrong with Ryan’s Medicare plan.

In fairness, Capretta also makes the broader point that he believes the Ryan plan would create the rigorous competition Medicare needs to control costs.

But in my mind, the real issue here is that both Ryan and the Democrats have made the same mistake.

Both are mostly avoiding the fundamental health care problem in the first place—chronic escalation in costs much higher than either GDP growth or the consumer price index. Neither side has offered a bold plan designed to change the current fee-for-service provider payment incentives that just keep fueling these unaffordable costs. Neither side seems either willing or capable of taking on the provider.

But both are willing to control future federal spending by dumping the excess health care cost problem on the consumer.

I don’t think we are going to have a real health care debate in this country until the voter/consumer/patient comes to understand the long-term threat they face from health care costs that show no sign of abating and they demand that the politicians aim for a solution not on their backs but on the backs of the people sending them these bills.

Robert Laszweski has been a fixture in Washington health policy circles for the better part of three decades. He currently serves as the president of Health Policy and Strategy Associates of Alexandria, Virginia. Before forming HPSA in 1992, Robert served as the COO, Group Markets, for the Liberty Mutual Insurance Company. You can read more of his thoughtful analysis of healthcare industry trends at The Health Policy and Marketplace Blog, where this post first appeared.

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  1. I agree that there are many ways in which bringing trnasparency to the healthcare marketplace would be a very good thing, particularly as it relates to measures of high value care. However, this is an area in which one should be very careful before making any blanket ideological statements about the power of the market or the government. The provision of most medical services, particularly those that drive the vast majority of medical costs, is very much unlike, for example, optional and standardized laser eye surgery . When talking about health costs and how to control them, keep in mind that we are talking, for the most part about care for people like disabled seniors with multiple chronic conditions such as diabetes and congestive heart failure. This is not a situation in which the conditions for market competition are in place, nor for a number of reasons would we want them to be.I hope that this new blog, which already has a wealth of thoughtful content, will be a forum for people to engage thoughtfully about these issues.

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  4. Nobody wants to attack the cost problem because it’s not politically viable, there are too many hands in the healthcare profit cookie jar, and Americans generally have the “someone else should pay for it” syndrome when it comes to healthcare costs. Just look at how many people complain when their insurance won’t cover an office visit for $20. They can’t get past the point of realizing that health INSURANCE is to protect against a catastrophic financial loss, not to take $60 off their cost of an office visit. If I had a nickel for every time I’ve heard “I just want to make sure the office visits have a low co-pay” I might just be able to afford a COBRA premium or two.

  5. Very interesting article.
    It is very toughest to control chronic diseases such as osteoporosis or Parkinson’s disease as prescribed as – Oxycodone or Lortab – medicines are very expensive that is why is very complicated.

    Rafael Nadal

  6. Margalit –

    Most PBM contracts in recent years pass drug rebates back to the self-funded employer / customer / payer. The most significant part of PBM profits comes from filling generic prescriptions by mail so they have an enormous incentive to switch prescriptions from brands to generics whenever possible, especially for maintenance drugs. As long as the doc doesn’t check the DAW (dispense as written) box on the prescription form, they can do this. It is also a key source of their value added in marketing themselves to payers.

    Nobody, including Wal-Mart, makes much money on brand name drugs outside of the drug companies. Walgreen, which accounted for 20% of all prescriptions filled at retail pharmacies last year, tells investors that its gross profit margin on a $200 brand name drug prescription (30 day supply) is less than $10. By contrast, on a $25 generic, it earns $15. Since 70% or more of its prescriptions are for generics, the blended average is $60 on which its gross margin is $12. With the most sophisticated information technology and its industry leading market share, its cost to fill a prescription – pharmacist and tech pay and benefits, pro rata store rent, information systems, distribution centers, etc. is $7-$9.

    The most expendable part of the drug company cost structure, in my opinion, is DTC advertising. As for drug reps and other marketing costs, more and more doctors won’t see them and won’t accept their freebies. To the extent that more doctors are satisfied that they can get needed information about drugs from some other source and don’t need to see drug reps, the drug companies will reduce their detailer workforce and their marketing costs.

  7. “When some poor kid from a third world country is brought here for some amazing life changing surgery who pays for all the resources?”

    So Nate, is your argument that we should continue to pay high provider costs so third world kids can get free medical care? Isn’t your job Nate to reduce provider costs every day? Aren’t you denying some poor third world kid a chance to get life changing surgery by reducing provider costs? Don’t you buy cheap drugs from Canada for your clients to save money? Doesn’t that send good U.S. money out of the country and reduce incomes here?

  8. rbaer –

    Regarding brand name drug pricing, there are really two issues. The first is just how profitable do the drug companies need to be to earn the cash flow and attract external capital needed to sustain a business model capable of innovation? Historically, I think the large drug companies were more profitable than they needed to be. That said, it’s not unusual for some of the large volume drugs to sell for 30%-40% less in other countries as compared to the U.S. Drug companies go along with that because marginal production costs are tiny and, even a 30%-40% discount still provides a considerable contribution to profits. Biologics are probably a somewhat different story but I’m not as familiar with the magnitude of marginal costs to produce those.

    As for “me too” drugs, the issue there relates to formularies. Should payers cover these drugs or not and, if so, what tier should they be place in and how much of the cost should be paid by the patient? There is also a definitional issue. Patients probably view a new drug that produces fewer side effects than the older one or can be taken only once per day instead of two or three times as an improvement. The VA negotiates lower prices than other payers but it has a highly restrictive formulary. Most patients in the U.S. would probably find the VA formulary too restrictive. Besides, many Veterans are also eligible for Medicare so they can access care outside the VA system if they want to.

    Finally, physician and professional fees account for about 21% of healthcare costs according to CMS. If about half of that goes for practice expenses, then physicians’ income accounts for roundly 10% of healthcare costs. I don’t know where you live but $200-$300K is not a lot of money in NYC, SF, LA, San Diego, Boston and quite a few other places. In NYC, for example, a 1500 sf two bedroom condo or co-op apartment in a full service building can easily cost $1.5 million or more. If the doc has school age children, private school tuition is very expensive. Moreover, smart people can make a lot more money in other fields like finance, real estate, business, etc. with a lot less training than it takes to become a doctor. I don’t begrudge them a high income. Where I fault them is in their reluctance to view it as part of their job to know and to care about costs. I also fault the AMA for its decades long history of trying to protect the guild and to stifle competition at every turn.

    • Barry, Nate,

      There a lot of claims,
      seems to be a possibly unbiased guess (as opposed to industry self reporting), but no matter what, our allocation of resources in terms of drugs is obviously wrong/dysfunctional/unproductive if you just look at the 81 K of pharm reps in the US, direct to consumer advertising, and the quality of original products lately (considering the magnitude of resources).

      Re Boston, CA, NYC: I save you the discussion that complaning about 300K in these few high-priced metro areas amounts to whining (but even conceding your point, that 200-300 K figure that I mentioned probably applies to at least 90% of the country). In fact, I spent a year in Boston, and docs there make LESS than elsewhere, not more – as a general rule, you make, as a physician, less in attractive metro areas, and even less in academic institutions of reputation. The high 6 figure entrepreneur docs mostly (there are exceptions) are in private institutions, drawing most of their patients from affluent suburbia (either because they/their institution can attract them and/or because they just are strategically located there). In general, it seems to me that high physician income does not seem to correlate with quality care; sure, there are exceptional physicians who attract patients to do excellent work, but there are also more than enough docs who just find the high value procedures and push them on anyone they can find.

    • http://www.sciencedaily.com/releases/2008/01/080105140107.htm

      Also, Marcia Angell, ex-editor NEJM, has written extensively on the topic. Pharma is very good at obscuring their marketing and promotions costs. When I was offered a consulting fee for work on a drug, it would have been listed as an R&D expense. In reality, they just wanted me to speak about the drug at meetings. (Turned it down as family needed me home.)


      Even better, but much longer.



    • “As for “me too” drugs, the issue there relates to formularies. Should payers cover these drugs or not….”

      That would largely depend on the dollar value of the rebates the manufacturer is willing to offer to the PBM and it has very little to do with patients and their definitional issues.

  9. As for price differences for services, I think Barry is mostly right, but I would add that administrative complexity does play a role. The number of people in hospital administration in the US are just stunning if you come from middle Europe – billing, credentialing (in Germany, that’s considered a state matter, like driver’s licenses), advertising, discharge planners and some of the manpower is for patient care (bettere physician/patient ratio, more PT, OT … a WELL RUN US hospital is probably better equipped than most European counterparts, but i believe there is not that much bang for the buck.

    I read somewhere that physician cost is only, what was it, estimated to be 7% or less, but even if that number is right, there is little reason to pay some specialists half a million a year or more. With “just” 200-300 K (that’s about or a little more what most PCPs make), physicians would in the top percentile and be able to afford a good lifestyle as well as loan repayment.

  10. Barry, I am surprised that you bring up the canard of “drug research paid by the US”, although it seems to be a more educated variant (the less educated is, heard here and elsewhere: all pills are developped in the US with US dollars, which is patently false). We know that pharm companies’ R&D spending is usually less than their marketing costs. We also know that current reimbursement patterns (a worldwide problem, but the US leading) lead to dysfunctional allocation of resources (billions for barely, nonsuperior or inferior blockbuster drugs and me-too drugs).

    The countries with universal coverage control prices, but still pay high price for patented drugs too, and they are very profitable anywhere …. while I worked in Germany, I enjoyed the special attention of pharm reps (even as an academic guest in stalinist-maoist France, I attended a 6 course drug dinner thrown by the pharmaceutic industry for the local academics), so I have to conclude, Barry, you don’t want the pharma companies making just loads of cash, it has to be sh…loads of money, in US dimensions. (Disclaimer: I am happy that the culture and regulations of pharm rep interaction with academics has changed, and I am pharm dinner free for 3 years).

    • Pretty compeling arugment against you here;


      From annual SEC filings so I would tend to believe them, pretty big penalities for lieing.

      “Pharmacia’s sales in North America (mostly in the U.S.) amounted to 60% of total sales in 2001. The prices of Pharmacia’s drugs in North America could have been reduced by 11% if research and development costs were allocated proportionally across all markets, still without affecting profits.”

      Advertising is half that of R&D

      Would like to see some data to back up your argument that R&D is less then marketing.

  11. Peter – While we’ve seen numerous comparisons showing that various services, tests, and procedures cost considerably more in the U.S. based on what insurers, including Medicare, actually pay for the care, I’ve never seen a good comparison of what it costs doctors and hospitals to provide the care.

    For doctors, we know that, for the most part, specialists earn more in the U.S. than in most other countries and we also know that they emerge from medical school with more debt. It would be interesting to see a comparison of practice expenses, though – staff salaries and benefits, office rent, equipment and supplies, malpractice insurance, etc.

    For hospitals, let’s see a comparison of the number of employees per licensed bed at academic medical centers in the U.S. vs. those in other countries and the same comparison for community hospitals. Labor costs are far and away the largest expense for hospitals. I doubt that salaries for nurses, techs, and non-medical staff are much different in the U.S. vs. Western Europe but the number of employees per bed might differ considerably. I also doubt that differences in administrative complexity are a meaningful factor with the possible exception of primary care, but that’s not a very big piece of the healthcare pie anyway. Defensive medicine may mean more tests are done in connection with a particular procedure in the U.S. vs. the same procedure in Europe. I don’t know.

    As for drugs, we all know that the marginal cost to produce additional pills is minimal. So, price controls in other countries allow those countries to, in effect, free ride on the U.S. market. Even drug companies that develop new drugs in other countries count on the ability to charge much higher prices in the U.S. than elsewhere which means that the U.S. pays far more than its fair share of the industry’s R&D costs. If the U.S. imposed similar price controls, there could be a significant adverse impact on drug innovation worldwide. Alternatively, other countries would have to pay more so the U.S. market could pay less. Interestingly, though, generics are actually cheaper in the U.S. Go figure.

  12. Yes Barry much here gets repeated. But as Robert Laszewski says the provider cost problem is not being addressed, nor will it ever be. So, will more private insurance address the problem, if you also believe in access – not if you look at provider costs here compared to other world systems. Just because systems are part private or “going” private, does not mean that is the solution. If it were we’d have the best and cheapest system in the world. Most world systems are government controlled/regulated even if part private. I’ll take Germany’s system where only about 10% of the population use private insurance. I’ll take Australia’s system over the U.S. system. Britain’s NHS is being threatened by private care, not enhanced by it. I don’t care if Canada’s rich want to fly out of the country for care, they still must pay for Canadian universal care and going somewhere else means faster service for the rest. I’ll fly overseas for better cheaper care than I can get here as an uninsured with enough resources to do so.

  13. “but the medical cartel controls the prices and the gates to care”

    You are a fool sir, More doctors = higher healthcare costs. Thats why New York and Miami have the highest number of per capita doctors in the world. They also have the highest healthcare costs per capita in the world. Meanwhile, rural medicine, where doctors are very few and far between leads to lower costs.

  14. There aren’t enough rich patients to fund pharmaceutical research. If only the rich bought drugs, there would be no drug companies. It’s the millions and millions of relatively poor with their $1 bills, and the governments that administer their money, that make drug manufacturers rich. Taking these folks (or their government programs) out of the market will bankrupt everybody, and most importantly will leave your beloved rich without life saving expensive medications.
    Be careful what you wish for…. Without Medicare men, Viagra would have to sell for $100,000 a pill to allow Pfizer to break even.

    • Margalit, you liberals and your made up facts.

      “Cialis, Viagra, Levitra and other erectile dysfunction drugs are not considered necessary by the U.S. Department of Health & Human Services. Apparently many men disagree. Hence the $3.1 million charged to Medicare Part D for the drugs in 2007 and 2008.”

      Ya that 3.1 million sure brought the cost down. Its not 2005 anymore. Time to update the argument.

  15. “Just because some rich people are generous with their money does not mean you design a national healthcare program that puts all rich people to the front of the line.”

    Peter – We’ve been through this before. Rich people in the UK and Australia can go private. Rich Germans can opt out of the public system even though they pay taxes that help finance it. Rich Canadians can come to the U.S. for treatment if they don’t want to wait for it in Canada.

    We’re not just talking about extras like private hospital rooms. The rich can more easily gain access to the big name doctors and hospitals like Senator Kennedy going to Duke University Medical Center for his brain surgery. They can self-pay for experimental treatments or for private nursing care in their own home. There are lots of medical services they can buy that most people can’t afford. It’s the way it is and always will be.

  16. Nate, patented drug research is funded by investors looking for a return and those drugs are not given away, they’re paid for by someone or some government program. Medical staff at all levels of pay who give to third world programs do it for charity. As usual you twist the interpretation to suit your narrow bias. Everyone should have access to good medical care and not have to wait behind those with more money getting to the front of the line to get non-emergency treatment because they can flash some cash. Be careful because your $100 bill can be trumped by a $1000 bill. Just because some rich people are generous with their money does not mean you design a national healthcare program that puts all rich people to the front of the line.

    • “Medical staff at all levels of pay who give to third world programs do it for charity. As usual you twist the interpretation to suit your narrow bias.”

      And who pays their salaries the other 50 weeks of the year that allows then to give their time to these charities? When some poor kid from a third world country is brought here for some amazing life changing surgery who pays for all the resources?

      Nothing is twisted Peter but your argument.

  17. “but not so much that they rob necessary resources”

    Peter, can I suggest an alternative perspective, without the rich the resources wouldn’t exist in the first place. Billions aren’t usually spent developing drugs to treat those that can’t can’t pay. The rich fund the reserach then the poor get the advantages of it down the road.

    Plastic surgeons that fix cleft pallats in their world countries do so becuase rich people pay then enough they can afford to.

    A lot of rural services only exist becuase of rich benefactors. If my history of Kaiser is correct I think they were created by some rich shipping people or something. I’ll look that up to be sure

  18. “I believe that rich people will always be able to afford some degree of special attention for all services including healthcare”

    That’s not the point rbar. The point is to have the same comprehensive coverage for everyone paid by everyone and the rich can then pay extra for some extras, but not so much that they rob necessary resources from those who need it more based on medical need. If you separate out the “rich” from paying for an all inclusive coverage package then they don’t have any skin in the game to preserve it, and being rich, get to politically erode the system for everyone else. When rich people don’t have to wait in line they don’t care about improving the speed of the line.

  19. “everyone has decent coverage”

    With the possible exception of MD as HELL, I think everybody would agree that everybody should have decent coverage. We diverge in the interpretation of the term “decent”.

    Those who believe that wealth and poverty are results of personal virtue or lack thereof, define “decent” as whatever the money in your wallet at a particular point in time can buy.
    Those who believe in the existence of larger societal virtues and responsibilities, define “decent” as whatever society as a whole can bring to bear and distribute according to individual needs at a particular time.

    I feel like a broken record, but this really is not about health care.

    • I think people should buy their own decent coverage. It will meet their own needs. If the patient controlled the money,. the coverage would be much better than it is now.

      Larger social issues are fine if you are neither stealing the funding or borrowing the funding. No matter what, no one is entitled to it forever. The individual needs are not necessarily possible to meet.

  20. Peter,

    I believe that rich people will always be able to afford some degree of special attention for all services including healthcare – it’s kind of the essence of being wealthy. But IMHO, the importance is to have them contribute in a way that everyone has decent coverage.

    “rbar, are your suggestions how other industrial countries control their medical costs and why they do it for about half?” ???

  21. “almost every country allows rich people to buy out of the government plan and more then half use private insurance.”

    Care to get specific Nate? You’ll find the countries who use more private insurance also have the higher costs.

  22. “Natural death becomes normal again. Live while you are healthy.”

    This is sheer idiocy and yes it should be harshly rebuked and chided for both is philosophical, moral, and economic shortcomings.

  23. Private insurance has no history of controlling costs. Putting seniors into the system and hoping that it will suddenly start to do so is wishful thinking. It is much more likely that we see a continuation of the current model with fewer people able to afford care. However, this will allow for top tax rates to be reduced (while lowest rates are increased).

    Peter- Read T. R. Reid’s, The Healing Of America. Very readable, best single book looking at how some other countries control costs. In short, they tend to control costs and providers compete on quality and service. In other countries, everyone is in the same system, so that there is a real political consensus to address costs. We avoid the issue. Also, here is a clue. If you travel, look at medical facilities in other countries. You seldom see the Taj Mahals you see here, with marbled atriums, fountains and flat screen TVs galore.


    • “Private insurance has no history of controlling costs. ”

      This is complete BS. When PPOs were rolled out they drastically dropped cost. HMOs were extremly successful at controlling cost. Just because you don’t like the cost doesn’t mean it wouldn’t be 10 times worse without private insurance.

      We know what fraud is under governemnt plans and we know what it is under private insurance, that alone is proof private insurance does in fact control cost.

      “In other countries, everyone is in the same system, ”

      More BS almost every country allows rich people to buy out of the government plan and more then half use private insurance.

      • HMOs controlled costs for a while, but it was not sustainable. HMO bastards still makes people smile. Lots of countries allow people to buy supplemental insurance, or even opt out, but everyone is covered by the same basic system. No one else has the fragmented system that we do. Note that I am not talking about single payer, which is pretty uncommon.


        • swizz, germans or one of those has 70+ private carriers and a fraction of our population.

          HMO concept was sustainanble people refused the ratioing, rationing that is common in all the other countries we supposedly strive to be. Apparently we need government to ration us not HMOs then it will be ok.

          I still disagree with no other country has multiple systems, many nations have a clear government run program then rich people opt out completly and buy private insurance. Other countires might not have as many options but it is not homegenous like you claimed.

  24. “The only way for this country to survive is to eliminate all subsidized healthcare. No Medicare. No employer based health insurance”

    This has always been my unfulfilled hope, because if this did happen it would take but a few months before the pitchforks at the gates would demand single-pay with price controls. The patient may control HIS money, but the medical cartel controls the prices and the gates to care. So MD, you and I agree.

    rbar, are your suggestions how other industrial countries control their medical costs and why they do it for about half?

  25. doctors are should be more carefull about the side effect of the medicine. the people should try avoid the medicine. if the needings of medicine are reduced then nobody will face the providing cost.

  26. Total and utter BS. The only way for this country to survive is to eliminate all subsidized healthcare. No Medicare. No employer based health insurance. The patient controls the money. They buy what they value. Natural death becomes normal again. Live while you are healthy.

    Your healthcare debt cannot outlive you.

  27. Why would politicians of any stripe be relied upon to address the costs of providing care? The third-party payment system is the primary cause of rising costs. Eliminate that, and let patients (consumers) address costs of providing care directly.

  28. It is virually guaranteed that medical progress plus an aging population will cause further growth of the HC industry, in excess of GDP growth.

    As a physician, I experience myself that so much that we are doing is of marginal benefit (a lot of surgery and overmedication is probably of negative benefit, i.e. harm).

    The most logical solution would be to have a board of medical experts that mostly consists of medical geriatricians (but also represents other specialties as well as patient advocates) decide what is beneficial care and therefore covered by medicare and what not (of course the not highly beneficial services can still be obtained via selfpay/supplemental insurance). But of course this will not be politically feasible, unless miraculous bipartisan consensus would emerge, which is not expected watching today’s republican seeing death panels in meek attempts of separating beneficial from nonbeneficial care.

    But how about doing these relatively simple steps:
    -adjust the fee schedule, physicians to be paid for procedures as for cognitive medicine, adjusted for risk and expertise (this is by far the biggest deal)
    -giving financial incentives to patients who make healthy lifestyle choices: loose weight, stop smoking, manage BP and/or BS succesfully with medication and/or exercise
    -in terms of maintenance drugs, covering generics only – will bring price consciousness to providers and pressure on the industry
    -meaningful malpractice reform (not caps, but stop the retrospective secondguessing by protecting providers doing a reasonable effort but who make difficult judgment calls

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