The Case For Rational Rationing

The House Republicans on Thursday took another swipe at the alleged rationing in Obamacare, voting to eliminate the independent advisory panel that will propose cuts in Medicare spending when it grows substantially faster than the rest of the economy.

Most people have never heard of the Independent Payment Advisory Board, but they certainly got an earful about “death panels” and “rationing” in 2010 when Republicans used it to attack the Democrats’ health care reform bill. Stoking fear of death panels and rationing helped the Republicans win control of the House.

The IPAB has nothing to do with death panels or rationing. The 15-member panel of experts will offer Congress options for holding down Medicare’s spending whenever it grows out of control. Congress has the option of either allowing those cuts to go into effect, or enacting its own menu of cost control measures.

There is no shortage of skeptical analysts who suggest Congress will be just as likely to reject IPAB recommendations and substitute nothing at all. After all, every Congress over the past decade has rejected imposing previously enacted cuts on physician pay. Why will the IPAB cuts be any different?

The reality is that neither party has a good track record when it comes to holding down Medicare spending, and the level of debate Thursday reflected their perennial obsession with the next election, not the next generation. “Do you remember death panels?” cried Rep. Jack Kingston, R-Ga., on the House floor. “It’s not necessarily a death panel, but it is a rationing panel and rationing does lead to scarcity for some. Who’s going to get the needed treatment, an 85-year-old or the 40-year-old with children?”

“The rationing is in the Republican plan,” responded Rep. Chris Van Hollen, D-Md., the ranking member of House Budget Committee. “What they do is allow insurance companies to ration people’s health care.” Never mind that insurers who cover Medicare beneficiaries must follow Medicare’s coverage guidelines.

It’s ironic that the symbolic vote – it will go nowhere in the Senate – took place on the day after a entirely different outside advisory panel met at the Centers for Medicare and Medicaid Services to discuss coverage issues. The hearing offered a revealing glimpse into how rationing could actually save beneficiaries and the government billions of dollars a year without jeopardizing care one iota. That’s right, billions.

The panel considered whether there was enough scientific evidence to support a Medicare decision to pay for drug treatments that can postpone diabetes-caused visual deterioration and blindness, known as diabetic macular edema. The Food and Drug Administration is considering an application by Roche/Genentech for a very expensive drug called Lucentis that can correct the condition.

How expensive? Lucentis costs $1,624 for a monthly shot that will be needed for the rest of the diabetic’s life. FDA approval is expected very soon since clinical trials published last year showed it is very effective.

But there is another drug available for the condition, which is also made by Roche/Genentech. It is called Avastin, and it is equally effective because it is essentially the same drug. The only difference is that Roche/Genentech packages Avastin in very large doses for its primary use, which is fighting cancer. Eye doctors have figured out that if you break those vials of Avastin into the smaller doses appropriate for direct injection into the eye, the treatment doesn’t cost $1,624, it costs $43.

This doesn’t just affect the government purse. Seniors who get the shots – and there are 325,000 Medicare beneficiaries with diabetic macular edema who will potentially qualify for the treatments – must pay 20 percent of the cost of these drugs as their co-pay. What would you rather pay every month: 20 percent of $1,624 ($324.80) or 20 percent of $43 ($8.60)?

If everyone on Medicare who is eligible for the treatment receives Lucentis, it will cost the government $6.3 billion a year, a technology assessment submitted to the committee said. If they receive Avastin, the government will pay only $167.7 million.

The committee didn’t consider pricing issues, unfortunately. Medicare by law can’t consider price when evaluating whether it will pay for treatments. And the Affordable Care Act, yes, the same reform law that Republicans are trying so desperately to repeal, says comparative effectiveness research paid for by the government (like the technology assessment on diabetic macular edema) cannot be used to make payment decisions.

So the committee simply voted on the scientific evidence. Eight of nine panelists said that both drugs (as well as two other expensive drugs in that class) worked about the same.

Right now, both drugs are being used “off label” because the FDA hasn’t approved either for diabetic macular edema. But Medicare contractors in about half the states are paying for them. Once the FDA approves Lucentis for the condition – the company won’t submit an application for Avastin because it isn’t in its interest to do so – CMS will begin paying for the pricier drug everywhere. Medicare will always pay for an FDA-approved drug. Physicians, who get a small mark-up on the price of drugs they use in their offices, will have a major incentive to use the more expensive, on-label product.

A rational government agency that is allowed to consider price would only pay for the off-label drug Avastin. Instead, what we have is irrational non-rationing that within a few years will be costing the government and seniors about $7 billion extra a year. Maybe Congress should hold a vote on that.

Merrill Goozner has been writing about economics and health care for many years. The former chief economics correspondent for the Chicago Tribune, Merrill has written for a long list of publications including the New York Times, The American Prospect, The Washington Post and Financial Times. You can read more pieces by him at GoozNews, where this post first appeared.

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41 replies »

  1. Bob Hertz –

    The actual direct cost of drugs manufactured in pill form, as opposed to much more complex biologics, is often literally pennies per pill. The largest costs components for drug companies by far, though, are R&D, sales and marketing. Companies have been aggressively cutting the latter two in the last few years. When comparing the drug industry to other industries, there are huge differences in what financial types like me call capital intensity or how much in assets it takes to support each dollar of revenue. Specifically, for its most recently completed fiscal year, Pfizer needed $2.79 of assets (capital) to support each dollar or revenue while Merck needed $2.19. In the much less capital intensive supermarket industry by contrast, Kroger needed just $0.29 of assets to support each dollar of revenue while Safeway needed $0.34. While net income (profit) as a percentage of sales is an easy concept for the average person to understand, it doesn’t reflect vast differences in capital intensity across industries. To do that, one should compare earnings before interest and taxes (EBIT) as a percentage of total assets. In the end, to sustain its business model, any company in any industry needs to at least earn enough to cover its weighted average cost of capital which includes both debt and equity capital of course.

    Steve –

    PPACA could only meet its budget targets by having the CBO score 10 years of anticipated revenue against just six years of expected benefits when the bill was being debated. If it is ultimately fully implemented, when we reach the point where the scoring compares 10 years of expected revenue to 10 years of benefits, the net cost will be considerably higher than first advertised even in 2010 dollars. Moreover, the amount needed to cover subsidies for people below 400% of the FPL is subject to huge forecasting error because its so hard to predict what employers will do with respect to continuing to provide coverage for their employees, the extent to which people can and will hide or understate their income to maximize their subsidy and the actual cost of care. The likelihood is that the ultimate cost will be considerably higher than the CBO projections.

  2. Let;s get back onto the drug pricing issue.

    I am not in the field of pharma myself, but looking at it from the outside I cannot connect two apparent facts:

    – the literal cost to manufacture a drug might be $5 for a month’s supply, including labor, raw materials, packaging and shipping.

    – the drug sells for $100 in most retail outlets.

    And yet, when governments horn in to lower the price to $70, manufacturers drop out and cite low profit margins as their reason for quitting production.

    Something does not compute here. Maybe it is me, I do not mind hearing that.

    Is my figure for the production cost way off? I have done some reading about the raw materials and their prices. I realize that a few drugs are very complex to produce but not that many of them.

    Or are the pharna companies applying a classic squeeze play and dropping out until they totally get their way again?

    Help me out here.

  3. IPAB is a new thing in American government. Unlike most other boards and commissions, the panel’s 15 members (appointed by the president and approved by the Senate) need not be bipartisan. Also unlike other boards, commissions, and federal agencies, the IPAB’s decisions are virtually nonrenewable .CLASS being scrapped for example reduced revenue which increases 10 year cost since claims would not have been for decades later

  4. From the same CBO site.

    “This report also presents estimates through fiscal year 2022, because the baseline projection period now extends through that additional year. The ACA’s provisions related to insurance coverage are now projected to have a net cost of $1,252 billion over the 2012–2022 period (see Table 2, following the text); that amount represents a gross cost to the federal government of $1,762 billion, offset in part by $510 billion in receipts and other budgetary effects (primarily revenues from penalties and other sources). The addition of 2022 to the projection period has the effect of increasing the costs of the coverage provisions of the ACA relative to those projected in March 2011 for the 2012–2021 period because that change adds a year in which the expansion of eligibility for Medicaid and subsidies for health insurance purchased through the exchanges will be in effect.”

    “English os obviously not your first langauge.”

    ““When PPACA was passed we were told it would save money, then it would cost 150 billion now 1 trillion.”

    You said that, not me.


  5. “As usual Nate you substitute insults for factual argument.”

    That’s just the way he rolls. Gotta love it.

  6. Nate says:

    “English os obviously not your first langauge.”
    “It exposes the dishonest accounting of 6 years expenses and 10 years of revenue.”

    Sound familiar.

    “With 10 years of money inflow vs. six years of outflow, the result is a positive – i.e., deficit-reducing – number. Surprise.

    That would be bad if true. But it’s not true:”


    As usual Nate you substitute insults for factual argument.

  7. English os obviously not your first langauge. The $150 billion was an increase over the original suggestions. They have actually found a number of increases that total more then $150 billion. CLASS being scrapped for example reduced revenue which increases 10 year cost since claims would not have been for decades later.

    The 1.7 trillion does not include an extra year it includes a 10 year period starting 2 years later then the original bvill. It exposes the dishonest accounting of 6 years expenses and 10 years of revenue.

  8. Nate says:

    “President Obama’s national health care law will cost $1.76 trillion over a decade, according to a new projection released today by the Congressional Budget Office, rather than the $940 billion forecast when it was signed into law.”

    More lies.

  9. March 2012 CBO.


    “CBO and JCT now estimate that the insurance coverage provisions of the ACA will have a net cost of just under $1.1 trillion over the 2012–2021 period—about $50 billion less than the agencies’ March 2011 estimate for that 10-year period”

    The $1.76 trillion number includes an extra year, and does not include revenue. Net cost is $1.25 trillion. The ACA has always been estimated at about a trillion dollars, it was never estimated at $150 billion.


  10. Seeing as how all OECD countries have a debt problem and by most measures would be considered broke isn’t that a great reason to not have national health insurance? When the US Goverment runs out fo money those with private insurance, if there are any left, wont be effected.

    If governments across the world don’t have the money to pay for healthcare why are liberals pushing for more government take over?

  11. right above you is links to 3 examples.

    PPACA was suppose to save us money, Instead of saving money they have since passage found 150-500 billion in additional cost in JCT

    111 billion in extra cost for exchange subsidy

    820 billion of true 10 year cost according to latest CBO analysis

  12. I am still waiting for the cite that said the ACA would cost $150 billion. AFAIK, that was never alleged. I never read Kos or Huffington, just mainline economists across the spectrum, direct CBO, CMS FRED, BLS and BEA data.


  13. Greece is broke. If you want to use that as your model, then I get to use Somalia as the model for free market medicine. There are shortages everywhere. This is largely in injectables and is largely due to low profit margins. This is true in the US where those prices are not controlled and in countries where they are. Given the universal nature of the problem, I dont think price controls are the only problem. Given that these have existed from many years, but shortages are a relatively new phenomenon, I would suspect something else.


    I should add that in most OECD countries there is price negotiation rather than strict controls per se. True price controls, like you see with rent controls clearly cause shortages.

  14. “The saving money part is just just confusion on your part.”

    “I read this stuff as much as anyone and never saw that number.”

    LOL really, maybe you need to stop reading DailyKos and Huffington so much and get some real news coursec?

    A powerful House Republican wants the Obama administration to explain why it’s asking for an extra $111 billion to implement part of the healthcare reform law.

    Ways and Means Committee Chairman Dave Camp (R-Mich.) is asking about a spike in the estimated costs of subsidies to help people buy private insurance — a central, and expensive, component of the new healthcare law.

    The administration’s budget request this year included $111 billion more for subsidies than its request last year. The difference falls across the same seven-year window.

    In a report the JCT published on March 21, 2010, the Committee used the more straightforward, broader definition of “unaffordability” that took into account the family plan example I described above. However, on May 4, 2010, several weeks after PPACA was signed into law, JCT issued a correction, stating that the March 21 interpretation was wrong, and should be replaced with “self-only coverage.”

    However it came about, this subtle, technical tweak was extremely consequential. Late in the evening of March 21, 2010, the House of Representatives passed the Patient Protection and Affordable Care Act, with a number of skeptical Democrats voting with their leadership in the final hours, persuaded that PPACA had been certified by the CBO as deficit-neutral. Without the JCT tweak, PPACA would have been sunk by an additional 10-year cost of $150 to $500 billion. Instead, Democrats used the favorable CBO estimate to claim that Obamacare was fiscally responsible.

    President Obama’s national health care law will cost $1.76 trillion over a decade, according to a new projection released today by the Congressional Budget Office, rather than the $940 billion forecast when it was signed into law.

  15. really Steve?

    In crisis-wracked Greece, even finding aspirin can be a pain. The Panhellenic Association of Pharmacists says Greece is running short of almost half its 500 most-used drugs.

    The Greek government sets drug prices, and public insurers cover most of the bills submitted by the manufacturers and the wholesalers that supply hospitals and drugstores. The economic crisis made cost-cutting an imperative. Over the last year and a half, the government has cut drug prices, in some cases by up to 25 percent. The aim was to trim a national health bill that totaled more than €13 billion ($17 billion) in 2010, or about 5 percent of GDP.

    Pharmaceuticals companies are owed €12bn (£10bn) for unpaid medicine bills in the eurozone – half of that in Spain – according to a senior executive, who said that the industry was counting on the help of the International Monetary Fund and the European Union to recover its debts.

    Bruno Strigini, president of Europe/Canada at US drug maker Merck, said that of the €12bn owed to the pharma industry in Europe – debts that are more than 30 days old – €6bn is outstanding in Spain. A further €4bn is owed to medical device manufacturers, which have recently written an open letter to the new Spanish prime minister, Mariano Rajoy.

    Some of the UK’s top cancer consultants warn that NHS drug “rationing” is forcing patients to remortgage their homes to pay for treatment.

    With all the talk about drug shortages in the US it might be easy to forget the rest of the world, but it seems that drug shortages are also hitting European countries and are affecting not just generics, but also biosimilars.

    Shortages have been reported in Germany, Hungary, The Netherlands and UK, to name just a few.

    Alberta is taking the lead among provinces in looking for new sources of intravenous pain drugs, anesthetics and anti-nausea drugs due to a national shortage, the province’s health minister says.

  16. “When PPACA was passed we were told it would save money, then it would cost 150 billion now 1 trillion.”

    Cite for the $150 billion number please. I read this stuff as much as anyone and never saw that number. The saving money part is just just confusion on your part.

    “Well until all the providers refused to treat anyone.”

    It varies a lot, but Medicare pays on average about 20% less than private insurers. I can guarantee you that very few docs would quit. They have plenty of docs in other countries and pay them much less. Besides, there is a basic economic principle here you are missing.


  17. “The preferred fovernment mechanism for rationing will be shortage.”

    We have that now. Many have no coverage.


  18. “something the IPAB could also implement.”

    Or they could go with what is more commonly done, like in France, allowing people to buy care.

    The 3/5 rule is intended to keep Congress from raising spending. If it wants to spend more, it can, but there needs to be a supermajority. This actually makes sense since this has become the new requirement in the Senate due to the frequent use of the filibuster. The Ryan plan just assumes that Congress will never increase the premium support levels. Magical thinking.


  19. Bob,
    Ever hear of the 1970’s? Rent controls, wage and price controls, capped interes rates. Caps don’t change market forces. They just create shortage and alternate pathways.

  20. “You buy a policy with the coverage you want before you need it not after.”

    That would imply cost is not a barrier to coverage. Those with limited resources are slotted into the, “death panel” group of private coverage.

  21. When PPACA was passed we were told it would save money, then it would cost 150 billion now 1 trillion.

    Is that decrease spending per member or decrease spending in total? If you forced younger people into Medicare the per member spending would decrease.

    If Medicare was to collect all the premium paid to private insurance now but only reimburse providers at Medicare rates on paper that would come out $300 billion or so ahead. That would offset current spending showing a decrease. Well until all the providers refused to treat anyone.

    Paolo you seem to forget these are the same people that passed a tax that wasn’t a tax until it was challenged in court at which time for court purposes it is a tax but when talking to the public is still not a tax. Are you really going to argue your semantics would stop them?

  22. It’s actually an impossible stretch. By law, the IPAB can only recommend changes that decrease Medicare spending, not increase it as in your example.

  23. it’s unamerican and open to corruption for the government to say what a company can charge. The correct way to do it is to allow the payors to set what they will reimburse for a drug. If the company wants to charge more they can, they just need to convince the user why they whould pay for it.

    For example 18935 of why we should leave insurance to the private enterprises this is already being done, theraputic reimbursement. For this class of treatment we pay $X

  24. Single payor in 2 months with 33 Senators and the Presidency.

    President recess appoints members to IPAB

    IPAB amends definition of disability so anyone can be on Medicare
    Same time eliminate private insurance

    33 Senators block overriding or changing the IPAB recommendations

    Changes implemented by default. Hello Single payor

    This isn’t a far stretch from the BS methods used to pass PPACA.

  25. Sorry Barry we don’t have that short of memories. Medicare was made palatable by the law clearly saying it would pay market prices for care. As soon as the cost was higher then they predicted they just struck that part of the law. There is no protection you could ever write into the law that we would trust.

  26. I believe that Canada, Germany, France, Sweden, and the UK (at least) all have Pharmacy Price Review Boards, which limit what drug companies can charge for their new products.

    An American version would have the FDA set the maximum price for the new drug right in the approval process.

    If the price for Lucentis was capped at $43 a month, there would be no need for special panels and charges of rationing.

    If 300,000 people will benefit from Lucentis right today, the drug company can make money at $43 a month. Not as much money as they expect to make today, but big deal.

    Other industries throughout America spend a lot of money on product testing, and then they bring their product to market charging less than the competition. This happens 24 hours a day in computers, auto parts, software, movies, fill in the blank. We pamper the drug industry incredibly.

    The only reason we may need ‘death panels’ is because medical providers engage in price-gouging on the most vulnerable patients. (Hospitals and doctors may also be involved, not just drug companies.)

    Cure the price gouging, and you remove much of the need to ration.

    Bob Hertz, The Health Care Crusade

  27. and those paying inflated prices for them. How is it the black market can get unlimited supplies but the hospitals can’t and thus are forced to buy from the black/gray markets.

  28. Peter before you say stupid things why don’t you research them? Saying something stupid then waiting for people to correct you isn’t the ideal method of learning.

    Providers have limits in providing non medicare approved services to medicare enrollees. Under the NHS they also outlaw paying for non approved care yourself, something the IPAB could also implement.

    To your first point after all these years you still don’t seem to grasp how insurance works. You buy a policy with the coverage you want before you need it not after.

  29. I think if it were made crystal clear in the law and any supporting regulations that patients would always be able to spend their own money for anything that Medicare didn’t cover and still be fully eligible for services it does cover, IPAB should be less threatening to conservatives and other opponents. Even if their worst fears came to pass, laws can always be changed. We wouldn’t be stuck with it forever.

    Squeezing provider payments doesn’t cut it as a long term cost control strategy for Medicare especially since it already underpays for many treatments, especially primary care. One way or another, whether it’s through IPAB or not, CMS needs to be able to specifically take costs into account in determining what services, tests, procedures and drugs it will pay for or not pay for.

  30. “If you don’t like an Insurance Company’s policy or limitations you have the opportunity to choose another insurer, sue them in court, or pay for it your self.”

    Gee Nate, those are great options. What do you think another insurer’s reaction would be if someone had a preexisting where their existing insurer refused to pay for further treatment? I also wonder if anyone would outlive the court process if pay for treatment refusal denied care.

    Odd that you don’t support IPAB attempts to control costs but you support insurers caps that you don’t describe as “death panels”. I guess you support all attempts (and costs) at prolonging life no matter the situation.

    “If you don’t like an IPAB decision you have no options.”

    No, as you stated above for insurer options; you can pay for it yourself. Isn’t that an option?

  31. The preferred fovernment mechanism for rationing will be shortage. No one will get it. Tey have already engineered shortage in common medicines just to see how it played. No one noticed except the docs trying to practice standard of care medicine. Watch for a shortage near you.

  32. I understand the logic behind the panel concept – this is about making difficult choices easier – but why anybody thought this was anything other than a giant political turkey is beyond me …

    Was there a better way of doing the same thing???

    You have to wonder.

  33. If you don’t like an Insurance Company’s policy or limitations you have the opportunity to choose another insurer, sue them in court, or pay for it your self.

    If you don’t like an IPAB decision you have no options.

    Nope nothing like a death panel, Merrill and Obama promise.

  34. “The IPAB has nothing to do with death panels or rationing.”

    A dishonest claim from Merrill, what a shock.

    If the IPAB proposes to not cover Gleevec and doctors accepting Medicare are not allowed to provide care not approved by Medicare eliminating the individuals ability to pay for it themselves how is that not a death panel decision as most of the public understands it? NHS has been doing it for years and it is very effective at controlling cost. It would be a logical suggestion at the top of the list.

    Lets give another clear example, if the IPAB decided to adapt the liverpool care pathway word for word and Congress couldn’t agree on something to replace it then we would have the very definition of death panels.

    Why do you bother making your BS claims, you have to know your going to get called out on them.

    “every Congress over the past decade has rejected imposing previously enacted cuts on physician pay. Why will the IPAB cuts be any different?”

    Really Merrill, are you that clueless or that dishonest? It takes a super majority of Congress to override their suggestion or it automatically becomes law, that is how it is different.

    “IPAB is a new thing in American government. Unlike most other boards and commissions, the panel’s 15 members (appointed by the president and approved by the Senate) need not be bipartisan. Also unlike other boards, commissions, and federal agencies, the IPAB’s decisions are virtually unreviewable. IPAB doesn’t have to adhere to the notice and comment rules of federal agencies, which permit citizens to respond to proposed rule-makings. IPAB dictates automatically become law unless Congress itself intervenes. Ah, but they’ve thought of that and made it virtually impossible. The law prescribes that Congress has a limited period of time in which it can modify IPAB rulings and then it must do so by a three-fifths majority. Even ratifying treaties and proposing amendments to the Constitution require only two-thirds majorities. As for the courts, forget it. The judiciary is forbidden to review IPAB decisions.”

    Recess appointments? No judicial review. 3/5s to overturn. No not different at all Merrill.

    “A rational government agency that is allowed to consider price would only pay for the off-label drug Avastin. Instead, what we have is irrational non-rationing that within a few years will be costing the government and seniors about $7 billion extra a year. Maybe Congress should hold a vote on that.”

    Exactly why government should not be in healthcare at all. I can make this decision for a plan I administer in a minute and have it implemented in 30 days. Any program sponsored by government requires an act of congress to pass common sense. That is why Medicare is the most expensive health plan in the world and the most inefficient.

  35. Social Darwinist here, just to remind readers that finding ingenious, creative ways to keep people alive for decades after nature would responsibly tell our species it is time to call it quits is just a fancy, distracting way to rationalize narcissism at its worst. Again, no one tries to take a legitimate way to argue with me where is the line in sizeable populations above 70 depending on the minority sized population under 30 to foot the elderly bills.

    Can’t anyone accept people die, and just prolonging life to allow select individuals/companies to flagrantly profit on misery and pain is, well, cruel?

    But, business models rationalize cruelty in profit making, eh?

  36. I’m with Merrill 100% on this one.

    Historically, Democrats’ response to the need to cut costs in the Medicare program is to squeeze provider payments. Keep that up and eventually Medicare patients will be hard pressed to find a provider willing to treat them. Medicaid is already at that point and still can’t control its costs.

    There is absolutely no reason why CMS should not be able to take costs into account in deciding what to pay for and not pay for except that spineless politicians won’t let them. Heck, they wouldn’t even let a proven money saver like competitive bidding for durable medical equipment move forward. Private insurers who cover Medicare patients through Medicare Advantage and Medicare Supplement plans need CMS’s political cover to determine their own payment policies. They will generally follow Medicare’s lead.

    For the Avastin vs. Lucentis example cited in the post, CMS should adopt reference pricing and pay the same amount for Lucentis as it does for Avastin and let patients who want Lucentis pay the huge difference themselves. Nobody is suggesting that people who can afford to can’t spend their own money for services, tests, procedures and drugs that are either not covered by Medicare or paid based on the cost of a less expensive and equally effective alternative treatment.

    Refusing to pay for services that either don’t work or cost more than they’re worth is NOT RATIONING. It’s common sense that reflects the reality of finite resources. Organs are rationed because there aren’t enough to accommodate everyone who could benefit from one and we have elaborate protocols to determine who gets them and when.