By MAGGIE MAHAR

Monday, The New York Times reported that the IRS, Congress and state officials have begun taking a close look at nonprofit hospitals, all asking one charged question: Do they really deserve their tax-exempt status?

Some 16% of U.S. hospitals are for-profit—and they pay taxes. Nonprofits, by contrast, have traditionally been tax-exempt.  But now investigators are asking: “Are they really that different from the
for-profits?  Do they provide enough charity care and community service to justify the break?

The short answer is this: To understand the economics of the hospital industry,  you first need to understand that it is in many ways very much like the real estate industry: what matters most is “Location, Location, Location.”

A hospital located in an affluent area will draw well-insured patients. By definition, then, it will provide less charity care because it well see fewer uninsured patients.

This is why for-profit hospitals tend to provide less charitable care: If you’re a corporation you don’t a build a for-profit hospital in a market where you expect that half of your customers won’t be able to pay.  For-profits don’t close their doors to the poor, but they purposefully try to locate areas where they won’t see as many of them.  As well they should: a for-profit corporation’s first obligation is to generate profits for its shareholders.

Non-profit hospitals, on the other hand, began as charitable institutions—often with a religious affiliation—and to this day, many are located in inner cities or poor rural areas where they serve a large uninsured or underinsured population. Traditionally, nonprofit hospitals have operated with a sense of “mission”—to serve the health needs of their community. This is argument  giving them a break on their taxes.

Yet, it’s  worth noting that all nonprofit hospitals are exempt from corporate income taxes as well as state and local property taxes—wherever they are located. Perversely, that exemption is most valuable to those located in the most affluent areas because their income is higher and their property is worth more. As David A. Hyman and William M. Sage point out in the current issue of Health Affairs:

“All else being equal, a hospital that provides little charity care and is located in a “desirable” location (in terms of property values) will receive a much greater financial benefit when its income and property go untaxed than a hospital that provides lots of charity care and is located in an “undesirable” location. Thus, in important respects, current subsidies are ‘upside down’ in the sense that they are worth the most to institutions that are likely to” [provide the least charity care. ]

This brings us directly to the question Congress and the IRS are posing: should nonprofit hospitals be exempt from taxes based simply on their status as nonprofits, or should tax-exempt status be dependent on what they actually do to serve their community?

Here, it’s important to remember that caring for the poor is not the only way that a hospital can contribute to its community. Under the law, a nonprofit can  receive a federal tax exemption, if it is organized and operated exclusively to promote one of the specific purposes set forth in section 501(c)(3) of the Internal Revenue Code—which includes charitable, religions, educational and scientific ends.

Thus an academic medical center which  loses money educating  medical students while also investing in the expensive technologies that it needs to do important scientific research might well be able to justify its tax exempt status even if it treated only a small number of indigent patients. Some hospitals also provide educational  services in their communities—running support groups for diabetic patients for instance, teaching them how to monitor their disease.

How a nonprofit uses any money left over after covering the costs of operation is also important.

A for-profit might distribute those earnings to its shareholders, or invest in something that would generate greater profits going forward: valet parking, for example, might attract more well-insured patients. But to qualify as a non-profit, Hyman and Sage note, a hospital must:
“retain its net earnings and use them to promote the purposes for which the nonprofit was created. “ In other words, a non-profit must plough any surplus back into its “mission.”

Yet in today’s fiercely competitive market, non-profit hospitals sometimes spend their capital in ways that seem to have little to do with mission—and much to do with struggling to take market share away from neighboring hospitals.

In Money-Driven Medicine: The Real Reason Healthcare Costs So Much ( Harper/Collins, May 2006).  I quote the director of a Phoenix-based health foundation describing how resources are allocated in his hometown as local hospitals chase affluent newcomers moving into the city’s “Valley of the
Sun”:

   
“By expanding and modernizing, acute care hospitals are looking to compete with a recent surge in physician-owned hospitals and specialty surgical centers,” he explains. Acute care hospitals fear that these specialty centers will “skim” lucrative business like heart surgery, leaving the general hospitals with the least profitable businesses—burn units, for example, level 3 trauma units or ERS.
   

Fighting to offset potential losses, the nonprofit acute care hospitals are rushing to add beds in the Sun Valley area where a new young, well-educated and well-insured work force is moving in. The foundation director describes a new facility: “It’s like a luxury hotel.”

Every hospital feels that it  must stake their claim in this newly affluent area, he adds, and “the land-rush mentality doesn’t always take into account planning for the community’s needs . . .  When it comes to breaking down the health needs of the population by age and chronic disease in order to try to decide what mix of ambulatory, inpatient and home health care will be required . . . This,” he observes, “Is not the game that hospital executives are in.”

Meanwhile nationwide, nonprofits like those in Phoenix may be overbuilding—or at least investing their capital in the wrong areas. As they view for well-heeled customers, they may be putting too much emphasis on cosmetics and bleeding-edge unproven technologies, while investing too little in less visible areas like palliative care, or the information technology that could reduce hospital errors.  

In many regions, nonprofit suburban hospitals are trying to take high-margin business away from big city hospitals. “What we have to do to maintain our position in the market is to keep adding services,” a Westchester hospital CEO explained to New York Magazine a couple of years ago. “That’s the whole reason we’re doing liver transplants.”

“Liver transplants”??

Do the residents of Westchester County need a local hospital doing liver transplants? Just how many would the hospital do? Would patients be better off at a high-volume medical center in Manhattan, where the carpeting might not be as nice, but, research shows, “practice makes perfect”?

These questions didn’t seem to come up. Transplants would raise the nonprofit hospital’s image.
 
And when it comes to enhancing a brand name, sometimes nonprofits seem littler different from for-profits. In Money-Driven Medicine, I quote from a 2005 study in the Archives of Internal Medicine which describes how even academic medical centers trawl for customers with ads like “We Do Botox!” or “FDA Approves Deep Brain Stimulation Therapy for Parkinson’s Disease”
The study pointed out that many of the ads (38%) risked “raising false hopes” by thumping the tub for unproven procedures like “deep brain stimulation for Parkinson’s,” while another 28% were advertising cosmetic procedures. Such ad spending has little to with improving the health of the community, much to do with growing market share.

Yet, with the number of uninsured patients and unpaid bills rising, many nonprofit hospitals find themselves caught between a rock and a hard place. If they can’t bring in the patients willing to pay for private rooms with Jacuzzis in the maternity ward–patients who will be impressed by a waterfall in the lobby and chutney for dinner–they won’t have the money they need to keep the trauma unit open–and serve the larger community. “No [profit] Margin, No Mission” is a favorite saying among hospital CEOs.

Moreover, today’s hospitals are increasingly dependent on the bond market to raise capital. At one time, both government and philanthropists contributed a much larger share of the money hospitals needed to survive, but today, hospitals rely on borrowing by issuing bonds. And, quite understandably, a bondholder’s primary concern is not whether or not the hospital is serving its community, but whether or not he will receive the expected return on his investment. Thus, when bond rating agencies like Standard and Poor’s rate hospital bonds, they can’t give points for charitable care.      

Nevertheless, if we are going to give nonprofits enormous tax exemptions, somebody needs to be keeping an eye on how they are spending their capital.

Two years after the Westchester CEO bragged about his new “product line” (liver transplants) The New York Times reported that a state audit of the very same Westchester hospital showed  “mismanagement, sloppy accounting practices and wasteful spending” which “contributed to staggering financial losses.”  The audit also showed that former executives at the hospital were spending lavishly on things like restaurants, hotels and florists—with scant controls or documentation” even while  “the medical center’s finances were deteriorating.”But while some hospitals should lose their tax breaks, we don’t want to throw out the baby with the bath water by doing away with tax exemptions for all  non-profits.  They are different from for-profits-in ways that are essential to our health care system.   

In the most recent issue of Health Affairs Bradford Gray and Mark Schlesinger very carefully analyze some 162 studies comparing the real-world performance of nonprofit and for-profit hospitals, nursing homes and health plans on a  range of issues and discover that, while they may not be as different as one might expect, the fact is that, on average:

“for-profit organizations more aggressively mark up prices over costs and otherwise maximize revenue. This pattern has been documented among community general hospitals, nursing homes, psychiatric hospitals, drug treatment centers, rehabilitation facilities, and health plans.

“Second, nonprofit organizations appear more trustworthy in delivering services, being less likely to make misleading claims, to have complaints lodged against them by patients, and to treat vulnerable patients differently from other clientele.

“Third, nonprofits are typically the incubators of innovation, using philanthropy and cross-subsidies to finance the development of services for which there is not yet a market.

Moreover, while only about one-quarter of non-profit hospitals provide enough uncompensated care to the poor and uninsured to equal  their  tax benefits, “one  study found that the nonprofit hospitals that were the least involved in free or subsidized treatment were the most engaged in other forms of community” service.

The bottom line is that auditing nonprofits is a good idea, though federal investigators should turn to community experts to find out just how much service a nonprofit offers. Local GPs who work in low-cost clinics, for instance, will know how easy or difficult it is for a Medicaid or uninsured patient to get an appointment with a specialist at a hospital clinic.(And will that patient be seen by residents or a combination of teaching faculty and medical students?) Local educators will know which hospitals are making a contribution to health education in the schools.

Because the hospital industry is all about location, these audits must be done on a local basis, with the community weighing in on decisions. The many ways in which a hospital serves its community are not easy to quantify, and they vary, depending on the needs of the community.

At the same time, it is good for non-profit hospitals to know that they are accountable–and that if they forget their mission, they can (and should) lose that tax exemption.

Consumer-driven medicine is seen, by many, as the answer to our health care crisis.
Put the consumer in the driver’s seat, we are told, and patients will drive down costs by insisting on the very best value for their dollars.

The movement goes hand-in-hand with health savings accounts and high-deductible plans: Force the patient to spend his own money, and he will be motivated to comparison-shop.

“When consumers pay directly, innovators respond to their needs—that’s how a market works,” declares Regina  E. Herzlinger, a leading consumer advocate, in Market-Driven Healthcare.  (Writing in 1997, Herzlinger somewhat optimistically held out the American automobile industry as a prime example of an innovative industry that has responded to consumers’ needs. )

What Herzlinger ignores is the “uncertainty” that is intrinsic to health care. In my recent book, Money-Driven Medicine: The Real Reason Health Care Costs So Much I quote Dr. Atul Gawande, who rightly identifies “uncertainty” as the “core predicament” of medicine– “the thing that makes being a patient so wrenching, so difficult, and being part of a society that pays the bills so vexing.”  (Complications: A Surgeon’s Notes On an Imperfect Science).

Consider, for example, a patient who is diagnosed with stage 1 prostate cancer. Chances are his physician will tell him that there are three possible treatments:

  a)”We could just keep an eye on it,” the doctor might say.. “Since you’re 67, and this is a cancer that grows very slowly, it’s quite likely that it will never catch up with you. “We’ll just have you come in every six months so that we can monitor its progress, but hopefully, we’ll never have to do anything.. This course of treatment is called “watchful waiting.”

b) “Alternatively, we could try radiation treatment. This will have side effects that you won’t like. About one half of patients become impotent within 2 years. Some suffer side effects like rectal bleeding. And there is a possibility that the tumor will come back.”

c) “Surgery. This is the most certain remedy. If all of the cancer is removed during surgery (and if course this is always an “if”) —you are probably cured.  But of course you face the risks of surgery—you could lose a lot of blood during surgery. And afterward, you could be impotent or incontinent—or both. Most people don’t suffer severe incontinence, but about a 1/3 while find that they leak urine when they cough or laugh. . . “

Then, if your doctor is very honest, he will tell you—“We can’t be sure, but I think that in your case, ‘a,’ or ‘b’, or ‘c’ is the best course of action.” (Though these days, a doctor who believes strongly in consumer-driven healthcare and patient autonomy may say, “I can’t tell you which treatment is best for you. That’s something you have to decide.” )

Given the ambiguities, how can patients hope to comparison-shop the way they might shop for a computer? 

While Consumer Reports can rate mid-priced refrigerators briskly and clearly, in a way that makes comparisons easy, it is all but impossible, even for physicians, to be positive of the relative benefits of a great many medical procedures. The product is opaque; you can’t compare two treatments the way you might compare two cars.  This is not just because the human body is so complex, but because each body is unique—what worked on one patient may not work on another.

Granted, today both physicians and patients enjoy access to more information than ever before. But, as anyone who has ever been seriously ill knows all too well, the more one learns about a disease and the odds of success with possible treatments, the more ambiguous the situation can become. (And most of our healthcare dollars are spent on serious and chronic illnesses.)
As researchers noted in a 2004 article in Health Affairs, “much of medical practice remains in gray areas . . . and is likely to remain so for quite some time.”

“Outcomes research”–which compares outcomes for similar patients exposed to different treatments, drugs or procedures– is still an infant science. In-depth analysis of outcomes requires long-term, risk-adjusted clinical trials.  It will be many years before we have enough clinical data to create useful guidelines for “best practice” when treating most chronic and serious diseases. (In an excellent article in The New Yorker, Dr. Atul Gawande describes how over a 40-period one physician painstakingly learned how to  establish what appears to be “best practice” for just one disease—cystic fibrosis. )

In the meantime, there is a real danger that quick comparisons of .how patients fare under different regimens will turn into an entrepreneurial industry that produces Instamatic “report cards.”  Such snapshots of medical data can be misleading, warns Mark Fendrick,  a professor of medicine at the University of Michigan. In a letter to Health Affairs, he paraphrases sports announcer Vin Scully: “The utility [of such ‘report cards’ on quality]  resembles  the benefit a drunk derives from a lamppost in the dark, ‘support not illumination.’

Returning to the consumer’s dilemma, to make his situation as a shopper all the more difficult, when it comes to healthcare he knows that there are no warrants or guarantees. The patient cannot return an unsuccessful operation. And if he winds up unhappy with the outcome, he may find himself stuck with something far worse than a bad haircut.

No wonder patients are reluctant to bargain-hunt—even in cases where they can get clear price information to make comparisons. This is not an industry where consumers are going to bring prices down—even when spending their own money.

A sick patient isn’t looking for a bargain, he’s looking for the highest quality. But when it comes to comparing healthcare providers, it’s extraordinarily difficult to measure quality. As one hospital CEO told me, “our patients know whether they like the rooms, the food, the service—but they have no way of knowing whether they are getting the best possible care.”

Even after the fact, the patient can never be sure—would his condition have cleared up on its own if he hadn’t had the operation? Would another, less expensive or less painful treatment or drug have just as good a job, with fewer side effects?

Some pundits claim that mortality rates will tell you how good a hospital or a doctor is. But the truth is, a hospital with high mortality rates may simply be one that takes the most difficult patients. When they are being “graded” on mortality rates, many hospitals have been known to “game” the system by refusing the hardest cases. Adjusting for the difficulty of the cases that a given doctor or hospital takes is a very tricky business.

The consumer-driven movement tries to shift the burden of ensuring quality to the patient—pretending that, by just going online, the resourceful health care shopper can become his own expert, and learn to  choose  the “best” procedures, doctors and hospitals at the best price. A few years ago, a Wall Street Journal article suggested that in this new era of consumer-driven care, “New rating systems around the country are staring to make it possible for people to shop for a hospital the way they shop for mutual funds.” (“Shopping for Hospitals,” May 1, 2002)

Did we learn nothing from the nineties?

Just as most people are not cut out to be their own money managers, the majority are not well suited to becoming their own physicians. In the 21st century we have instant access to a world of information—but information is not knowledge. All of the mutual fund rating systems in the world could not save the small investor if he bought a five-star high-tech fund at the market’s high. And if it is difficult for laymen to avoid the hype while chasing hope on Wall Street, consider the dilemma of a seriously ill patient facing the mysteries of his own mortality.

Patients need to rely on their doctors—doctors who are professionals and will put their patients’ interests ahead of their own financial interests—to give them the best possible advice. Some of that advice will be based on what the doctor has read and learned, some on what he has experienced. Much of that experiential knowledge will be intuitive knowledge that is hard to put into words—knowledge that a patient can’t pick up on the Internet.

Certainly, today’s patient wants to be included in the decision-making process. The days of “Doctor Knows Best” are long gone. Patients want to ask questions, to have their options laid out for them. Often, they want a second opinion.  But while they don’t want to be kept in the dark, once they have been informed, most want their physicians to help guide them toward the course of treatment that the physician has reason to believe (even though he often cannot be certain), will yield the best result.

In an essay questioning the whole idea of consumer-driven medicine, Robert Berenson, a physician and former top Medicare official, quotes health economist Victor Fuchs, noting that Fuchs “understands that the patient/physician relationship is very different from the one we accept in the commercial marketplace because it requires patients and health care professionals to work cooperatively rather than as adversarial buyers and sellers.”

In other industries, “caveat emptor” always applies. The savvy consumer must take care that the seller does not cheat him. He must demand the best product at the best price.

But healthcare is different from other industries. The buyer is not a “consumer”–he is a patient. And the seller is not a businessman marketing a commodity—he is a physician  practicing his profession. Insofar as a patient “shops” for healthcare, he needs to shop— not for the least expensive doctor, nor for the doctor who advertises that he has the highest ratings on  somebody’s rating system– but for a doctor whom he trusts to act as a professional, and put the patient first.

In other words, what we need isn’t “consumer-driven medicine,” but “patient-centered medicine.”

With well over 25,000 visitors per month to THCB, undoubtedly many are not well grounded in critically looking at published research studies. This, of course, also is true in the media at large.  With the recent publication in the American Journal of Public Health of a study touting the relative greatness of the Canadian healthcare system over that in the United States, I thought it would be valuable to share an appropriate way to begin to look at published studies.

As an aside, remember to distinguish scientific studies from opinion pieces (like those found on THCB).  In opinion pieces, the writer is, of course, expressing an opinion, though the opinions can certainly be based upon facts.

Ok. The first thing you do when looking at a study is: read the title.  This is generally what will (or, more likely, will not) get you reading further.

What next?  Find out who wrote the study.  Biases of researchers are very hard to overcome.  Many researchers have devoted their professional (and activist, in many cases) lives to promulgating certain points of view.  Sometimes these views are heretical, and the researcher finds himself (or herself) at odds with nearly everyone else in the field.

Now that does not mean the researcher is wrong.  Case in point is Dr. Stanley Prusiner’s discovery of prions—better known as the agent responsible for Mad Cow disease.  Dr. Prusiner suffered the withering criticism of nearly everyone for years until it looked like he was right.  Now he is the proud owner of a Nobel Prize.

But I digress.

In the aforementioned article, who are the authors?  Dr. David Himmelstein, Dr. Steffie Woolhandler and Dr. Karen Lasser, all of Harvard.

I had the pleasure of interviewing Dr. Woolhandler on my program.  She is very well spoken and articulates her views very well.  But she (and Dr. Himmelstein) is one of the founders of Physicians for a National Health Program.  For nearly two decades, she has devoted much time and energy to pushing the concept of a national healthcare system in the US (Canada-like).

Do you think that this bias might creep into the study design?  Would you be suspicious of a drug study that was funded entirely by the manufacturer of the drug?

After you get the names of the authors, you must find out if they have any potential conflicts of interest.  This will generally be found at the end of the article, where a single-line biography of study authors are found.  The much-maligned-here-at-THCB American Medical Association has been a big proponent of financial conflict-of-interest disclosures in publications.  And financial disclosures have become the standard in most scientific (or nearly scientific) journals.

But what do we find at the end of the AJPH article we are discussing?  Nothing implying the depth of ideological fervor of the authors.  Not even a mention of the association of the authors with PNHP.

And this is wrong- because it implies that the authors of the study do not have a potential stake in the study’s outcome.  It is no different than a drug or implants study funded by the manufacturer.  It does not make the conclusions necessarily invalid, but it sure does bring them into question and worth corroborating independently before they become headline news.

In this, the internet age, when you hear about a study in the mainstream news—use your considerable internet acumen to do some brief checking up—find the study, find the authors and find out if there could be a major conflict of interest.  Then check out the ‘rest of the story’.

I found Eric’s Novack’s June 13 post, “The Three Percent Myth,” provocative, though I’m afraid I can’t agree. Medicare is, in fact, more efficient than private insurers.

In his comment on the post, Rick underlines a key difference: In contrast to private insurers Medicare doesn’t have to spend millions on marketing, advertising, and Washington lobbyists. 
On top of that, private insurers must generate profits for their shareholders. In 2003, the HMO industry as a whole reported total earnings of $5.5 billion—up 83 percent from $3 million in 2002 , according to Weiss Ratings, a firm that assesses the financial strength of banks and insurance companies.

In 2004 the industry’s profits jumped another 10.7 percent to $11.4 billion,  and in the summer of 2005 industry leader WellPoint told investors that it expected its profits to continue to levitate by an average of 15 percent a year for the next five years. That same week Wellpoint announced its plans to boost average premiums by 16.6 percent in 2006.

In my 2006 book, Money-Driven Medicine: The Real Reason Health Care Costs So Much, I quote Weiss vice-president Melissa Gannon, who is remarkably candid about
the impact the insurance industry’s fat profit margins have on society:

“While this bodes well for the industry’s overall health, rising premiums have forced many consumers to select more restrictive health plans or opt not to purchase insurance entirely.”

But it’s not just the cost of marketing, advertising, lobbying and providing profits for investors  that makes a private insurer’s overhead so much higher. Insurers also have higher administrative costs because they are constantly enrolling and disenrolling customers as people change plans. (The average turnover in an employer-sponsored insurance plan is 20% to 25% a year. By contrast, Medicare patients stay put. Even if they could switch, most prefer Medicare’s coverage to the coverage they had under a private insurer.)

In Money-Driven Medicine, I quote former Medicare chief Bruce Vladeck who points out that:

“. . . even very efficient insurers must spend roughly 5 percent of their premiums just to enroll and disenroll customers  . . . . This is why, when I was in Washington, some of us talked about giving people age 55 to 65 the opportunity to voluntarily enroll in Medicare –letting them pay premiums to the government in exchange for full Medicare coverage . . Donna Shalala, who was Secretary of Health and Human Services at the time, said to me, ‘You really want to compete with the insurance companies, don’t you?’

And I said, ‘You bet,” Simply because our costs were so much lower, I knew I could beat them.’”

In his post, Eric also argues that Medicare is less efficient because its oversight is lax, and thus millions are lost to fraud. But if you look at cases where healthcare providers like National Medical Enterprises cheat insurers, you’ll find that they are just as likely to bilk private insurers.

If anything, private insurers may be more laid-back because they can “pass the costs associated with fraud on along their customers in the form of higher premiums,” notes The Wall Street Journal, quoting Louis Parisi, director of  the New Jersey Insurance department fraud division. (Medicare has a harder time finding funds to cover fraud.)

In the same story, the Journal quotes the medical director of an NME hospital saying that when he tried to inform the Prudential Insurance Company of possible fraud, company executives merely laughed, saying that for them, large bills meant large premiums and big bonuses.

Eric goes on to suggest that Medicare’s voluminous rules create “hidden overhead” for healthcare providers who must spend hours deciphering the coding. But Jonathan is right in pointing out that private insurers also create “hidden overhead”: for doctors who must deal with the 12 different sets of forms form 12 different insurers—all designed to make it difficult for the doctor to be reimbursed.

While interviewing doctors for my book, I found that the vast majority found Medicare’s paper-work far simpler. They also liked the fact that Medicare does not try to micro-manage their practice by forcing them to call and ask permission to keep a patient in the hospital an extra two days, or to perform a certain procedure. Medicare simply publishes a list of what it will and won’t cover—and that’s that. When dealing with private insurers, by contrast, physicians spend hours on the phone.

What’s interesting is that, in the course of interviewing doctors for Money-Driven Medicine, I found that the majority preferred Medicare—even when it paid less—because it was so much less hassle. As The New York Times recently pointed out, private insurers make a game out of delaying reimbursement,  and designing the forms so that the doctor leaves out one detail, he or she won’t be paid.

Finally, I agree with John when he points out in his comment that even if we switched to Medicare-for-All ( a bill now in Congress that would let people 55-65 and those under 20, voluntarily switch to Medicare, paying Medicare rather than a private insurer for coverage) —and even if Bruce Vladeck is right that because Medicare’s administrative, marketing, advertising and lobbying costs are so much lower, and because it doesn’t have to generate profits, Medicare could provide more coverage for less—this still doesn’t solve the larger problem of health care inflation of 8% a year. After a couple of years, inflation would exceed the lower administrative costs—then what?

Ideally, if more people were on Medicare, Medicare would begin to exercise its clout as the nation’s largest payer—the way other governments do—negotiating with drugmakers and device-makers for lower prices. (The high cost of drugs and devices is a major reason why our hospital bills are so high—drugs and devices account for 15% of the $2 trillion-plus  that we spend on healthcare each year. Private insurers are less likely to bargain because they can always pass the cost along to their customers—and they do just that.. In just the last five years the cost of an average insurance premium has risen 75%.)

Of course drugmakers and device-makers argue that Americans need to pay twice what patients in other countries pay for their products in order to cover the high  cost of research.

This is simply not true. Analysis by Families USA, a non-profit consumer group, shows that drugmakers spend roughly twice as much on advertising, marketing and administration as they spend on research.

Moreover, from 1995 to 2002, drugmakers took top prize as the nation’s most profitable industry, showing profit margins of 13 percent to 18.6 percent of sales each and every year. (In 2004, they fell to third place, but still posted profits equaling 16 percent of sales.) Meanwhile, in recent years, device makers have boasting profits margins as high as 20%.

There is no reason for drug makers and device-maker to make so much more money than other industries—especially when those industries are going broke trying to cover the high cost of healthcare for their employees.  Investors needed to be rewarded for taking a risk, but there’s just not that much risk when you invest in Pfizer or Johnson and Johnson.

Even on Wall Street, health care analysts say, that that if you cut  profit margins in these industries—and cut back on excessive  marketing, advertising and lobbying— and  drug-makers and device-makers could roll back prices without making a dent in their research budgets.

The Industry Veteran joins us this afternoon in the latest in THCB’s series by guest posters, following up on excellent posts by veteran financial journalist  Maggie Mahar and orthopedic surgeon turned talk show host Eric Novack. The Veteran found Eric’s comments on the health care system inspiring — to put it mildly. They set him to thinking about the true role of physicians in the healthcare system and in society at large. Needless to say, as always on THCB, his words are his alone.     
    
   

On this sunny morning I thought I might take time away from more productive pursuits to answer some of the typically narrow minded and self-serving posts of the physicians who attend THCB in the same way that dogs raise their hind legs at convenient lampposts.  The object of my opening disdain is someone by the name of Dr. Eric Novack.  Alas, Maggie Mahar demolished his drivel in a more cordial manner.  Novack’s transparently phony views suggest an analogy to Samuel Johnson’s comment about a dog walking on its hind legs.  Physicians writing about politics, health care economics or social policy are similar to this canine trick in that it is almost never done well; the wonder is that it is done at all.

Other physicians seeking to foist their miscreant views on THCB usually content themselves with illogical or poorly informed letters that disagree with some of my posts.  I don’t wish to be too caustic in responding to their blatant ignorance.  After all, they spent years performing brute rote memorization and other, low cognitive tasks, so their distorted thinking is a product of their trained incapacity.  While it isn’t terribly useful to disparage plumbers for being poor cooks, the pipe cutters who consider themselves master chefs despite an inability to boil a potato do merit some contempt.

A few themes of disagreement and bewilderment emerge from the physicians’ posts.  One chap, for example, asks about the “de-skilling” reform that I urge upon medical practice.  I realize that memorizing bones and ways to add carbonyls to benzene rings doesn’t leave much time for understanding history, so I’ll try to provide a remedial lesson.

In the late 19th and early 20th centuries, the pace and substantive nature of industrial production was largely directed by skilled craftsmen on the production floor.  This situation stymied the interests of managers who considered matters of volume, configuration, quality and cost as matters for their control. Their solution, as implemented by Henry Ford and others, consisted of the assembly line for which workers with far less skill could be inserted or removed as interchangeable parts.  Labor historians have actually documented many periods of de-skilling throughout the industrial revolution.

As applied to medical practice, the process consists of pushing the scope of practice, discretion and competence down the food chain.  Primary care practitioners should do a fair amount of the things that only specialists do at present.  Nurse practitioners should assume responsibility for many primary care functions, PAs should get other responsibilities, and so on.  Other health care professionals such as pharmacists and nurses should also assume more physician responsibilities.  Of course, physicians for years have berated such “assembly line medicine,” “therapeutic triads” and other labels for the process, despite the fact that studies have shown it produces better outcomes and lower costs.

Other affirmers of the Hippocratic oath who seek to recoup the costs of their medical education from their first four patients find fault with my call to feminize medicine and increase the number of foreign medical graduates.  They claim that even now, 50% of practitioners are women and most hospital physicians are FMGs.  Their figures are possibly correct, but their claim is equivalent to saying that Hispanics, blacks, Asians, poor whites and the aged infirm run the US because there are so many of them.  I merely ask these disingenuous posters to examine the ranks of service chiefs at major teaching hospitals, the senior faculty at top medical schools and the key opinion leaders who speak on behalf of the Big Pharma companies at medical conventions.  Only small percentages of these big, swinging schwanzes are women or FMGs.

A few years ago I systematically examined the reasons for this paucity of women in the medical profession’s key positions.  Basically, the motivations and the personality profiles of influential physicians approximate those of senior executives at the largest 1000 companies.  The desire for wealth, status, power, ego and other forms of self-aggrandizement predominate.  For some of the same reasons that the numbers and influence of women in the corporate boardrooms remain small, their sway in the medical profession is also puny.  In most cases, women are just the working stiffs and peons of the profession.  That stratification of medicine won’t do.  I’m talking about making medicine a feminine profession in the same way as elementary school teaching, nursing and public librarianship.  That will incentivize you egocentric males and the small number of female-impersonating women in the profession to ply your greedy ways in business without the special dispensations that society grants to physicians.

Finally, I don’t know whether I’m amused or nauseated by the posts from physicians who seek to justify their claims to unconscionable incomes by citing the many years they spent in school and the related costs.  Along the same line, a cardiologist at the American College of Cardiology meeting told me that the country should guarantee cardiologists a starting salary of $250,000, at a minimum, because they had to forego the enjoyments of their years between the ages of 20 and 30.

Well, according to the logic of THCB’s greedhead physicians, veterinarians sure get a raw deal because they spend quite a few years in training and receive only a fraction of MDs’ salaries.  Of course PhDs really take it up the sphincter, with all the years they spend in graduate school, a series of post-doc positions in indentured servitude, and then some really chancy prospects of even getting a job.

The lesson here is not like memorizing the steps of the Krebs cycle or the twelve cranial nerves, so I’ll take it slowly for sawbones readers.  No mnemonic devices or acronyms are required. 

One’s income in a market economy is not based upon years of schooling, contribution to society (whatever that means), or any other assessment of intrinsic worth.  Instead, labor is a product that seeks its economic rent in a competitive market and, like any other product, it captures whatever willing buyers will pay for it.

Of course, if one’s profession obtains a legal monopoly through state licensure and then chokes off the labor supply, buyers in the market will have to pay more for that particular labor.

Alas, the day proceeds and I can waste no more of it instructing arrogant, ignoramus physicians.  I charge by the hour and since I don’t make the return on equity of a Big Pharma company, I see no need to coddle your swinish asses.

As a parting shot, I see that Dr. Novack identifies himself as an orthopedic surgeon.  This information reminds me of an old axiom that made the rounds in the pharmaceutical industry several years ago.  Before the prevalence of Ken and Barbie reps, the ranks were smaller and populated by pharmacists and others with graduate degrees in the health sciences.  Many of these sales people used to complain about the fact that they needed to dumb down the detail presentations so drastically for some specialties.  That’s when one wag passed around the story about the procedure used by residency programs for selecting new people.  According to his apocryphal tale, teaching hospitals would take the bottom 10% of med school graduating classes and if people in this tier could bench press 200 pounds or more, they were taken into orthopedic programs.  Those unable to push the bar to arm’s length went into OB/GYN.  I suspect Dr. Novack had two nurturing nurses spotting for him and they raised the bar from both ends.  —  Industry Veteran

Here is a quick hit for the day. We have read about Medicare (actually CMS, but it sounds better to give Medicare its own personality) publishing payments for 30 procedures. I encourage you check out cms.gov and try to actually understand the Excel file that you get for your efforts.

Only government could call that ‘disclosure.’

Private insurers are also getting into the mix. We have all heard about Aetna publishing the range of reimbursement
  for contracted physicians. Many other companies are announcing that they will
  follow suit. These news reports always include the comment that physicians and
  hospitals do not want this published. I disagree.

Two scenarios can emerge from this, once all insurers publish reimbursement 
rates (and they are not mutually exclusive).

As an orthopedic surgeon, I will use an orthopedic example. If insurer X reports
  publicly that the range of reimbursement for treating a broken wrist ranges from $500 – $750, I will obviously immediately go and check to see where I am
  on that scale. If I am at the low end, I will definitely not sign a new contract
  with that insurer for less than what my colleagues are getting for the same
  work. I will not be alone.

Scenario two is more intriguing. Once all insurers publish their fee schedules, doctors no longer need to participate in insurance plans. All I need to do is set my rates comparably- and reasonably- and drop all the insurance plans. And I can eliminate much of my billings/collection staff. I can also now account
  for the actual work it takes to do different things—and perhaps accept lower
  payment for some things, while charging more for much more complex work. (The example I use is joint replacement: a re-do [revision] joint replacement also pays about 20% more than a first time [primary] joint replacement, even though it can take 4x the work, with increased liability.)

The disclosure would have the absolute opposite effect on insurers than they intended. Although I suspect the smart folks at Aetna, UnitedHealthcare, Healthnet, and others have considered this already, and it is why they are so reluctant to actually make public this information.

The Wall Street Journal reported in a June 13th article,
  Page D1 that several major insurers (Aetna, Cigna, Humana, UnitedHealth)
  as well as Medicare are disclosing the prices they have negotiated with doctors
  and hospitals for a number of common procedures. Some are beginning to include
  quality indicators with the pricing information. This is an apparently-growing
  trend that may spell doom for companies like HealthGrades,
  but this wasn’t noted in the article. One interesting thing: apparently at least
  a few insured people have used the system, even though they’ll be well past
  the deductible. Maybe some few will note a link between the premiums they pay  and the Medical Loss Ratio their insurer experiences. On the other hand, the
  article notes that in the absence of any other quality indicator, people may
  think that more expensive implies higher quality and choose the
  high-cost provider.

The insurer’s tools are restricted to their own plan members: this means if
  you’re covered through Cigna you can’t tell what out-of-pocket costs might be
  for somebody covered by (say) United. The article goes on to detail several
  of the limitations inherent in these disclosures, well-known to readers of The
  Healthcare Blog. Tools like these might actually be useful to those with HDHP
  coverage, or the uninsured.

But there’s more. The article says states are beginning to mandate that hospitals
  disclose their charges. Charges amount to the "list price" that almost
  nobody pays, so this isn’t very helpful to prospective patients. The list includes
  South Dakota, Minnesota, and Florida. I wonder who got the states to mandate
  that instead of something useful. Some state hospital associations are evidently
  taking proactive measures, and have created their own websites to disclose hospital
  charges before being told they must. But why would they do this?

Look at this from the New Hampshire Hospital
  Association PricePoint system:

How much do government programs pay compared to other payment
sources?
In many cases, Medicare & Medicaid reimburse hospitals at rates that do not
cover the costs they incur to provide care. Payments from privately insured
patients generally subsidize the shortfalls created by Medicare and Medicaid
and therefore represent a “hidden tax” on individuals and families not
covered by government programs.

Where have we heard this before?

When you ask for prices, you get median and mean charges with no promise that
  your bill will bear any resemblance to either figure, and this editorial.
  Apparently, they expect they’ll be forced to disclose someday, and this way
  they can control the content of the disclosure. If the legislature gets involved
  the hospitals might not be allowed to put their own "spin" on things. This actually
  is brilliant strategy. They’re not disclosing very much, but they can claim
  they’re being as transparent as they can be, given the vagaries of medical treatment.
  They can lobby commercially-insured patients to lobby congress to increase Medicare
  reimbursements with an implication that the amount they pay in "hidden taxes"
  will go down. But of course it won’t. They do not mention that there are many
  cases for which Medicare & Medicaid reimburse hospitals at rates that exceed
  the costs they incur to provide care. Imagine! Finally, they offer no assurances
  that the costs they incur to provide care are reasonable.