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Healthsouth Quickie

Following onto the recent post about the problems of for-profit health services, which highlighted Richard Scrushy, HealthSouth’s CEO, in the last couple of days another former HealthSouth honcho has plead guilty to falsifying records.  For those of you scoring at home that makes 15 execs admitting guilt so far. Healthsouth ended up claiming more than $2.5 billion in false profits a la Enron.  Also today the Corporate Counsel and Corporate Secretary just quit. Cleaning up the mess can’t have been too much fun.

More details on the Medco suit

Here’s what Medco said in its IPO offering document last April:

    In February 2000, two qui tam, or whistleblower, complaints under the Federal False Claims Act and similar state laws were filed under seal in the United States District Court for the Eastern District of Pennsylvania. These
    complaints allege improper pharmacy practices, violations of state pharmacy laws and inappropriate therapeutic interchanges. We have not been served with the complaints and have not been required to defend against the allegations.

Well now that the US Attorney is joining the suit, it appears that the "practices" included
"Inappropriately filled prescriptions includ(ing) instances where a Medco pharmacist said he consulted a doctor but didn’t, or when a prescription was canceled suspiciously".  The stock market doesn’t seem to care, based on the fact that the existence of the suit was disclosed in the S1. However, the US Attorney is being very aggressive claiming that the government can charge $5000 for each script that was affected, and that there are thousands and thousands.  It’s worth keeping an eye on this one as PBMs may find their future in whatever comes out of the Medicare Drug Coverage bill is affected by this publicity–whether or not Medco is found guilty and fined a huge sum.

Did Astra Zeneca treat innocent MDs as Babes in the Wood? by Matt Quinn

Matt Quinn wrote this post about doctors charging Medicare for samples given to them by drug companies. Astra Zeneca has already settled with the Feds at  a cost of $330m for promoting that behavior. As I’ve mentioned many time, I think Medicare’s structure makes it easy to defraud, so I don’t place all the blame on the docs.  I actually think Matt’s a little over-critical of physicians (and by extension drug companies) here.  But Matt used to work in the business of marketing oncology drugs to physicians and knows many of the tricks. So bear that in mind when you read his post below:

    A federal judge is blaming a pharmaceutical company (Astra Zeneca) for a physician, Dr. Saad Antoun, billing for (injectible) samples of their drug which he was given for free: "The judge said Antoun appeared to be ‘the kind of doctor everybody wants to go to and that this was a mistake of bad judgment fostered upon you by the drug company.‘" The full story from the Report on Medicare Compliance is here.
    My question: if this doctor is so helpless as to 1) not ask Astra directly about "misleading labeling" regarding billing for samples 2) not ask his peers/staff about the legality of billing for samples and 3) not do the (minimal) research needed to know that it violates federal law and 4) follow the directions of a drug rep in running his practice and treating his patients, how much faith should anyone have that this guy is competent in his profession?  Would it be the drug company’s fault if he used Zolodex improperly and it harmed or killed a patient?  Perhaps the label was "misleading" or the drug rep told him about an off-label use that he had heard about.
    My take is that Dr. Antoun knew exactly what he was doing — or should have.  Egregious pharmaceutical marketing only works because physicians allow it to work.  If physicians rejected trips, graft in the form of "unrestricted educational grants" and honoraria, free meals, gas, and concert tickets and other "non-scientific" aspects of drug marketing, then the companies would stop spending money on this stuff.  But many physicians don’t.  External agencies only need to regulate a profession when members of that profession can’t conduct themselves ethically.  I guess Judge Farnan can’t understand this and refuses to keep up the government’s (taxpayers’!) side of the deal.

Political update on uninsurance story

For more on the issue of how many uninsured there really are and how long they are uninsured for, go look at The Bloviator’s post. His and my conclusion is that the Census Bureau has mislabeled the 15.3% of the population that is uninsured "for the whole year." That number instead represents a snapshot of those uninsured at any one time.  Still a big number, though with many people moving in and out of it, hence a big political effect.

Regarding the political effect, my friends at Harris Interactive have given me a peek at the numbers in their classic question about the US health care system.  They have been asking the public about their view of the system forever.  When the number of people thinking that the system needs to be completely rebuilt goes above 30%, as it did in 1991 and 1992, its time to pay attention to health care politically.  Well as you can see below, its over 30% now!

2003 data from Harris Interactive:
System works pretty well/minor changes are needed: 17%
Some good things/but fundamental changes are needed: 50%
So much wrong/system needs to be completely rebuilt: 31%

Uninsurance: the numbers go way up.

It didn’t take a rocket scientist to figure it out (although The Bloviator pointed the way yesterday and he’s as smart as a rocket scientist).  An increase in unemployment plus fewer people getting health insurance at work has led to an increase in over 2.4 million people being uninsured. The New York Times article has the Census Bureau reporting that in 2002 43.6 million or 15.2% of the population were uninsured. (That’s actually down from 16.8% in 1998 before the full impact of the SCHIP program took millions of kids out of uninsurance into Medicaid, or something like it). 61.3% of Americans are covered by their or their family’s employer, and that’s down from 63.6% two years ago.

It’s worth remembering that there are three types of uninsured.  Those who’ve been uninsured for a year or more (about 6%), those uninsured at any one time (about 15%) and those uninsured at some point during a year (about 25%). (NOTE ADDED LATER The Bloviator points out that in fact the Census Bureau reports that the 15.2%/43.6 million were uninsured for the whole year. I may have missed a trick here, and I’ll report back what the 6% refers to). The 43.6 million is the middle group, which means that some 80-odd million were uninsured at some time in the past year. The political ramifications of uninsurance — and they are the only ones that matter — depend on how likely people think they are to lose their health insurance, and therefore face the risk of a financial crisis brought on by lacking health insurance.

We got to the Clinton reform process because in the 1990-2 recession enough people felt worried that losing health insurance was something that might happen to them, and not just to other people. At that stage surveys suggested that over 30% of Americans wanted a complete rebuilding of the health system.  But by the time the legislation was brought to Congress in 1994 unemployment had fallen and fewer than 20% said they wanted complete system rebuilding.  I don’t have the current numbers to that question, (although I shall go begging for them from my friends at Harris). However, health care is moving its way up the list of issues for voters, and EBRI reports that only 60% of those with employer sponsored insurance are confident that it’ll be there for them in the future (full report here), and most importantly that, "among all Americans, support for a government plan jumped from 25 to 36 percent in the past year".

I paraphrase HHS secretary Tommy Thompson’s response as "we should do better but we won’t". Meanwhile the Democratic candidates are getting serious enough about the issue to be sniping at each other about who said what when about Medicare.  This means that we are well ahead of where we were at this stage in 1991 when we still were trying to figure out who Bill Clinton was, although we didn’t then have the other minor distractions of occupying Iraq and fighting terrorism.  So expect these numbers to increase the level of grandstanding on the Democratic side, and maybe even get the White House a little concerned. Although in my biased view it looks like they’ve written off any domestic issues as a platform for 2004.

PBM quickie: Feds join lawsuit against Medco

The Feds have backed two whistleblower suits against Medco.  The allegations claim that Medco used a variety of techniques to favor Merck (which owned Medco at the time) and was paid $430m in 2001 to switch scripts from Merck’s competitors. Back in March 2003, Milt Freudenheim in the New York Times highlighted Medco’s income from rebates (some $1 billion a year) and its ability to move share towards Merck’s drugs.

PBMs have for a long time made money from rebates, and have also been very economical with the truth to their health plan customers about how much they got from pharma companies for those rebates and how much was passed through to their customers.  However, during the late 1990s their performance seemed very ineffective in keeping down the cost of drugs for their plan and employer clients, either in reducing their usage or by holding down their unit price. For more of my take on PBMs see this post.

Interestingly enough, Medco’s stock price went up over a dollar in the latter part of the afternoon after 2pm when the confirmation (of somewhat old news) came out that the US Attorney’s office was joining the suit.

Schering Quickie

In this post a while back I wrote about the problems that mid-market pharma companies are having dealing with patent expirations.  The Jenks Health Care Report has an article on the future of Schering Plough available here , which goes into much more detail about what’s wrong at Schering and whether it can be made right.  Their view is that Schering will be dressed up for sale.  The question is, would an acquisition of a wounded company help any of the usual big Pharma suspects? Most of them have already gotten big enough in terms of sales force and market clout, so would they want Schering’s somewhat lackluster portfolio and pipeline?  Probably not at its current PE ratio of 20, which is the same as that of Bristol-Myers SquibbPfizer’s PE ratio is around 50.

The Bloviator and the uninsured

A terrible title, but if you’re enjoying reading this blog the other one I’ve found with the closest flavor is the excellent The Bloviator, written by Ross Silverman, a lawyer/public health professor at Southern Illinois University (and a Red Sox fan by my inference). He focuses more on the public health aspects of medical care and less on the business side but he is very well informed and ahead of the game in spotting news and obscure statistics. Go take a look at his piece on the uninsurance numbers, which is a good companion to my post on Medicaid.

Tenet’s counsel can’t stand the heat

Modern Healthcare reports that Tenet’s embattled Chief Counsel Christi Sulzbach has quit. She cited external pressures as her reasons for stepping down, including criticism from Iowa Senator Chuck Grassley . Seems like after articles like this she wasn’t going to play Scrushy’s game of notgoing quietly into the night. However, for bad things to be done it takes not only naughty people at the top, it also takes a system that’s leaving itself open to relatively easy abuse.  My first ever post on this blog (which centered on Tenet) suggests that FFS Medicare is that system.

Why Wall Street hates health care services but doesn’t know it.

In a news article titled HealthSouth Scandal Doesn’t Slow Former Chief the New York Times’ Milt Freudenheim profiles former Healthsouth CEO Richard Scrushy.  Healthsouth was in may ways a corollary of Columbia/HCA and Medpartners.  Whereas Columbia was hospitals and MedPartners was physician clinics, Healthsouth owns home health services and out-patient surgicenters. Like the other two it over-expanded and over-promised to Wall Street.  The problem with for-profit health care in Wall Street terms is that these are all low-margin businesses, which are dependent on labor, and can produce little "same-store" growth without poaching business from competitors down the street.  High growth businesses that Wall Street loves have high margins and produce high productivity gains to maintain them.

None of these companies fundamentally changed the way medical care was delivered by introducing huge productivity gains. Even in the early days of Medpartners when they bought multi-specialty groups like Mullikin Medical Centers in Los Angeles, the promise of new ways of delivering care more cost-effectively under capitation ended up passing the improved margins onto payers and health plans. Then when "medical trend" went back up in the mid-1990s the capitated groups were left holding the bag.  Medpartners (of which Scrushy was also briefly Chairman) ended up going into bankruptcy, although the company reemerged as the now successful PBM CaremarkRx.

Given that Wall Street likes high margins and perpetual growth, yet creating high margins in medical care delivery is difficult, these for-profit companies are left with three options.
1) Buy competitors rapidly and mask flat "same-store" growth with overall revenue growth until the music stops and there’s no-one left to buy. (Medpartners, Columbia/HCA).
2) Increase margins and revenue by sticking it to payers (especially Medicare) and hope they don’t notice. Problem is they will eventually. (Columbia/HCA, Tenet)
3) Lie about it.  Claim to be making massive profits, even if it’s not true, until the FBI wakes up. (Healthsouth, Enron — OK, OK I know they weren’t a healthcare company but it’s the same principle)

There is of course the fourth option, that of admitting you are a low margin player like a utility company, and accepting the low valuation Wall Street gives you. But that’s not really much fun, is it?

As for Scrushy at Healthsouth, he’s clearly still having lots of fun going powerboating and jetting around in his new plane.  He’s also claiming that he knew nothing about what the 12 of his lackeys who’ve already plead guilty to fraud were doing. That sounds similar to Ken Lay’s claims about his innocence to what was going on at Enron.  Who knows? They may end up sharing the same cell at Club Fed.


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