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POLICY/PHARMA: “Producers” comment on how much we should spend on health care.

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The casual reader who’s been following the health care system and the election–which has had a touch of health care injected into its rhetoric recently–might believe that a nation spending 15% of its GDP on health care, while having a few other “priorities” in places like Eye-Rak, perhaps ought to be wondering about how to slow down its health care spending. Other readers might have noticed that pharmaceuticals are very expensive compared to other countries, and that the odd rogue representative from that industry is starting to suggest that the industry might think about how to moderate those costs. But of course you wouldn’t get to be the CEO of a major pharma company if you thought like that.

Instead you’d think like this. First, health care spending ought to be 18% of GDP. And that spending should be funded by middle and upper-income individuals saving up to 10% of their incomes in special accounts to pay for it because, well, because you just can’t trust those government people. Second, the health care system should be rebuilt with Medicare changed to focus on integrated patient care (presumably with the government taking a lesser role). Third, people need to shape up and practice personal responsibility and pay for their own preventative care. Fourth, the environment for brave pharmaceutical companies who take such high risks should be made easier, and the politicians–instead of criticizing them–should realize that the font of all wealth and success in the modern world comes from pharmaceutical research.

If you think that this is a strategy for a more efficient cost effective health care system, delivering more of its products and services to a wider population more equitably, then you too are probably in line to be the CEO of a major pharmaceutical company, or maybe you already are.

Although he says one or two sensible things about Medicare and school meals, Fred Hassan’s Four Pillars of Wisdom Health Care Reform might look to the outside observer as being just a leetle, leetle bit self-serving. But he has his supporters on the libertarian right. At Tech Central Station, which BTW genuinely doubles as a PR agency for oil companies that for some obscure reason don’t believe in global warming, libertarian columnist Arnold Kling thinks that critics of the system hate those “producers” in the industry. Those people who hate the producers include Uwe Reinhardt, who complains about the high cost of health care and attributes it to the high cost of services. Kling feels that Uwe’s counting the wrong things (services) and that really we should be looking at those outputs–although he doesn’t explain what outputs are, and that everyone who understands health care knows that outcomes (one version of “outputs”) are poorly counted and often just plain poor in American healthcare.

But while they are loathe to criticize producers of health care services, especially producers of very expensive medical technologies which enjoy monopoly protection, those on the political right of a more fiscally-conservative ilk are starting to complain about the costs that are being dumped into new government programs–which will end up being transferred to those producers under our current system. Blogger Josh Clayborn is one such conservative who maintains that these government programs are something we can’t afford. Although the cynical amongst us might note that while we can’t “afford” to borrow money to offer drugs to Medicare recipients, apparently we seem to be able to afford to borrow money to give huge tax breaks to the super-rich.

But those of us who think that the health care system consumes too much money inefficiently have a little bit of ammunition. For the perfect Adam Smith market to appear in health care, information and expertise has to appear on the consumer side, and monopolies have to be broken on the producer side. Well anyone who knows anything about health care knows that we are far from that happy state. While Fred Hassan is unhappy about alleged government interference in the pharma business stopping his precious innovation, the real story is that he doesn’t seem to be objecting too much to the government interference in the market that allows his industry to routinely increase prices and play all sorts of games to prevent competition.

And while we’re on the subject of consumer knowledge, it’s worth taking a quick look at this table which shows that only 33% of Americans believe that we spend more on health care for the elderly than we do on health care for kids. Given that level of understanding of the health care system, its hard to imagine that the “consumer” versus the “producer” is a fair contest. And fifty years of “free market” health care shows that it hasn’t been. Which is why the single payer crowd and the managed care/managed competition crowd all believe that some specialist entity needs to at least be attempting to level the playing field.

And when a major pharma CEO is promulgating about how the rest of us should be funding his retirement fund (rather than our own), well one of my correspondents suggested that it reminded him of when the Chicago press would interview Al Capone in the 1920s and Scarface Al would opine on topics ranging from the changing status of women to juvenile delinquency and government policy for small business. The less amusing aspect of all of this is that health policy in the first and (gawd help us) second Bush term is being run by Hassan and his cohorts in big pharma, so we can expect the current level of producer versus consumer imbalance to continue. Unless of course I’m wrong and the CDHPs first become common and then work to restrain health care costs. But I’m not holding my breath.

HEALTH PLANS/POLICY: Plans challenge Commonwealth Fund position on CDHPs

You’ll recall that the Commonwealth Fund has been featured on THCB as a bastion of opposition to the idea that CDHPs will lead to nirvana, and that people who join them may skip out on needed services. Well now a couple of health plans are disputing this saying that behavior changes are being seen amongst those who sign up for CDHPs. There isn’t much more to say other than this will play out in the coming years and we’ll see who’s right. However, there’s no inherent contradiction in saying that people who choose CDHPs will use more preventative services while still being healthier than those who stay in traditional plans.

Anyway, here’s the article, which gives you a good intro to the subject if you haven’t read THCB’s earlier reports (like this one).

QUALITY: Comprehensive ‘pay for performance’ article

Other than (probably falsely, but if someone knows the truth please tell me) claiming that I was in the group that back in 1997 invented the expression in a health care context, THCB readers will also know that I am somewhat optimistic about the pay for performance concept. There’s a very good Wall Street Journal article about P4P in California on Firday, and luckily it’s been reprinted in a place where you don’t have to subsribe to the WSJ to get it, so go read it.

THCB PLUG: Upcoming Michael Porter event

The good folks at Harvard Business School Publishing are getting into the field of audio conferences. They’ve bribed me with a free pass to their first one so long as I mentioned it to you, and that I’ve accepted gives you a clue about which HBS professor is not presenting. The one who is presenting is Michael Porter, luminary of the business competitive strategy field who has been massively successful and influential in that arena for decades, so much so that all my MBA friends can still recite his 7 Pillars of Wisdom Five Forces of Competition. For reasons that I’m sure will appear puzzling to him in several years and were probably due to excessive consumption of alcohol, Porter has decided to enter the quagmire known as health care.

Porter’s initial thrust is to suggest that healthcare is not competing on the right level. He says:

Competition in the health care system occurs at the wrong level, over the wrong things, in the wrong geographic markets, and at the wrong time. Competition has actually been all but eliminated just where and when it is most important.

To get this from the horse’s mouth, get your corporate credit card out and go sign up here for the webinar which is on Tuesday 28 September.

My biased read will be delivered sometime later. I suspect that given the new emphasis on P4P and DSM in Medicare, Porter’s thinking may become pretty influential in health care.

THCB NOTES: FierceHealthcare Newsletter

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Your host here has picked up another gig which is pretty complementary with TCHB. I’m now editing the new FierceHealthcare newsletter. This is a free newsletter each weekday emailed out around 12 noon EST which captures the gist of the 5 healthcare biggest stories that day, and has a link to another 5-10 stories or press releases of interest. It’s mostly aimed at the health care business crowd, but the kind of topics you see in it will be pretty familiar to THCB readers. I encourage you to sign up here. If you want to see a sample first, go here.

FierceHealthcare is pretty much straight news, although I supply a little context. So I will be attempting over time (and actually have been for some months) to continue to take THCB away from the the “selective” news reporting type of blogging where it started out (and which tends to be how Don Johnson’s BusinessWord and Ross Silverman’s Public Health Press‘s News Links features operate) and into more in-depth analysis, opinions on the future likely course of healthcare (from me and my various contributors), and scurrilous gossip (OK, maybe not that scurrilous!). You shouldn’t notice too much difference, but as ever please let me know your opinions.

QUALITY: More problems at Tenet sub-contractor

A little more scuttle-butt from my source on that Tenet sub-contractor THCB wrote about a while back.

Disarray abounds at the small healthcare IT company that Tenet has chosen to support its Core Measures JCAHO submission requirements. The company recently was denied JCAHO “listed” Core Measures vendor status because JCAHO’s Board didn’t feel that the company should be permitted to sell to hospitals directly. Although the company is still permitted to support Tenet, Tenet (as the JCAHO listed entity) is wholly responsible for data submission screw-ups: something that has occurred every quarter, so far.

Adding to the dysfunction is the removal of this company’s CEO and founder by its board and the departure of the company’s CFO, VP of Engineering, VP of Sales, Director of Marketing, and several senior engineers in the past few months. One wonders why Tenet would entrust something as important as JCAHO accreditation to a company that JCAHO refuses to certify…

I have some really juicy stuff on this waiting in the wings, but I probably need to get the as yet non-existent THCB legal counsel on the case first.

POLITICS/POLICY: Harris Poll Shows Tight Presidential Race

As I’ve saying for a while, this Presidential race remains too close to call, and today my favorite polling organization confirms that. A Harris Poll taken late last weekend showed Bush and Kerry tied. Why believe Harris? Well aside from being bright enough to employ me for a little while in the late 1990s, they have a very good record in very close elections. For example they were the only ones to get the UK 1992 election right (a very narrow Tory win) and the most accurate in the 2000 Presidential election in which they called the popular vote a tie (and it was).

Which all lead me to the conclusion that Bush needs to stop talking about health care. On the other hand some commies might suggest that the other parts of his record that he is running on aren’t too strong either. But the point is that (gullible or not) the public thinks that he’s a better bet than Kerry on that furr-in terra stuff. Of course them furr-iners massively prefer Kerry — lucky for Bush they don’t get to vote.

POLICY/POLITICS: Which Californians care about Prop 72?

So the mudslinging has begun with the No on 72 crowd calling it a government takeover of the health care system in California. Prop 72 is an up or down popular vote on the SB2 “Pay or Play” passed last year just before Gray Davis was booted out by Arnie. Calling Pay or Play a government takeover as have recent ads is pretty disingenuous, as the law only gives the government control over those who choose to “pay” into the pool in order to stop employers gaming the system. But why waste precious ad time saying that, especially as it smacks of the truth.

Of course if you really want to find out what this is about you need to follow the money. The California Health Care Foundation’s HealthVote 2004 site shows who’s spending what. Unions are supporting the campaign with about $1m so far, and that’s mostly an ideological buy to support SB2’s sponsor State Senator John Burton. On the other side is $6 million from the people who’d have to –shock-horror — pay for their employees’ health care! Who are this disinterested crowd? The list of contributors by size

1.California Restaurant Association
2.CKE Restaurants. (Carl’s Jr)
3.California Restaurant Association Issues PAC
4.Target
5.Macy’s West, Inc.
6.Harman Management Corporation (biggest KFC franchisee)
7.Sears
8.Yum! Brands, inc. (parent company of KFC, Taco Bell)
9.McDonald’s corporation
10.Wendy’s international, inc.

I think it’s safe to say that Walmart is on that list in spirit at least too. So basically anyone who employs a lot of low wage-employees is fighting this. But really what difference would it make to them? People will keep living in California and someone will make money selling them fast-food and whatever schlock Target is selling. So it’s not exactly as if these jobs are going to pack up and go to Arizona.

So really this is as naked as it gets. These corporations are trying to preserve the share of their revenue that goes to profit over that which goes to compensation. And for that, they want the rest of us to fund the care of 1 million uninsured people who work for them. Arnie is opposed to 72. Welcome to Kal-ee-forn-iya.

PHARMA: The debate on R & D spending, with UPDATE

Following the revival of the “taxpayer pays for the drugs twice” line by Marcia Angell, there’s an excellent article and series of comments in Derek Lowe’s In the Pipeline blog on the subject of paying for R&D. Derek has somewhat talked down the role of the NIH–and was kind enough to mention my comment on that aspect of the subject in a subsequent post. He was further taken to task for it by the (new to me) Bedside Manners blog. All posts well worth reading.

And there is no doubt that we are on the edge of much more spending and much more great results from all this medical research (do the words genome or nanotechnology ring a bell). But right now, that’s not the point. What is the point is the relationship between who’s spending what on what and the political result out of it.

Broadly, with the NIH (i.e. the taxpayer) doing mostly big basic R and some D and the for-profit sector doing mostly applied R & D, here’s the spending score.

NIH $27 billion on Research in 2004 (corrected to $23 billion in 2003 in update below)
Pharma $33 billion on R&D in 2003 (according to PhRMA’s numbers)

Both these numbers have been going up rapidly, and there are lots of arguments about what’s in it, but the overall issue is that they are pretty much the same. No one cares about the distinction between R &D; people only care about what’s spent to get the drug onto the market, and you need basic R, applied R and D to get that done. But that total is around $60 billion and we spend more than that marketing the drugs. The government’s report on the pharma industry from which I pinch this chart shows the real issue, and that issue is mostly a political and business issue.

And of course the political issue is how to deal with the fallout of these three numbers — the 13% of revenues spent on R&D, the 20% going to profit and the 31% going to sales and marketing. So long as the public gets to see that industry’s R&D spending only just exceeds the taxpayers’, yet they have to pay more in profit (i.e. higher prices) than big Pharma is paying in R&D, and that nearly three times what is spent developing the drug is being used to market it, this problem is not going away for pharma. Of course it might help their cause if they stopped being at war with their best customers.

UPDATE: Contributor Joe Crea informs me that:

The $27 billion dollars on research by the NIH is a very common misconception. That figure + or – a $billion is the OPERATING BUDGET or BUDGET AUTHORITY for the NIH; and, not all research at, by, or for the NIH is pharmaceutical-related.

I have attached OMB breakdowns of the budget for the NIH as well (Ed note: shows total Gov spending on Health R&D at $23bn in 2003) as a report that breaks down how that research budget is spent. Remember, the NIH has multiple institutes, centers, as well as the Library of Medicine. As can be seen from the report, about 10% of R&D is done by the NIH (intramural) — the rest is “farmed out” in the way of grants and Cooperative Research and Development Agreements (CRADAs).

Here is an explanation of this system by PhRMA. Take it for what it is worth (it was a readily available summary), but likewise, is the report by The American Association for the Advancement of Science (not exactly a bunch o’ FReepers). Just keepin’ things in perspective!

Joe may well be right, much of the money allegedly spent on research by NIH may not get to the lab bench, but on the other hand my colleague Bob Leitman tells a story of his visit to an R&D facility owned by very big pharma company. When he commented on the acres of marble in the halls and the restrooms, his host told him “Well we’ve got to hide the money somewhere!” So I think it’s fair to say that the big numbers on both private and public side have a fair bit of bureaucracy tucked away in there. It’s also fair to say that the NIH farms out much of its research, but that’s irrelevant. The point is how much gets spent by whom on what and not who gets it.

My point is that there is a lot of money spent, and both types of spending on research is necessary to create drugs, but the political issue is simple. The pharma industry makes more on profit than it spends on R&D, and spends nearly 3 times on marketing than it spends on R&D and gets some large level of help for its R&D from the taxpayer. And it prices drugs at a level that makes its consumers very angry. So big pharma can either continue its present course of trying to tough this out (which I believe has a significant long term risk of vicious price controls or regulation) or try to figure out a middle way. I’ve put my proposals for that middle way here, but I believe that they have to take a small hit now or a huge hit later.

POLICY/POLITICS: My quick view on the politics of Medicare in the campaign, with brief UPDATE

There was a lot of fuss about Medicare and health care in the last few days, particularly brought up by Bush. I think this is a serious blunder on his part. Given Swift Boat and Kerry’s non-position (or actually he should just use Bill Maher as spokesman because he explains it well) on Iraq, why is Bush trying to change the subject?

Here’s why I think Bush is being politically dumb here. If you look at these polls, things are still very close, and the Bush convention bounce seems to be over. Now if you play with the electoral college (try here) basically if Kerry wins Florida and Pennsylvania, then Ohio, Missouri, etc, don’t matter. What is special about Florida and Pennsylvania? They are the two oldest populations in America. Why did Clinton win Florida in 1996? Because he scared seniors into believing that the Republicans would kill Medicare as seniors knew it. Now, premiums are going up, and HHS’ own data is showing that the cost of the drug benefits to seniors will consume most of their social security checks, and seniors hate the Medicare bill, especially the ban on drug importation.

So let’s play it out. Seniors vote at roughly one and a half times the rate of those under 65s. Four in ten seniors say that they’ll vote based on health care. While 12.1% of the US population is over 65, the number is 18.1% for Florida, and 15.8% for Pennsylvania’s. So essentially the more voters focus on health care, the more likely it is that they’ll vote for Kerry, and each one of those votes in magnified by 1.5 X 1.5 for seniors in those two states. (or to be really pedantic only 1.5 x 1.25 for Pennsylvania).

So why is Bush bringing this up? I don’t know. If I were him I’d go back to terra, terra, terra. Otherwise Kerry can keep bringing up this kind of stuff.

UPDATE: A correspondent tells me why Bush is bringing this up. Karl Rove apparently believes that you should attack the other guy’s strength, and so that’s why Bush is attacking Kerry on health care. With that strategy, I don’t think Rove would last long as a coach in the NFL, and he hasn’t won a national campaign yet (after all tying is like kissing your sister), but Arianna Huffington thinks that Kerry should take Rove’s advice and come after Bush on terrorism and Iraq.

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