Kaiser Health News Opinion Column
Ian and I have a co-authored Kaiser Health News opinion column out today. We argue that repealing insurers’ antitrust exemption won’t change things much and isn’t likely to help consumers significantly. Further, a focus on competition in insurance markets has the potential to distract policymakers and the public from the principal source of increases in premiums: concentration in the provider market.
Here’s the opening paragraph:
It is well known that concentration in the health insurance industry is to blame for rapidly rising premiums. Well known, but wrong. Taking political advantage of this common misconception, last week the House passed a bill to repeal insurers’ antitrust exemption. But even if that bill becomes law it won’t do much good, and politicians’ distraction could actually harm consumers. It’s far more likely that premium increases are largely due to other factors.
Kinda makes you want to read the whole thing, right?
The Treatment Guest Post
Jon Cohn just published my guest post on The New Republic’s The Treatment blog. In it I continue my exploration of lessons learned from the health reform effort to date. One conclusion is that government may not be a solution, though for a different reason than is meant by most people who make that claim.
Usually proponents of markets or libertarian ideals view government as an impediment to good outcomes. The experience of health reform has revealed another sense in which government may not be the solution–because it can’t get out of its own way. That is, our government is improperly structured to solve the problems we face. It isn’t necessarily that government can’t be a solution or that government can’t propose a solution, it is that government can’t pass a solution, at least not very often. Even if health reform ultimately passes, it is clear that an historically rare level of single-party control was required to pull it off.
Please read the whole post. Also, if you’re a health policy junkie consider subscribing to The Treatment. It’s another low volume/high quality blog.
Responsibility and the Structure of Government
Continuing Catharsis Week, my colleague Steve Pizer and I wrote a Kaiser Health News opinion column that appears today. In it we note the rare demonstration of responsibility of congressional Democrats and the Administration that brought us so close to health reform. Then we explain the forces that contribute to the scarcity of responsible government and to the near collapse of the health reform effort. Just a taste:
Our system of government is designed to produce an abundance of great speeches about sweeping reforms and a pittance of actual reform delivered. So, except for frustratingly brief moments, we really have no government, just a collection of perpetual campaigners, focused on the next election and accepting no responsibility for the country’s long-term problems. In 2009 it was comforting to believe that the leaders of the majority party would use their power to govern responsibly. They tried and failed. The campaigners have taken over, again.
Please read the whole thing.
Though I agree with what we wrote, I’m still disappointed in Democrats for not (yet?) finishing the job they started. The design of our government certainly makes it far harder for leaders to govern responsibly. I get that. But I’m not willing to give the Democrats (or Republicans) a free pass. Perhaps it is because some of them certainly appeared to want to do the right thing. That gave me hope. Then it was crushed, maybe to be revived once more (I still can’t tell).
The last time I was so disappointed in a political party and a president was when George W. Bush took us to war in Iraq. Like the abandonment of compressive health reform, that too was an unnecessary and costly decision that resulted in loss of life. It is hard to forgive, and harder yet to forget, leaders who trade blood and treasure for political gain. I understand why they do it. I just don’t like that they do so. I never could. And that’s why I do what I do and not what they do.
But few of us are 100% free of responsibility and power, small though it may be. Most of us can vote. We can also write or talk to our representatives and/or their staff members. We can demonstrate, volunteer, and contribute money. In small ways we can do something toward making our dysfunctional government and the actions of our leaders ever so slightly better.
Last week I called my Democratic congressional representatives and urged them to continue to fight for health reform. (You can too. Here’s where to find contact info.) If I perceive for a moment that they are not seizing opportunities to make progress on coverage and costs they will lose my full support, and possibly all of it. The same goes for our president.
I don’t expect to have my way on every issue. I understand political realities and the limitations of our government. But I do expect my representatives to do their job within the constraints of our system. When, despite the incentives for irresponsibility, there is a chance to do the right thing, to begin to address a pressing national problem, and when the (super) majority exists to carry it out, then it should be done. On health care it wasn’t, or hasn’t been yet. Democrats defeated themselves once last week. But it is within their power to change course. If they throw in the towel for good that will be a loss for which we will all pay.
A Funny Thing About Drug Pricing
A University of Chicago law student with a prior career in the pharmaceutical industry whom I interviewed for a job the other day shared some knowledge regarding drug pricing that I thought quite interesting. It hadn’t occurred to me, though it seems perfectly obvious, that drug companies price drugs over which they possess a patent monopoly according to the avoided costs of the next best treatment for the diseases they address. If an insurer typically has a hundred heart attacks in its risk pool every year, and a new wonder-drug will prevent fifty of them, it will pay just under its cost for treating the fifty avoided heart attacks for a supply of the drug sufficient to achieve this result.
And it turns out, according to my source, that pharmaceutical companies do typically set the unit price of non-copycat patent drugs in relation to the avoided cost for insurers for on-label use. But then a funny thing happens. The pharmaceutical manufacturer begins promoting down-label and off-label uses of the drug – i.e., use of the drug by patients who are not as at risk of the condition as those for whom the drug was approved to treat, and use of the drug to address other conditions than that for which it has been approved, respectively.
The avoided costs for treating down-label and off-label patients is typically less than for on-label patients, if it can be quantified at all. But at this point, the decision whether to administer the drug is within the hands of the doctor and the patient, and the insurer reimburses for the drug at the price that was negotiated based on the higher on-label rate of cost avoidance. Over time, the down-label and off-label use of a drug can and often does exceed the on-label use, often by a significant degree. As a result, an insurer will often find itself paying out significantly more in reimbursement for a patent drug than the cost of avoided medical treatment the drug achieves. Yet another hidden cost driver in the Freakonomics of our crazy health care system.
A comment from Austin Frakt follows.
Pharmaceutical manufacturers have so many ways to milk insurers. Co-pay rebates to policyholders being another (hat tip to recent Planet Money focus on this). These are just a few of the ways in which insurers really aren’t the big problem in health care. They’re played by providers.
Pascal’s Wager? The Uncommon Relationship Between Drug Industry Profits and Research
Tyler Cowen has cautioned in the NY Times that cost containment measures as part of health care reform may impact the US lead in medical research and development. But how much do private sector profits contribute to the pace of medical innovation? This question is particularly salient to the US pharmaceutical industry, which is the largest private contributor to US medical R&D, and has agreed to provide up to $80 billion in cost savings over ten years in connection with comprehensive health reform. Will this modest hit to their profits detract from their investments in research and development?
The standard corporate finance answer is no. In a well established business with access to capital markets, the link between profits and investment in research development is weak. So long as a business’s expected profits from research and development exceed its cost of capital by some amount, its investment in research and development will chiefly be limited by the law of diminishing returns. An increase in profits will not spur additional R&D investment, because the business has already invested all it profitably can. A decrease in profits to some point still above its cost of capital will not decrease R&D investment, because foregoing profitable investment opportunities will not increase profits.
But it turns out this is not true for pharmaceutical companies. Pharmaceutical R&D investment does vary in close relation with profits (Scherer 2001, Health Affairs). Why? Pharmaceutical companies do not lack access to capital markets. Why do they choose to make investments in R&D out of free cash flow that they won’t make with funds from other sources?
I think the answer is this: Patent protection assures an enormous payoff to the inventor of a blockbuster drug. But the probability is remote and in any event difficult to estimate that any given research program is going to produce a blockbuster. Thus it is difficult to impossible to estimate the risk-adjusted return on investment of such a research program relative to cost of capital. So such research programs get funded cautiously if at all from the capital markets. Free cash flow, however, is close to cost-free money. Betting it on a blockbuster with free cash flow is a lot like Pascal’s wager: if you lose, you lose nothing; if you win, you win everything.
I had the discussion that led up to these thoughts with a Facebook friend of a certain free market bent whom I took to be making the generally incorrect assertion that R&D investment varies with profit. Though I took great pains to explain the text-book reasons why that is not generally the case, he remained incredulous that I could not appreciate the obvious relationship. And the thing is, it was completely intuitive to him, because he works for a company – Google – that is also a special case. Google also operates in an industry where a single success can create blockbuster returns through first mover advantages and network effects. Not surprisingly, Google plows a lot of its free cash flow back into R&D on projects whose odds of success are hard to quantify. It was completely obvious to my friend why it should do so.
The pharmaceutical R&D investment model that also applies to software has been called “virtuous rent seeking.” But the CBO, for example, has questioned whether the private incentives for such investments, in the pharmaceutical arena at least, are so strong that they produce overinvestment from the perspective of social utility. And of course, that is the tragedy of Pascal’s wager: whether or not he lost nothing on the bet, society as a whole perhaps lost a great deal when he turned his mind away from science to God. In the end, it is not clear that any diminution of investment in R&D by the pharmaceutical companies as a result of health care reform will actually be missed.
Electronic Health Records and Multi-Provider Use: Lessons from the VA
This post originally appeared on The Health Care Blog on 17 August 2009.
With billions of dollars of stimulus funds available and the President and state governors promoting them, electronic health records (EHRs) are likely to become commonplace in the U.S. health care system. To be sure the transition will be complex and costly, but incentives provided by insurers and the federal government for quality improvement tied to EHR use will encourage providers to enter the brave new electronic world and bring their patients with them. While EHRs are praised for their promise to increase efficiency and safety, it is still an open question how much of those benefits will be realized or when.
There is one clear threat to the fruition of EHRs’ potential for quality improvement: the inability of various EHR systems to share information with one another. This potential limitation is highlighted prominently in a new Congressional Budget Office (CBO) report Quality Initiatives Undertaken by the Veterans Health Administration (August 2009), principally authored by Allison Percy of CBO’s National Security Division.
The Veterans Health Administration (VHA) is the largest U.S. integrated health care system. With over 200,000 full-time-equivalent employees, each year it treats 5.1 million of its 8 million enrollees at 153 medical centers, 931 ambulatory care and outpatient clinics, 232 readjustment counseling and outreach centers, 134 nursing homes, and with 50 residential rehabilitation treatment programs and 108 comprehensive home-based care programs.
Facilitating its care of veterans, the VHA uses health IT infrastructure known as VistA (Veterans Health Information System and Technology Architecture). This open source EHR architecture was developed in a collaborative effort involving clinicians and programmers. The CBO report documents the now well-known quality improvement in VHA care since the 1990s and the key role in that improvement played by VistA, which permits the tracking of nationally recognized and internally developed quality indicators.
However, the CBO report also highlights VistA’s blind spot, one that may also plague EHRs to be developed for other facilities and health systems. VistA cannot exchange data between the VHA and private providers due to incompatible protocols and lack of data-sharing agreements. The implication is that care cannot be easily coordinated across providers and quality measures cannot be based on a complete set of information relevant to patient care: only care known to the VHA can be incorporated into VA physicians’ medical decisions and VHA’s quality measures.
This lack of inter-provider electronic communication is relevant to VHA care because the vast majority (80%) of VHA enrollees have access to care from other sources. Multi-system use is a well-studied phenomenon among VHA enrollees and recent findings pertaining to its extent and effects on outcomes are documented in the CBO report. A similar phenomenon, multi-provider use, will be relevant to care of non-veterans in non-VHA settings since many individuals receive care from different providers that operate within different systems. Even if each individual provider’s EHR system is well implemented, the potential inability of them to communicate with one another threatens the realization of EHR benefits and the accurate measurement and tracking of quality indicators.
Will the collective system of EHRs likely to be implemented in the U.S. be a nirvana of seamless electronic integration or a Tower of Babel? Likely it will start closer to the latter and, one hopes, gradually move toward the former. But it will only evolve toward integration if incentives to do so are established.
Fortunately this problem is anticipated and one the VHA has already started to address. The VHA has initiated efforts to coordinate the exchange of electronic health records with the Department of Defense (DoD), though more work remains. Less progress has been made integrating VHA data with those from non-DoD systems. However, the VHA has participated in the development of the National Health Information Network (NHIN) and expects to be exchanging data with Kaiser Permanente this fall using NHIN open source software called CONNECT.
EHRs have great potential to monitor and increase quality and to solve some of the coordination problems that occur across provider boundaries. But the extent to which they can facilitate improvements in quality and coordination will be limited by the degree to which data can be exchanged between the various EHR systems likely to be implemented. So long as EHR information remains within provider silos they will not fulfill proponents’ claims of overcoming the fragmentation of our current system and the problems to which it leads.
The CBO report documents the lessons learned and limitations encountered by the VHA in developing, implementing, and employing an EHR system and in integrating that system with others. Those are important lessons not just for the VHA but for health IT practitioners and proponents in general. The path to optimal use of EHRs to enhance patient care may be long and hard, but the VHA is already several steps along it.
Response to Comments of “Obama’s Medicare Half-Truth”
I guess somebody liked my post Obama’s Medicare Half-Truth because it was picked up and re-posted on The Health Care Blog.
As is typical of my pieces that appear there, it sparked a bit of a debate (my other posts on The Health Care Blog to date are here, here, and here). Normally I would respond to comments on the same site they appear. But I have a lot to say, want to use hyperlinks, and prefer to have more editorial control so in this case so I’m making an exception and responding on my blog.
I do not have time to address every comment raised in the debate and won’t. Below I touch on what I feel are the most important points. Before doing so, one note to new readers coming here from The Health Care Blog: If you comment here I expect you are aware of my comments policy.
The Title. Some commentators objected to the title of the post. They did not like that I characterized Obama’s statement about Medicare as a “half-truth.” Actually, this is not only my judgment but also that of Politifact.com. Some may worry that others will misunderstand my point or misuse my title to promote anti-reform propaganda. I give readers more credit. I think they will read beyond the title. As a blogger with a current three figure readership I am not terribly worried about fueling the anti-reform movement. (The title used at The Health Care Blog is not my responsibility.) Moreover, there are plenty of other sources for propaganda fodder. I stand by my title, and I encourage readers to write their own blog posts on this topic or others with titles more to their liking.
The Liar Charge. Some readers were concerned that my reference to Joe Wilson’s “you lie” charge in the first sentence of my post would be misunderstood to relate to Medicare. They correctly point out that Wilson’s outburst pertained to the coverage (or, really, the lack thereof) of illegal aliens under the reform proposals. The version of the piece that currently appears on my site makes it clear I am talking about two different issues. I referenced Joe the Liar as a means of bouncing off the current focus on that unfortunate incident.
I sure hope readers didn’t think I did not know what Wilson was referencing. Readers of this blog know that I don’t make stuff up and that I go to reasonable lengths to check my facts. Where appropriate and/or necessary I link to other credible sources. On the Wilson “you lie” charge I did just that. If you follow the link in the first sentence it will take you to a video in which it is as plain as day what Obama was talking about when Wilson lost control of his emotions.
So, maybe I was being too cute in playing off the Wilson incident. In light of the response I give myself no marks for style. Mea culpa! Let’s move on.
The Proportion in MA. Some issue was made about the importance of the size of the Medicare beneficiary population enrolled in MA plans: 23%. It is only these individuals who would be potentially directly affected by cuts to MA. (Actually, as I’ll get to below, all beneficiaries would be affected, but most of them positively.) Now, 23% is large, but it is nowhere near as large as the 77% of FFS enrolled beneficiaries who would not be negatively affected. The vast majority of Medicare beneficiaries have no direct stakes in the fate of MA. They ought to be at least indifferent on this issue.
The Main Point. Actually, those 77% in FFS Medicare have something to gain if payments to MA plans are cut, if they pay Part B premiums or are taxpayers. Part B premiums and taxes (payroll and income) support Medicare, including the MA program. The more MA costs the government, the more the 77% on FFS, and other taxpayers, pay. We all have a stake in Medicare costs (to government). Currently MA plans are paid, on average about 14% above the per beneficiary costs of FFS Medicare. (Let’s presume for now that all that extra money is converted into more generous benefits and/or lower beneficiary cost sharing. I don’t care to debate this as it is not essential for my main ponit, but it is debatable.)
This brings me to the main point of the post. It was fundamentally about the extent to which beneficiaries value current MA benefits relative to the lower level of (and less expensive) benefits in 2003, prior to the passage of MMA. (MMA is just the most recent of several statutes that raised payments to MA plans.) The paper I reviewed in the post shows that they don’t value it all that much: just $0.14 on the dollar. That means that there would be no change in beneficiary utility if the government paid beneficiaries in cash $0.14 for each dollar above 2003 levels it pays MA plans. The balance ($0.86) could be used for something else (like health reform).
Aside from paying beneficiaries cash, this appears to be exactly what Obama and the Democrats intend to do. Republicans too have proposed provisions that would reduce MA payments. So this is one of the elements of health reform with bipartisan support. CBO and MedPAC have been calling for MA payment reduction for years. It is probably inevitable that it will occur. I take it as a comfort that beneficiaries will not miss the extra benefits (above 2003 levels) that much, only at a monetized rate of $0.14 to the dollar.
Why should you believe my study on which this result is based? I can’t convince you to do so, but it may be useful to know the following. The work went through years of vetting before publication. The first stage was to get funding. If you’ve ever tried to get funding from the Robert Woods Johnson Foundation (the source for funding of the study on which my paper, and thus the post, was based) you know that there is a rigorous scientific review process with multiple stages of revision.
But that’s just the fist step. After my colleagues and I had completed the first (and second, and third) round of work we shared results at health policy and economics conferences and seminars. We did this for over a year, revising the methods in response to critiques. Finally, the paper itself underwent a very rigorous peer-review and revision process.
For a time, I am happy to entertain comments pertaining to the methods described in the paper. I refer readers to it and the HCFO Findings Brief that summarizes the study on which it is based, both of which are referenced in the original post.
Guest Post on The Health Care Blog
Quick note: I have a guest post up on The Health Care Blog titled The Health Care Cost Shifting Myth. It reviews the literature on health care cost shifting, the idea that providers charge private payers more to recoup losses due to low payment levels from public programs.
The conclusion is clear from the title: very little cost shifting actually occurs, nothing like the dollar-for-dollar shifting some claim. It is a far better approximation to assume zero cost shifting. The notion that health care providers shift costs should be stricken from our minds. It leads to incorrect conclusions and policy recommendations.
Guest Post on The Health Care Blog
Quick note: I have a guest post up at The Health Care Blog. It is about the interoperability of electronic health records, something we all may be inconvenienced by in the coming years.
Careful readers may notice a misplaced apostrophe or two (oops). It takes less care to notice the misspelling of my name in the by line. I’ve asked them to correct it. As I’m fond of saying, the “n” in “Frakt” is both silent and invisible.
But forget all that. Read it for the content.
Later: The’ve corrected my name. Good.
Careful What Public Plan You Wish For
I have a guest post published on The Health Care Blog today about the lessons of Medicare and Medicaid with respect to a public plan.
A recent guest post on Ezra Klein’s blog expressed similar sentiments (it is quite smart and worth reading in full).
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