Pharmaceutical R&D – its cost and what it delivers

Posted by on Friday, Aug 10, 2012

This entry is from Dr. McCanne's Quote of the Day, a daily health policy update on the single-payer health care reform movement. The QotD is archived on PNHP's website.

Pharmaceutical research and development: what do we get for all that money?

By Donald W Light, Joel R Lexchin
BMJ, August 7, 2012

Data indicate that the widely touted “innovation crisis” in pharmaceuticals is a myth. The real innovation crisis, say Donald Light and Joel Lexchin, stems from current incentives that reward companies for developing large numbers of new drugs with few clinical advantages over existing ones.

The “innovation crisis” myth

The constant production of reports and articles about the so called innovation crisis rests on the decline in new molecular entities (defined as “an active ingredient that has never been marketed . . . in any form”) since a spike in 1996 that resulted from the clearance of a backlog of applications after large user fees from companies were introduced. This decline ended in 2006, when approvals of new molecular entities returned to their long term mean of between 15 and 25 a year.

The real innovation crisis

More relevant than the absolute number of new drugs brought to the market is the number that represent a therapeutic advance. Although the pharmaceutical industry and its analysts measure innovation in terms of new molecular entities as a stand-in for therapeutically superior new medicines, most have provided only minor clinical advantages over existing treatments.

How much does research and development cost?

Although the pharmaceutical industry emphasises how much money it devotes to discovering new drugs, little of that money actually goes into basic research. Data from companies, the United States National Science Foundation, and government reports indicate that companies have been spending only 1.3% of revenues on basic research to discover new molecules, net of taxpayer subsidies. More than four fifths of all funds for basic research to discover new drugs and vaccines come from public sources. Moreover, despite the industry’s frequent claims that the cost of new drug discovery is now $1.3bn (£834m; €1bn), this figure, which comes from the industry supported Tufts Center, has been heavily criticised. Half that total comes from estimating how much profit would have been made if the money had been invested in an index fund of pharmaceutical companies that increased in value 11% a year, compounded over 15 years. While used by finance committees to estimate whether a new venture is worth investing in, these presumed profits (far greater than the rise in the value of pharmaceutical stocks) should not be counted as research and development costs on which profits are to be made. Half of the remaining $0.65bn is paid by taxpayers through company deductions and credits, bringing the estimate down to one quarter of $1.3bn or $0.33bn. The Tufts study authors report that their estimate was done on the most costly fifth of new drugs (those developed in-house), which the authors reported were 3.44 times more costly than the average, reducing the estimate to $90m. The median costs were a third less than the average, or $60m. Deconstructing other inflators would lower the estimate of costs even further.

Hidden business model

Although the industry’s vast network of public relations departments and trade associations generate a large volume of stories about the so called innovation crisis, the key role of blockbuster drugs, and the crisis created by “the patent cliff,” the hidden business model of pharmaceuticals centres on turning out scores of minor variations, some of which become market blockbusters.

Myth of unsustainable research and development

Complementing the stream of articles about the innovation crisis are those about the costs of research and development being “unsustainable” for the small number of new drugs approved. Both claims serve to justify greater government support and protections from generic competition, such as longer data exclusivity and more taxpayer subsidies. However, although reported research and development costs rose substantially between 1995 and 2010, by $34.2bn, revenues increased six times faster, by $200.4bn. Companies exaggerate costs of development by focusing on their self reported increase in costs and by not mentioning this extraordinary revenue return. Net profits after taxes consistently remain substantially higher than profits for all other Fortune 500 companies.

Towards more cost effective, safer medicines

What can be done to change the business model of the pharmaceutical industry to focus on more cost effective, safer medicines? The first step should be to stop approving so many new drugs of little therapeutic value. The European Medicines Agency (EMA) does Europe a disservice by approving 74% of all new applications based on trials designed by the companies, while keeping data about efficacy and safety secret. Twenty nine per cent of new biologicals approved by the EMA received safety warnings within the first 10 years on the market, and therapeutically similar drugs by definition have no advantages to offset their unknown risk of increased harm. We need to revive the Norwegian “medical need” clause that limited approval of new drugs to those that offered a therapeutic advantage over existing products. This approach led to Norway having seven non-steroidal anti-inflammatory drugs on the market compared with 22 in the Netherlands. Norway’s medical need clause was eliminated in 1996 when it harmonised its drug approval process with that in the EU. EU countries are paying billions more than necessary for drugs that provide little health gain because prices are not being set to reward new drugs in proportion to their added clinical value.

We should also fully fund the EMA and other regulatory agencies with public funds, rather than relying on industry generated user fees, to end industry’s capture of its regulator. Finally, we should consider new ways of rewarding innovation directly, such as through the large cash prizes envisioned in US Senate Bill 1137 (Sen. Bernie Sanders), rather than through the high prices generated by patent protection. The bill proposes the collection of several billion dollars a year from all federal and non-federal health reimbursement and insurance programmes, and a committee would award prizes in proportion to how well new drugs fulfilled unmet clinical needs and constituted real therapeutic gains. Without patents new drugs are immediately open to generic competition, lowering prices, while at the same time innovators are rewarded quickly to innovate again. This approach would save countries billions in healthcare costs and produce real gains in people’s health.

This important BMJ article by Donald Light and Joel Lexchin gives us the background that explains why we have the feeling that the pharmaceutical firms are gouging us with outrageous pricing, in spite of their excuse that these prices are necessary to support their research and development – an excuse that seems not to hold water.

The pharmaceutical industry wants less government involvement (except for the research money), when what we need is much more government involvement. Under a single payer system that included pharmaceuticals, prices would be negotiated based on truly legitimate costs plus fair profits, and not based on wasteful expenses such as product research designed primarily to reset the patent clock.

As Light and Lexchin explain, even the European nations would benefit with a greater regulatory role in improving value though such measures as determining medical need of new products. But just think how much better off we would be in the United States if we would just get past the concept that we must go all out to protect the sacred marketplace – a concept that has allowed the pharmaceutical firms to continue to plunder us.

Dutch insurer intends to block single payer for Slovakia

Posted by on Thursday, Aug 9, 2012

This entry is from Dr. McCanne's Quote of the Day, a daily health policy update on the single-payer health care reform movement. The QotD is archived on PNHP's website.

Slovakia wants to nationalise private health insurers

Private Healthcare UK
August 6, 2012

Slovakia’s prime minister Robert Fico plans to reduce national healthcare to a single state-owned insurer by 2014, and this would mean the nationalisation of two private health insurers or buying them.

The government wants to introduce a system of one health insurer instead of several health insurers. Fico says, “Privately-owned health insurers should leave the Slovak market. Slovakia’s health care system has been suffering from a lack of funding, while private insurers turn a profit based on public money.”

The current health care system in Slovakia is a form of private-public partnership, where all Slovaks pay a healthcare tax of 14%, and can choose cover provided by one of the three providers, who provide cost-free treatment.

The two private health insurers, Union, owned by Dutch insurer Achmea, and Dovera, controlled by Slovak-Czech private equity group Penta Investments, provide cover for 1.8 million of a total 5.4 million Slovakians. The state owned General Health Insurance Company, better known as VsZP, provides cover for the remaining 3.6 million.

As a local company, Penta has to be very careful what they say and so has said it will listen to government plans.

But Achmea has said it will use all official and legal channels to protect the business interests of Union, and is not interested in selling Union or its portfolio to the state. If it invokes EU law on protectionism it could take many years for any legal battle to be concluded, and as a large EU health insurer Achmea has the financial and political muscle to thwart tiny Slovakia.

Slovakia has a health insurance program covering everyone, financed by a payroll tax. But Slovakians can choose one of two private insurers in place of their public plan. Slovakia’s prime minister now wants to end the diversion of public money to profits of the private insurers, so all funds are spent on health care.

Many in the United States who support private insurance have praised the Dutch system of private health plans, but you really have to question the moral authority of these plans when a large Dutch private insurer intends use EU law to force Slovakia to continue to use its unwanted insurance product.

Yet our political leaders in the United States want to keep the private insurers in charge. It seems that Slovakia has some valuable lessons for us.

Is the federal employees health program anti-competitive?

Posted by on Wednesday, Aug 8, 2012

This entry is from Dr. McCanne's Quote of the Day, a daily health policy update on the single-payer health care reform movement. The QotD is archived on PNHP's website.

OPM seeks more competition for employee health plans

By Joe Davidson
The Washington Post, August 6, 2012

The Obama administration is considering fundamental changes to the Federal Employees Health Benefits program (FEHB), which is generally regarded as something Uncle Sam does right.

Yet, the Office of Personnel Management (OPM) thinks the good thing could be even better by giving workers more choice in health insurance companies. The OPM wants to do that by reviving legislation proposed during the George W. Bush administration.

“While the FEHB model has withstood the test of time and influenced the direction of health reform, the competitive environment is not as robust as it could be,” says an unsigned OPM briefing paper obtained by The Washington Post. “The health insurance market has changed dramatically over the last 50 years, but . . . the FEHB program lacks the flexibility to adjust in response to the changing market.”

Specifically, the OPM paper, which has circulated recently among congressional and industry officials, expresses concern about the growing dominance and market concentration of Blue Cross Blue Shield and the departure or diminished role of other health plans.

Two Blue Cross Blue Shield plans, standard and basic, together serve about 62 percent of the federal employee market. The next five largest plans cover 22 percent.

In a June article about health exchanges under the Affordable Care Act, Health Affairs says that although insurance plans are widely available in FEHB, “enrollment was concentrated in plans owned by just a few organizations, typically Blue Cross/Blue Shield plans.” Health insurance premiums, the article continued, were lower “where competition was extremely high” and higher “where competition was extremely low.”

FEHB “continues to be the gold standard for health insurance, offering far more choices and competition than other large employers,” said Alissa Fox, a senior vice president of the Blue Cross and Blue Shield Association.

She goes on to offer an argument that runs counter to the basic notion of capitalism. Increased competition, in this case, will result in increased prices, according to Fox. The regional plans could “cherry pick” low-cost regions, argues a Blue Cross Blue Shield paper, resulting in national plans being forced to charge higher premiums to cover higher-cost regions.

“Within a few years, the nationwide plans will become non-competitive and stop offering nationwide coverage all together,” the Blue Cross Blue Shield paper says. “This may leave certain areas of the country underserved.”

More competition might be better in theory, but that theory falls short with FEHB, says Jacqueline Simon, public policy director for the American Federation of Government Employees. Arguments on both sides of this debate are invalid, she said, “unless and until there is one standard benefits package that all plans must provide, plans will not be competing on price and/or quality, and those are the only things that matter.”…

OPM paper:

BlueCross BlueShield Association perspective:

Many in the policy community have claimed for decades that employer-sponsored plans offer the best benefits and the greatest value in health care coverage, and that the largest of all programs – the Federal Employees Health Benefits Program (FEHBP) – is the very best, with the greatest competition and the greatest value.

The position papers from the Office of Personnel Management (OPM) and from the BlueCross BlueShield Association (BC/BS) cast serious doubt on whether private plan competition is providing us with the best value. OPM claims that the dominance of BC/BS is anti-competitive and results in higher than necessary insurance premiums. BC/BS claims that introducing more competition on a regional level will result in adverse selection, forcing national plans (i.e., BC/BS) to charge higher premiums to cover higher-cost regions.

The point is obvious. The very best that we have in competition of private health plans – FEHBP – doesn’t work well since it still is anti-competitive and exhibits adverse selection.

If the very best can’t do it right, why do our policy makers insist on sticking with this flawed model? One model that worked very well and avoided these unsound policies was the traditional Medicare program, that is until private Medicare Advantage plans were introduced into the mix. We now see anti-competitive plan concentration (United Health) and well-documented adverse selection favoring the private plans while sticking taxpayers with a larger Medicare bill.

Let’s get rid of the private plans, including the private Medicare Advantage plans, and then, under our own improved Medicare for all program, we would no longer have to deal with market concentration and adverse selection.

Low cognitive ability impairs enrollment in Medicare supplemental plans

Posted by on Tuesday, Aug 7, 2012

This entry is from Dr. McCanne's Quote of the Day, a daily health policy update on the single-payer health care reform movement. The QotD is archived on PNHP's website.

Low Cognitive Ability And Poor Skill With Numbers May Prevent Many From Enrolling In Medicare Supplemental Coverage

By Sewin Chan and Brian Elbel
Health Affairs, August 2012


Because traditional Medicare leaves substantial gaps in coverage, many people obtain supplemental coverage to limit their exposure to out-of-pocket costs. However, some Medicare beneficiaries may not be well equipped to navigate the complex supplemental coverage landscape successfully because of their lower cognitive ability or numeracy—that is, the ability to work with numbers. We found that people in the lower third of the cognitive ability and numeracy distributions were at least eleven percentage points less likely than those in the upper third to enroll in a supplemental Medicare insurance plan. This result means that many Medicare beneficiaries do not have the financial protections and other benefits that would be available to them if they were enrolled in a supplemental insurance plan. Our findings suggest that policy makers may want to consider alternatives tailored to these high-need groups, such as enhanced education and enrollment programs, simpler sets of plan choices, or even some type of automatic enrollment with an option to decline coverage.

From the Conclusion

Many public policies focus on individual choice as a means of determining exactly how benefits should be distributed or of assuring that a policy has maximal effectiveness. Inherent in all of these policies is the assumption that all or most people have the mental capacity to make the choices that are in their best interest. We have shown that many people do not have this capacity and that this deficiency can affect their choices in adverse ways.

Overall, people in the lower third of the cognitive ability distribution were six to twenty-three percentage points less likely to enroll in a supplemental Medicare insurance plan than those in the upper third of the cognitive ability distribution, even after controlling for a host of other variables. Furthermore, the chance of enrolling in a supplemental Medicare insurance plan was approximately five percentage points lower for those in the lower third of the numeracy distribution than for those in the upper third.

These problems were most pronounced for those with low incomes, low wealth, and multiple chronic illnesses, where the likelihood of enrollment was forty percentage points lower for the least cognitively able, and an additional thirteen percentage points lower for those with weak numeracy skills. People who are chronically ill and those who do not have the financial ability to self-insure against substantial out-of-pocket costs would almost certainly be better off enrolling in supplemental insurance plans.

The magnitude of our findings on cognitive ability and numeracy was sizable, particularly compared to the influence of health on enrollment decisions. By way of comparison, if we add together the estimated effect on enrollment for people who were hospitalized in the past year and those with three or more chronic illnesses, the sum is still considerably less than the negative effect of being in the bottom third of the cognitive ability distribution.

Given the difficulty associated with making good choices, addressing the problem of low cognitive ability and numeracy is important, and not only for Medicare. Health care reform is likely to increase the set of decisions to be made, particularly for the newly insured. Unless there is comprehensive insurance coverage in which all services are covered and the issue of coverage choices is redundant, understanding the role of cognitive ability and numeracy in making these decisions is essential.

This study demonstrates that low cognitive ability decreases enrollment in supplemental Medicare insurance plans, preventing these individuals from having the financial protections and other benefits of supplemental coverage. Other studies have shown that this results in impaired outcomes.

Although the authors recommend approaches that would improve enrollment while preserving choice, they end with a statement that begins, “Unless there is comprehensive insurance coverage in which all services are covered and the issue of coverage choices is redundant…”

Of course, an expanded and improved Medicare which, amongst other improvements, would roll into the benefit package the coverage provided by supplemental plans, would obviate the need to make any choices since all reasonable services would be covered. Low cognitive ability and poor skill with numbers would no longer be determinants in whether or not a person had adequate coverage. Everyone would automatically.

Fireworks! Orchestras! and dancing doctors!

Posted by on Monday, Aug 6, 2012

This entry is from Dr. McCanne's Quote of the Day, a daily health policy update on the single-payer health care reform movement. The QotD is archived on PNHP's website.

Fireworks! Orchestras! and dancing doctors!

Health Care – A Counter-Ceremony Honoring America’s Health Care System

By Kevin Horrigan
St. Louis Post-Dispatch, August 5, 2012

“Perhaps not surprisingly in a country where health care reform is so controversial, it was the high-profile presence of the NHS that stunned many American writers…. Certainly the U.S. equivalent, which would be dancing health insurance corporate executives, was hard to imagine.”

— Paul Harris, in The Guardian, June 28

Hah, hah, hah. Very funny. It’s not hard at all to imagine what the “U.S. equivalent” to your Olympic Opening Ceremony’s salute to Britain’s National Health Service would look like. I’m already working on it.

Sure, “dancing health insurance corporate executives” will be part of it. If you’d made that much money last year, you’d want to dance, too.

“Executives in the top spots at the country’s seven largest publicly traded health plans were paid a collective $87 million for their services in 2011,” American Medical News reported in May.

Picture this: It’s night in Florida. We’re in a darkened Raymond James Stadium in Tampa, jammed with 66,000 delegates to the Republican National Convention and their guests. A spotlight illuminates the stage. The seven top health care CEOs, carrying canes and dressed in white top hats and tails, prance on stage as the Mormon Tabernacle Choir sings “Puttin’ on the Ritz.”

Pretty nice, huh? And that’s just the start.

The spotlight widens to show 94 primary care doctors, in multi-colored scrub suits, forming a ring around David Cordani, the CEO of Cigna Health Care, bowing and scraping to honor the fact that at $19.1 million, Cordani made more in 2011 than all 94 of them combined.

The orchestra breaks into Gershwin’s “It Ain’t Necessarily So” as the stadium floor is lighted, revealing 400 actual health insurance bureaucrats wearing telephone headsets and sitting at small desks. They shake their heads back and forth in our “Salute to Rescission.”

The crowd erupts, because fans know that if Republicans repeal the Affordable Care Act, God will be in his heaven, all will be right with the world and insurance companies once again will be allowed to retroactively cancel coverage when someone needs it.

But now! What’s that? Lights around the stadium’s upper tier are forming a large donut, signifying the “Medicare donut hole” that will return once “Obamacare” is eliminated, thus insuring that drugs for anything between basic coverage and catastrophe are not covered. The orchestra swings into “Live and Let Die.”

Cannons in the end zones fire clouds of pills into the sky. As they fall to the floor, out of the stadium tunnels limp thousands of senior citizens who are allowed to scrounge for the pills. But only for three minutes, because it’s time for our….

Tribute to the ER! Giant video boards flash the image of former President George W. Bush uttering these immortal words in 2007: “I mean, people have access to health care in America. After all, you just go to an emergency room.”

The theme from the TV show “ER” comes up as sirens wail, ambulances and EMS trucks tear around the stadium floor, disgorging patients into the busy “emergency department” on center stage, already jammed with insured adults and children who have no primary care doctors.

Our ER “treats” them and send them on their way with big weights (symbolizing hospital bills) strapped to their backs, which they then pass to the people in the crowd — who are delighted to get them!

On guy-wires stretched across the top of the stadium a huge number “17.6” sparkles in gold and silver lights. It represents the percentage of the gross domestic product devoted to health care — 8 percent higher than the Brits. The music swells into Creed’s “Can You Take Me Higher?”

The crowd sings along, waving 66,000 foam “We’re Number 1” fingers, signaling America’s status as the nation with the most expensive health care in the world — 2.4 times more expensive than the silly Brits.

KA-BOOM! go the fireworks. We crane our heads skyward to see a giant figure “37,” symbolizing the World Health Organization’s ranking of the American health care system.

The big finale: With the crowd’s attention diverted skyward, volunteers — all of them from health insurance companies — have erected cardboard cutouts of men, women, children and babies around the floor of the stadium. There are so many of them — 45,000 — that they loop around the field in a squiggly line almost a mile long.

They represent the 45,000 Americans whose lack of health insurance contributes to their premature death each year, according to a 2009 study by the Harvard Medical School. Now riding into the stadium atop Rafalca, his wife’s Olympic dressage horse, is Mitt Romney, who will be nominated for president on the following night.

He guides the mare’s nose to the first cardboard figure. A simple nudge and, like dominoes, they topple over in spectacular sequence. The crowd goes wild.

Of course, depending on what happens in November, we could see an alternative “big finale.”

Obama could enter the stadium on his trusty steed “Single Payer,” and immediately run into the obscure maze of “Machinery Politics,” knocking Obama off of “Single Payer” who is immediately diverted to the glue factory as Obama remounts on “Pragmatic Incrementalist” who saunters over and nudges the first of 30,000 cardboard cutouts. The crowd goes wild (though only those sitting in the far left saw what really happened).

We’re going to have to do something about that crowd!

(They say that practical jokes have to be executed absolutely perfectly or you shouldn’t even try them. There is something about the domino cascade of 30,000 to 45,000 cutouts of American men, women, children and babies that just doesn’t sit well. Can we ever get the crowd to understand?)

Single payer slips into CAP forum

Posted by on Friday, Aug 3, 2012

This entry is from Dr. McCanne's Quote of the Day, a daily health policy update on the single-payer health care reform movement. The QotD is archived on PNHP's website.

Cutting Health Care Costs: Leading Experts Propose Bold Solutions

Center for American Progress
August 2, 2012

The Center for American Progress convened leading health policy experts—including current and former federal and state officials, executives of health insurers and hospital systems, physicians, and economists—to develop bold and innovative solutions. These solutions are designed to reduce overall health care spending for both public and private payers.

Please join us as we release alternative strategies that would protect Americans’ access to necessary care. Several of the experts will be on hand to present the solutions, lead a discussion of the issues, and answer your questions.

From the Q&A discussion:

Harvey Fernbach, MD, a practicing physician with Physicians for a National Health Program:Wouldn’t you think that many of the bold solutions would do better if we simply expanded and improved Medicare, and take the insurance companies which are profit oriented and the businesses out of the equation because they wouldn’t have to play a major role.  That’s why President Obama was for it. I believe… we believe that… (inaudible) …a related metaphor… single payer is the gold medal for health care. I’d like to get your opinion on it.

Tom Daschle: Let me start with that because that’s as much of a political question as it is a medical one, or a health related question. I personally believe that a Medicare for all approach would be terrific. I’d be very enthusiastic about it. The problem is the current political lay of the land prevents it. So we have to deal with what’s possible, and in dealing with what’s possible, it seems to me that taking the concepts that we know could work, redesigning them and improving what we’ve got may the the next step. The ACA is the next step. It creates a new infrastructure that allows for a lot of the things we know work well, to work better across the entire country. But one day, perhaps, we’ll be in a position to alter that political landscape to accommodate something a little bit more aggressive.

Harvey Fernbach: (inaudible) … ACA eventually to single payer.

Tom Daschle: I think ACA puts us on the thirty yard line in terms of what it is we have to do with seventy yards to go. (Audience laughter.) But we’ve got a good start.

Video of CAP forum:

This is a followup to yesterday’s Quote of the Day message on a forum on recommendations to contain health care spending, sponsored by the Center for American Progress. It was noted that single payer advocates were once again excluded from the process. Well, not quite. PNHP’s Harvey Fernback was in the audience and asked a question that prompted Tom Daschle to proclaim that “a Medicare for all approach would be terrific” and he would be “very enthusiastic about it.”

Thanks, Harvey, for being there. It’s a lesson for all of us in our reform advocacy activities. Be there and do it!

Daschle says that we still have seventy yards to go, so let’s get with it.

Center for American Progress effort to contain health care spending

Posted by on Thursday, Aug 2, 2012

This entry is from Dr. McCanne's Quote of the Day, a daily health policy update on the single-payer health care reform movement. The QotD is archived on PNHP's website.

A Systemic Approach to Containing Health Care Spending

By Ezekiel Emanuel, M.D., Ph.D., Neera Tanden, J.D., Stuart Altman, Ph.D., Scott Armstrong, M.B.A., Donald Berwick, M.D., M.P.P., François de Brantes, M.B.A., Maura Calsyn, J.D., Michael Chernew, Ph.D., John Colmers, M.P.H., David Cutler, Ph.D., Tom Daschle, B.A., Paul Egerman, B.S., Bob Kocher, M.D., Arnold Milstein, M.D., M.P.H., Emily Oshima Lee, M.A., John D. Podesta, J.D., Uwe Reinhardt, Ph.D., Meredith Rosenthal, Ph.D., Joshua Sharfstein, M.D., Stephen Shortell, Ph.D., M.P.H., M.B.A., Andrew Stern, B.A., Peter R. Orszag, Ph.D., and Topher Spiro, J.D.
The New England Journal of Medicine, August 1, 2012

Although the Affordable Care Act (ACA) will significantly reduce Medicare spending over the next decade, health costs remain a major challenge. To effectively contain costs, solutions must target the drivers of both the level of costs and the growth in costs — and both medical prices and the quantity of services play important roles. Solutions will need to reduce costs not only for public payers but also for private payers. Finally, solutions will need to root out administrative costs that do not improve health status and outcomes.

The Center for American Progress convened leading health-policy experts with diverse perspectives to develop bold and innovative solutions that meet these criteria. Although these solutions are not intended to be exhaustive, they have the greatest probability of both being implemented and successfully controlling health costs. The following solutions could be implemented separately or, more effectively, integrated as a package.













These are the types of large-scale solutions that are necessary to contain health costs. Although many in the health industry perceive that it is not in their interest to contain national health spending, it is a fact that what cannot continue will not continue.

Americans therefore face a choice. Payers could simply shift costs to individuals. As those costs become more and more unaffordable, people would severely restrict their consumption of health care and might forgo necessary care. Alternatively, governments could impose deep cuts in provider payments unrelated to value or the quality of care. Without an alternative innovative strategy, these options will become the default. They are not in the long-term interests of patients, employers, states, insurers, or providers.

We present alternative strategies to contain national health spending that allow Americans to access necessary care. Our approach addresses the system as a whole, not just Medicare and Medicaid. It is the path to rising wages, a sustainable federal budget, and the health system that all Americans deserve.


Bending the Cost Curve through Market-Based Incentives

By Joseph R. Antos, Ph.D., Mark V. Pauly, Ph.D., and Gail R. Wilensky, Ph.D.
The New England Journal of Medicine, August 1, 2012

In a market-based approach, open-ended subsidies to beneficiaries and price-controlled reimbursements to providers should be replaced with fixed dollar subsidies — effectively shifting Medicare from a defined-benefit to a defined-contribution approach. The business model would shift from one that is driven by the volume and intensity of services to one that rewards cost-effective and efficient care.

Under this approach, Medicare would adopt a premium-support model, which provides a fixed subsidy for each beneficiary’s purchase of insurance. Health plans, including traditional Medicare, would compete with each other on equal terms. Beneficiaries could purchase more expensive coverage if they felt the extra cost was worth it to them.

Similarly, the principle of defined contribution should be applied to the currently unlimited tax subsidy for employer-sponsored insurance. Employer contributions to health insurance are not counted as part of the employees’ taxable income. That subsidy encourages the purchase of health insurance, but it also provides an incentive to increase the amount of coverage, which helps fuel the growth of private health spending. Converting the current exclusion to a predetermined refundable credit would be a reform similar to premium support for Medicare. A less dramatic compromise would set a dollar limit on the tax exclusion that is indexed to grow more slowly than the trend in medical spending.

Well-functioning competitive markets are required for these types of decentralized approaches to work effectively. Objective, understandable information needs to be available so that consumers can make informed decisions about their choice of health plans. The plans need to be able to adjust their benefit offerings to respond to changes in consumer demand. This could be facilitated by public and private health insurance exchanges without limiting what plans can offer and what consumers may buy.

A defined-contribution approach to subsidies would help resolve the federal budget problem without limiting the way in which consumers are able to spend their own funds. Reliance on competitive markets rather than on regulatory controls provides strong incentives for more efficient delivery of the health care services that consumers truly value.


Policies that attempt to reengineer the health system without changing the underlying financial incentives that drive health spending will ultimately fail. The adoption of a defined-benefit approach to federal health subsidies can improve the understanding of both consumers and providers that resources are limited and choices must be made, but those decisions should not be dictated from Washington through regulatory controls. A market-based approach that relies on competition and financial incentives can promote efficient health care delivery, reduce the unit cost of care, and thus help resolve the federal budget problem without placing limits on how individuals choose to spend their own money. Consumers will decide for themselves whether more costly coverage buys them access to better care and more effective medical technology, and those decisions will ultimately determine the pace of health spending growth. Budget-driven fiscal targets that are inconsistent with public wishes and the capacity of the health system to deliver are not sustainable.

With some fanfare today the recommendations on containing health care spending, advanced by a group of experts convened by the Center for American Progress (CAP), are being presented at a forum for the media at CAP headquarters in Washington, D.C. The recommendations of these experts are being released in a NEJM article, along with another article representing a different approach to cost containment by authors known for their support of market solutions to health care cost escalation.

The two supposedly contrasting views are being reported as representing the conservative Republican position on the one hand, and the progressive Democratic views on the other. This is not quite true since the Center for American Progress is a centrist organization and does not represent progressive/liberal views, even though it is more aligned with the Democratic Party. The point here is that the policy packages should be evaluated based on their soundness, and not on their alleged political leaning.

The proposal of Joseph Antos and colleagues can be summarized as a conversion of our health care financing to a defined-contribution approach, both for Medicare and for private health plans. It is based on the terribly simplistic concept that patients should select their insurance products and their health care based on what they have to pay out of their own funds. Supposedly this drives quality up and prices down. In reality, this erects greater financial barriers to health care, compounding physical suffering and financial hardship. It is astounding that these ideas have not yet been dumped on the trash heap of health policy failures.

The proposals by Ezekiel Emanuel and his colleagues are more of a laundry list of ideas intended to slow the increase in health care costs. Each one needs to be addressed separately, which we can’t do adequately in this message. Some of the ideas have been around for awhile and show little promise of having much impact on spending. Some are similar to a few of the measures in the Affordable Care Act which also provide little promise of containing costs without significantly restricting access because of issues of affordability or failure to adequately finance the health care infrastructure. Some are terrible ideas such as tiering of insurance products, or depending on patient-consumer price shopping. Protecting against malpractice claims by use of safe harbors depends on the fantasy that such harbors can be precisely defined when the variables in real-life clinical situations are too great. Competitive bidding can be disruptive to those that lose out in the bidding process, impairing access as losers leave the market.

Some of the better ideas such as reduction of administrative waste and global budgeting are commendable except for the fact that they are not recommending the fundamental repair of our health care financing infrastructure that would be required for these concepts to have any significant impact on future health care spending. Our fragmented, dysfunctional system is incapable of adapting such concepts in a broad manner.

CAP was part of the process that excluded single payer (improved Medicare for all) advocates during the reform process. Viewing the list of the CAP authors (above), it is clear that single payer advocates are still excluded. Many of the authors are fully aware of the superiority of the single payer model, but have bought into the concept that it is not politically feasible, whereas supporting our private insurance industry is. Some of the authors also seem to have neoliberal, pro-market views.

In sum, this effort to provoke a renewed interest in seriously addressing our American exceptionalism in our misdirected and wasteful spending in health care is a major disappointment. Other nations have been far more effective in achieving greater value in health care spending, and we know how they do it. It is a terrible shame that we are once again allowing committee-think to lead us down the wrong path.

Acceleration of merger and acquisition activity

Posted by on Wednesday, Aug 1, 2012

This entry is from Dr. McCanne's Quote of the Day, a daily health policy update on the single-payer health care reform movement. The QotD is archived on PNHP's website.

Dollar Volume of Health Care Mergers and Acquisitions Doubles in the Second Quarter of 2012, According to New Report from Irving Levin Associates, Inc.

Irving Levin Associates, Inc.
July 19, 2012

The increase in M&A activity (merger and acquisition) was spread across both the technology and services segments of health care. The $38.1 billion in health care technology transactions represented an 87% jump from the first quarter, while the $23.1 billion in health care services acquisitions was almost triple the dollar volume in the first quarter. In the health care services segment, long-term care and hospital acquisitions continue to dominate both the number of transactions and the dollar volume, with physician medical group acquisitions also very active as health care market participants try to get ready for the increase in Accountable Care Organizations. In the technology M&A segment, the number of e-health transactions has been growing and has averaged over 20 acquisitions per quarter for the past four quarters. “The fact that the Supreme Court decision validated most aspects of the Affordable Care Act means that providers and payers will be consolidating to be stronger players in the new market. Coincidence or not, there was a flurry of announced M&A transactions in the week after the decision,” stated Stephen Monroe, Partner at Irving Levin Associates and editor of The Health Care M&A Report.

Following the Supreme Court decision to uphold the fundamentals of the Affordable Care Act, merger and acquisition activities have accelerated within the health care industry. Is that what we’ve come to? An industry in which participants jockey for market position? Does anyone care about the patient anymore?

The answer to the last question is yes. But a health care environment created by MBAs cannot reproduce the professional milieu in which the patient is placed at the pinnacle. Corporations may have some of the same rights as people, but they can never have an inner being that understands, feels, and lives with empathy and caring like the professionals dedicated to the healing arts.

Corporations do have the power, and the money, and their rights, but caring isn’t on their list.

Concentration of health care spending

Posted by on Tuesday, Jul 31, 2012

This entry is from Dr. McCanne's Quote of the Day, a daily health policy update on the single-payer health care reform movement. The QotD is archived on PNHP's website.

The Concentration of Health Care Spending

National Institute for Health Care Management
July 2012

Spending for health care services in the United States is highly concentrated among a small proportion of people with very high use. For the overall civilian population living in the community, the latest data indicate that more than 20 percent of all personal health care spending in 2009 — or $275 billion — was on behalf of just 1 percent of the population. The 5 percent of the population with the highest spending was responsible for nearly half of all spending. At the other end of the spectrum, 15 percent of the population recorded no spending whatsoever in the year, and the half of the population with the lowest spending accounted for just 3 percent of total spending.

With numbers like these, it is clear that per-person spending among the highest users is substantial and represents a natural starting point when thinking about how to curb health care spending. For instance, the average expenditure for each of the approximately 3 million people comprising the top 1 percent of spenders was more than $90,000 in 2009. The top 5 percent of spenders were responsible for $623 billion in expenditures or nearly $41,000 per patient. In contrast, mean annual spending for the bottom half of distribution was just $236 per person, totaling only $36 billion for the entire group of more than 150 million people.

Implications of Concentrated Spending

The concentration of health care spending has several implications for health policy, particularly as we think about how to control overall spending for health services. First is the obvious need to “follow the money.” With half of the population incurring just $36 billion in health care costs, it simply is not possible to realize significant contemporaneous or short-term savings by directing cost-control efforts at this group.

Strategies to improve management of chronic conditions, end-of-life care, and expensive episodes hold more promise, but raise challenges as well. To begin, accurate prospective identification of patients who can most benefit from disease management can be tricky since many of the same chronic conditions associated with higher spending are also present — and in the case of the elderly, highly prevalent — among lower-spending groups. Furthermore, even when these conditions are less prevalent for low spenders, the number of low spenders with the condition will be high simply because many more people are low spenders. Thus, interventions based solely on the presence of a chronic condition are bound to include a significant number of people who would not incur high costs, at least in the short term. Managing high spending at the end of life can also be problematic. Not all persons with high spending will die soon, and predicting timing of death and distinguishing between care that may extend life in a meaningful way and care that does little good is something that is often accomplished only in retrospect. Societal reluctance to discuss end-of-life care and fears of rationing only complicate the matter. Finally, although it might be possible to manage some of the expensive episodes more efficiently through use of clinical pathways, for example, it is virtually impossible to predict or avoid these random high-cost events.

A second implication of the highly concentrated spending pertains to the acceptance of risk by providers and payers. Emerging payment and delivery system reforms, such as accountable care organizations, rely on integrated provider organizations to accept some degree of risk for a defined patient population. These organizations will need a patient base that is large enough to balance out the sizeable downside risk of attracting just a few high spending cases. Additional risk-adjustment and other means of protection against high-cost outlier cases may also be needed. Similarly, in a world of community rating and guaranteed issue, insurers face a significant risk of adverse selection and negative financial implications if they happen to attract a disproportionate number of high spending patients. Here, too, adequate means of protecting against adverse selection and the risk posed by high spenders are required.

The healthier half of our population accounts for only 3 percent of health care spending, whereas the top 5 percent was responsible for nearly half of the spending. This study also confirms the 20/80 rule: 20 percent of the population is responsible for 80 percent of health care spending. This concentration of spending is of great importance as we evaluate methods of containing costs.

Perhaps the most significant factor is that cost-containment strategies targeting healthier individuals will have very little impact on total health care spending since so little is spent on this sector in the first place. This explains why the current trend to increase price sensitivity through high-deductible health plans will produce very little savings even though it will act as a barrier to beneficial health care services. Reducing spending by 10 percent in the 150 million people who use only 3 percent of health care will reduce total health care spending by only 0.3 percent – a drop in the bucket of our national health expenditures. It is a small price to pay for being certain that people will seek appropriate care when they should.

What about high-deductible plans for the 5 percent who account for half of our health care spending? The costs for each patient would far exceed the deductibles, thus most care in this group – that provided after the deductible is met – would not be reduced since price is no longer a factor.

The brief mentions problems with other strategies to control costs in populations with skewed concentrations of health care needs.  Many strategies under consideration would be ill-advised, both because of the paucity of savings and because of the distortions in access and equity.

We really don’t need to look for inevitably-flawed strategies to try overcome these distortions. A single payer system – improved Medicare for all – is an ideal model to cover all appropriate health care expenses no matter how much they are skewed within a population.

Republicans dismiss the uninsured, but what about the Democrats?

Posted by on Monday, Jul 30, 2012

This entry is from Dr. McCanne's Quote of the Day, a daily health policy update on the single-payer health care reform movement. The QotD is archived on PNHP's website.

GOP Says Coverage For The Uninsured Is No Longer The Priority

By Julie Rovner
NPR, July 27, 2012

For decades, the primary goal of those who would fix the U.S. health system has been to help people without insurance get coverage. Now, it seems, all that may be changing. At least some top Republicans are trying to steer the health debate away from the problem of the uninsured.

Take this exchange between Fox News Sunday host Chris Wallace and Senate Minority Leader Mitch McConnell (R-Ky.) earlier this month, just after the Supreme Court upheld most of President Obama’s health law.

Wallace: “What specifically are you going to do to provide universal coverage to the 30 million people who are uninsured?”

McConnell: “That is not the issue. … The question is how can you go step by step to improve the American health care system? It is already the finest health care system in the world.”

But McConnell isn’t the only top Republican saying covering the uninsured should no longer be the top priority.

“Conservatives cannot allow themselves to be browbeaten by failing to provide the same coverage numbers as Obamacare,” Sen. Orrin Hatch, R-Utah, told a conference at the conservative American Enterprise Institute. “To be clear, it is a disgrace that so many American families go without health insurance coverage. But we cannot succumb to the pressure to argue on the left’s terms.”

“Every once in a while, the Republicans have rare moments of honesty. And so when they say that they don’t want to expand coverage, this is one of those rare moments,” says Ethan Rome, who runs Health Care for America Now, an advocacy group working to promote and defend the health care law.

“They look around and they see middle-class families and others in need, and what do they want to do? They want to give tax breaks to the super rich,” he says. “That’s who they are and what they do. And I think that’s why they’re starting to talk about how they don’t want to expand coverage. Because they at least want to be truthful about a couple of things. And those are the ways in which they want to abandon certain populations and be frank about it.”

So the Republicans contend that the problem of the uninsured “is not the issue,” but the Democrats have enacted a program that pretends to provide universal coverage when they are leaving 30 million uninsured. Who is being honest here?

Because the issue of national health insurance has been associated with liberal/progressive politicians, some have mistakenly assumed that Physicians for a National Health Program (PNHP) has aligned itself with the Democratic Party. This is a non sequitur.

PNHP is a 501(c)3 organization, and, as such, does not support any political candidate nor any political party.

More importantly, PNHP is a single issue organization, exclusively supporting a single payer national health program – an improved Medicare for all. Neither the Democratic Party nor the Republican Party supports single payer.

During the political season, it is tempting for single payer supporters to select a party that might be more open to single payer, and then to support candidates of that party in the election. But top down doesn’t work, as those who supported the Democrats can now see. The top rejected single payer.

We need a bottom up approach by joining together in coalitions, by educating the public, and by promoting grassroots efforts to bring a loud and clear single payer message to all would-be politicians, regardless of political affiliation. As individuals, we can support candidates that lead on the single payer issue, but as an organization, PNHP will lead on policy, not politics.

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