In an agreement with President Obama and Senator Max Baucus, Chairman of the Senate Finance Committee, PhRMA pledged $80 billion toward the costs of health care reform. Though some of the details of this agreement have since become a matter of controversy, two parts of the pledge are widely known — (1) drug companies would give a 50 percent discount to Medicare beneficiaries for the costs of their drugs in the “doughnut hole” (annual costs between $2700 and $6,100); and (2) drug companies would give higher rebates on the drug costs of people on Medicare and Medicaid. It has been estimated that about $30 billion would be expended for these two purposes over the next 10 years, with the other $50 billion being directed to non-specified costs of reform.

This pledge was hailed as an “historic agreement” by the White House and praised by the AARP, but it soon became clear that much of this pledge will not result in savings to the federal government. Further, as pointed out by Charles Butler, a pharmaceutical analyst at Barclays Capital, those discounts won’t cost the drug companies much — “Because of the discounts, Medicare beneficiaries are likely to continue filling prescriptions in the doughnut hole, whereas in the past many stopped taking their medications because the drugs were unaffordable to them.”

The main point of contention in weeks after this agreement was whether the quid pro quo for the drug industry is assurance that the government will not pursue negotiation of drug prices. In August, an internal memo obtained by the Huffington Post confirmed that the White House and the drug industry lobby secretly agreed to protection of drug companies from price controls. (Grim, R. Internal memo confirms big giveaways in White House deal with big PhRMA. Huffington Post, August 13, 2009) Both sides subsequently issued conflicting reports in an effort to backtrack from the controversy. But many progressives in Congress felt betrayed. In response, Speaker of the House Nancy Pelosi declared that the House was not a party this agreement. The House E & C Committee, chaired by Henry Waxman (D-CA) soon passed an amendment to the House bill (H. R. 3200) calling for negotiation of drug prices by the government, and many Democratic leaders would like the drug industry to make a bigger commitment to health care reform.

Despite the lack of transparency in whatever deal was made between PhRMA, the President and Senator Baucus, the drug industry’s agenda is crystal-clear — expand its markets through wider insurance coverage and government subsidies, avoid price controls and competition from importation of drugs from other countries, and gain maximal patent protection from generic drug-makers of biotech drugs.

Much as the insurance industry feels more secure in the more conservative Senate, the drug industry has also counted on the Senate Finance Committee to roll back provisions in any House bill counter to its interests. PhRMA therefore became an active supporter of a bipartisan approach to health care reform. While not lobbying specifically against the public option, it expressed serious concern over any erosion of employer-sponsored health insurance. It also arrayed its forces in these directions:

• Joining with Families USA, a not-for-profit advocacy group for affordable health care, in a $150 million ad campaign supporting health care reform. This campaign includes a re-appearance of Harry and Louise, the fictional couple now on Medicare who played a large part in defeating the Clinton Health Plan in1993-1994. They now tell us on major national TV channels, some network news and Sunday talk shows that “a little more cooperation, a little less politics, and we can get the job done this time.”

• Teaming up with Families USA to lobby for expanded Medicaid coverage for
Americans making up to 133 percent of the federal poverty level ($14,000 a year for individuals). As Tauzin said: “When Families USA and PhRMA can get together, I hope that’s a sign to everybody in the House and Senate that we can find common ground, and that the president’s call to put party aside and to put ideologies aside and try to find what works is a good call.”

• Lobbying against proposals that would prohibit brand-name drug makers from paying generic drug makers to delay marketing of lower-cost generic drugs.

• In the first six months of 2009, PhRMA and Pfizer spent $13.1 and $11.7 million in lobbying, respectively.

It was soon apparent that the initiatives taken by the drug industry to appear to support reform was bound to please its CEOs and stockholders. These early returns were gained:

• Passage by the Senate HELP Committee (by a 16-7 vote) of a provision giving manufacturers of branded biotechnology drugs at least 12 years of patent protection before generic manufacturers can bring such drugs to market (the White House had proposed seven years while Henry Waxman had wanted five).

• Strong projected annual increases on prescription drug spending

In sum, in the same way that the insurance industry had already won preferential treatment from legislators even as developing health care reform legislation was in a fluid state, the drug industry had also achieved many of its important goals, especially assurance of strong future markets for its products for years to come. In our next post, we will see how the hospital industry has fared during this critical period of potential system change.

John Geyman, M.D. is the author of The Cancer Generation and Do Not Resuscitate: Why the Health Insurance Industry is Dying, and How We Must Replace It, 2008. With permission of the publisher, Common Courage Press

Buy John Geyman’s Books at: http://www.commoncouragepress.com

“Greater reliance on individual choice and free markets are the solutions to what ails our health care system . . . A handful of policy changes that harness the power of markets for health services have the potential to give patients and their physicians more control over health-care choices, create more health insurance options, lower health costs, reduce the number of uninsured persons—and give workers a pay increase to boot.”

If competitive markets are so effective in controlling health care costs, how is it that these costs continue to soar at rates three or four times the rates of cost of living or median family incomes?  Here are five reasons why markets fail, and can never succeed, to control health care costs.

There is little actual competition in health care markets.  Instead, we find widespread consolidation, whether among hospitals, pharmaceutical companies, other suppliers, nursing homes, dialysis centers, or insurers.  As examples, Tenet, the second largest hospital chain in the country, controls 80 percent of hospital beds in El Paso, Texas, while private insurers have near-monopolies in 95 percent of HMO/PPO metropolitan markets (raising antitrust concerns by the U. S. Department of Justice). One-half of Americans live in areas that are too sparsely populated to have any real competition.  And of course, when people are seriously ill and require the most costly care, they find it difficult or impossible to comparison-shop for physicians or hospitals.

On the supply side, providers and suppliers have wide latitude to set prices.
Much of the health care industry is investor-owned, from insurers to hospital chains and drug companies. As such, they are obligated to their shareholders to maximize profits and have wide latitude to set prices independently. In California, for example, Tenet hospitals have set charges for drugs ten times higher than state averages, while Ovation Pharmaceuticals hiked its price for Cosmegen, a chemotherapy drug for a kidney cancer in children, by more than 3,400 percent (not a typo!) in 2006.  So-called not-for-profits can also set their own prices, as illustrated by a recent Wall Street Journal report that the “nonprofit” Carillion Health System in southwestern Virginia charges $4,727 for a colonoscopy and $1,606 for a CT scan of the neck, levels three to ten times higher than charged by other local facilities.

Our fragmented system works against bulk purchasing.

In such a fragmented multi-payer system as we have, there is little opportunity to achieve sizable discounts through bulk purchasing.  Indeed, bulk purchasing of drugs was specifically prohibited by the Medicare Prescription Drug, Improvement and Modernization Act of 2003.  That legislation was crafted by conservative legislators and lobbyists to protect the pricing prerogatives of the drug and insurance industries and to avoid discounts on drugs of 40 percent or more as are achieved by the Veterans Administration.
Distorted reimbursement policies favor gaming of the system.

We have entrenched policies with a wide gap between physician reimbursement for procedures and cognitive services (ie., the face-to-face listening and talking part of medicine as is typical in primary care, geriatrics, and psychiatry).  Procedures are over-reimbursed while time-intensive cognitive services, including coordination and continuity of comprehensive care, are under-reimbursed.  It is well documented that higher-reimbursed areas of the country attract larger numbers of specialists with more specialist visits, more hospitalizations and ICU use, more inappropriate and unnecessary care, and worse outcomes than are seen in lower reimbursed parts of the country with fewer specialists and more generalist physicians.  Other providers game the system as well.  For example, HCA, the largest hospital chain in the country, has inflated its revenues by “upcoding” the severity of patients’ diagnoses, falsifying billing ledgers, and bouncing patients among its hospitals, sub-acute facilities, and home care agencies in order to bill multiple times for each episode of illness.

Demand for health care is not very sensitive to prices.

Although conservative theorists tell us that patients overuse health care if they are insured (moral hazard), that premise has been discredited as a major cause of health care inflation.  We don’t see runs by patients to unnecessary care.  Most medical care is ordered by physicians, who themselves are largely responsible for an estimated one-third of health care services that are either inappropriate or unnecessary.  As for price sensitivity, a  2005 RAND report found that spending dropped by only 17 cents for every dollar increase in price.

What can we conclude from all this?   Based on three decades’ experience with our deregulated marketplace, we have to conclude that markets cannot control health care costs, and in fact are themselves a big contributor to health care inflation.  Market ideology in other kinds of markets do not apply in health care.  Managed care of the 1980s and 1990s not only failed to contain costs, but also brought further complexity and turmoil to the marketplace while disrupting relationships between patients and physicians.  It has become obvious that reining in the costs of health care and at the same time increasing access and quality of care will require major reform, including a larger role for government.  Joseph Stiglitz, Nobel laureate in economics and former chief economist of the World Bank, puts it this way:

“Markets do not lead to efficient outcomes, let alone outcomes that comport with social justice.  As a result, there is often good reason for government intervention to improve the efficiency of the market.  Just as the Great Depression should have  made it evident that the market often does not work as well as its advocates claim, our recent Roaring Nineties should have made it self-evident that the  pursuit of self-interest does not necessarily lead to overall economic efficiency.”

In our next post, we will look at how inflating health care costs driven by market forces
cause financial insecurity and economic hardship for a large and growing part of our population.

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Adapted from Do Not Resuscitate: Why the Health Insurance Industry is Dying, and How We Must Replace It, 2008 by John Geyman. With permission of the publisher, Common Courage Press.

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