High Health-Care Prices: More Talk Than Action

By Drew Altman
The Wall Street Journal, January 12, 2015

People in the U.S. go to the doctor less frequently and have much shorter hospital stays than people in other countries that spend far less per capita on health care. But health services are consistently more expensive here than in comparably wealthy countries.

Price is the major factor that distinguishes the cost of our system from those in other developed nations. The sticker shock of some medical services and drugs is also the dimension of the health-cost problem most visible to the public. So it’s interesting that most efforts in this country to address health-care costs don’t focus on price much at all. Instead, they focus on reforming the delivery of health care and provider reimbursement to reduce the volume of health care Americans use and to weed out unnecessary procedures and hospitals days.

To be sure, high medical prices are talked about a lot. One reason there is more talk than action is the anti-government environment, which would inhibit regulatory action to constrain prices. Taking on price also means taking on health care’s powerful industry interests. More effective competition between providers would help reduce prices, but the health-care industry appears to be consolidating more than competing, as is the health insurance industry.

It would be a mistake to make price the only focus of a cost-reduction strategy. But it’s striking that while price is such an important reason our system appears to cost so much more than others, efforts to reduce the high prices of medical care are not a meaningful part of current cost-reduction efforts.

Drew Altman is president and chief executive officer of the Kaiser Family Foundation.

http://blogs.wsj.com/washwire/2015/01/12/high-health-care-prices-more-talk-than-action/

****

U.S. hedge fund plans to take on big pharma over patents

Reuters, January 7, 2015

U.S. hedge fund manager Kyle Bass, who won fame for predicting the subprime mortgage crisis in 2008, plans to take on some of the world’s biggest drug producers by challenging the patents of their top brands, he said on Wednesday.

Bass, the founder of Dallas-based Hayman Capital Management, L.P., said some drug firms were hanging onto patents in questionable ways and he planned to take around 15 firms into a so called Inter Partes Review (IPR) process created by the America Invents Act. in 2012.

“We are going to challenge and invalidate patents through the IPR process … (and) we are not going to settle,” Bass said in a presentation in Oslo, Norway’s capital.

“The companies that are expanding patents by simply changing the dosage or the way they are packaging something are going to get knee capped,” he said.

Bass said the firms he planned to challenge had a combined market capitalisation of $450 billion and if he succeeded that could halve, benefitting his investments and reducing medicine prices in the United States.

“This is going to lower drug prices for Medicare and for everyone,” he said.

Bass did not name any targets and also declined to elaborate on how he planned to make a financial gain from the challenges. He also declined to give details on his investment position.

http://www.reuters.com/article/2015/01/07/pharmaceuticals-haymancapital-idUSL3N0UM42O20150107

****

Comment:

By Don McCanne, MD

Health care prices are much higher in the United States than in other nations. The difference seems to be that other nations rely much more on government administration of pricing whereas we depend more on the marketplace, especially on the private insurance industry that has a relatively weak negotiating power over our medical-industrial complex, worsened by ongoing consolidation within the industry.

That is not to say that the government does not play any role. The administered pricing of our Medicare program has been more effective than the private insurers in slowing the increases in the costs of health care. The private insurers have slowed the increase in insurance premiums but at the terrible cost of transferring risk and payment responsibilities to patients.

That said, government administered health care pricing in the United States is still too weak. We even prohibit the government from negotiating drug prices in the Medicare Part D program. Drug pricing is not only obscene, it is criminal, or at least it should be a crime when companies can price their drugs at tens of thousands of dollars only because our dysfunctional market will bear those prices.

Since we have not allowed our government to take a more active role, we should ask if the private sector can be capable of providing greater value. Up to this point it has not been so, as is verified by the fact that we have far higher prices than other nations.

But suppose the private sector did move in using their unique tools to control markets. Consider the approach of hedge fund manager Kyle Bass. He is famous for creating large fortunes by betting against the market with tools such as credit default swaps in the subprime mortgage crisis and credit default swaps on government bonds in Greece.

Based on this Reuters article, apparently now Bass wants to bet against drug firms that seem to be abusing the patent laws to drive up drug prices. He is quoted as saying that these companies are “going to get kneecapped.” Wow! When he is finished, he says, “This is going to lower drug prices for Medicare and for everyone.” Although he has not revealed his strategy, it does not take too much imagination to come to the conclusion that he may well use credit default swaps to make another fortune once he is effective in disabusing the industry of their belief that these innovative patents are valid.

Which is better? Is it better to allow the private sector to use innovations such as credit default swaps to bring about fairer pricing of drugs, even though considerable funds are redirected upwards, further increasing income and wealth inequality? Or is it better to have government administered pricing wherein there is no opportunity to create new fortunes by using Wall Street tools to divert health care dollars to the wealthy? If for no other reason, you would think that government administered pricing should be preferred simply because it is more effective.

Since we do not seem to be inclined on relying on our government to serve our needs, maybe we should think more about private sector opportunities. For starters, someone might want to secure a patent on kneecap replacements. Our friends on Wall Street would no doubt recognize the investment potential, and the venture capitalists would be lined up at your door.

Billing and insurance-related administrative costs in United States’ health care: synthesis of micro-costing evidence

By Aliya Jiwani, David Himmelstein, Steffie Woolhandler and James G Kahn
BMC Health Services Research, Online November 13, 2014

Abstract

Background: The United States’ multiple-payer health care system requires substantial effort and costs for administration, with billing and insurance-related (BIR) activities comprising a large but incompletely characterized proportion. A number of studies have quantified BIR costs for specific health care sectors, using micro-costing techniques. However, variation in the types of payers, providers, and BIR activities across studies complicates estimation of system-wide costs. Using a consistent and comprehensive definition of BIR (including both public and private payers, all providers, and all types of BIR activities), we synthesized and updated available micro-costing evidence in order to estimate total and added BIR costs for the U.S. health care system in 2012.

Methods: We reviewed BIR micro-costing studies across healthcare sectors. For physician practices, hospitals, and insurers, we estimated the % BIR using existing research and publicly reported data, re-calculated to a standard and comprehensive definition of BIR where necessary. We found no data on % BIR in other health services or supplies settings, so extrapolated from known sectors. We calculated total BIR costs in each sector as the product of 2012 U.S. national health expenditures and the percentage of revenue used for BIR. We estimated “added” BIR costs by comparing total BIR costs in each sector to those observed in existing, simplified financing systems (Canada’s single payer system for providers, and U.S. Medicare for insurers). Due to uncertainty in inputs, we performed sensitivity analyses.

Results: BIR costs in the U.S. health care system totaled approximately $471 ($330 – $597) billion in 2012. This includes $70 ($54 – $76) billion in physician practices, $74 ($58 – $94) billion in hospitals, an estimated $94 ($47 – $141) billion in settings providing other health services and supplies, $198 ($154 – $233) billion in private insurers, and $35 ($17 – $52) billion in public insurers. Compared to simplified financing, $375 ($254 – $507) billion, or 80%, represents the added BIR costs of the current multi-payer system.

Conclusions: A simplified financing system in the U.S. could result in cost savings exceeding $350 billion annually, nearly 15% of health care spending.

From the Discussion

Eliminating added BIR costs of $375 billion per year (14.7% of US health care spending) would provide resources to extend and improve insurance coverage, within current expenditure levels. Since uninsured individuals have utilization of about 50% of insured individuals, the current 15% uninsured could be covered with roughly half of the $375 billion. Remaining savings could be applied to improved coverage for those already insured.

http://www.biomedcentral.com/content/pdf/s12913-014-0556-7.pdf

PNHP release:  $375 billion wasted on billing and health insurance-related paperwork annually: study
https://www.pnhp.org/news/2015/january/375-billion-wasted-on-billing-and-health-insurance-related-paperwork-annually-stud

Comment:

By Don McCanne, M.D.

Previous studies have demonstrated the waste of billing and insurance-related functions in health care in United States. This study refines and unifies the estimates of these costs and shows how much could be recovered if we were to switch to a simplified financing system such as Canada’s single payer system for providers, and U.S. Medicare for insurers. The $375 billion recovered would be enough to cover the uninsured and bring the coverage for the underinsured up to standard.

The PDF of the full study is available through open access at the biomedcentral link above. It should be filed under landmark articles in every health policy library.

What Happened in Vermont: Implications of the Pullback from Single Payer

By Steffie Woolhandler, M.D., M.P.H., and David U. Himmelstein, M.D.
Jan. 10, 2015

Gov. Peter Shumlin’s Dec. 17, 2014, announcement that he would not press forward with Vermont’s Green Mountain Care (GMC) reform arose from political calculus rather than fiscal necessity. GMC had veered away from a true single payer design over the past three years, forfeiting some potential cost savings. Yet even the diluted plan on the table before Shumlin’s announcement would probably have lowered total health spending in Vermont, while covering all of the state’s uninsured.

Background

Decades of exemplary grassroots organizing (and strong labor union support) in Vermont put single payer on the agenda. During Shumlin’s 2010 gubernatorial campaign, he promised to implement a single payer reform, which was a factor in the Progressive Party’s decision not to field a candidate. But the details of Shumlin’s plan weren’t fleshed out during the campaign.
 
After his victory, Shumlin and the legislature commissioned economist William Hsiao to study options for health reform in Vermont, including single payer. Rejecting a fully public single-payer plan, Hsiao instead proposed a “public-private hybrid” model and projected $580 million in savings, including large administrative cost savings, in the program’s first year.

Spurred by Hsiao’s positive projections, in 2011 the legislature passed a health reform law that laid out plans for implementing the Affordable Care Act in the short term, and called for a later transition to a single payer GMC plan. But while the law gave a detailed prescription for implementing the ACA (including construction of an exchange whose final cost was about $250 million), the sections on single payer were vague, and punted decisions on critical issues to the GMC Board to be appointed by the governor. That board would determine whether critical services like long-term care would be covered; the amount of copayments; how hospitals and doctors would be paid; and whether capital funds would be folded into operating budgets or allocated through separate capital grant (the sine qua non of effective health planning). Critically, the bill included no plan for funding the single payer program.

An early signal of trouble was Shumlin’s appointment of Anya Rader Wallack to chair the new GMC board. Wallack had deep ties to the private insurance industry, having held key positions (including the presidency) at the Blue Cross Blue Shield of Massachusetts Foundation. That foundation played a central role in designing and pushing for Massachusetts’ 2006 Romneycare reform, and subsequently issued a series of glowing evaluations of Romneycare that helped buttress the case for replicating its structure in the ACA.

From the outset, Shumlin’s team embraced an Accountable Care Organization payment strategy that would enroll most Vermonters in large hospital-based, HMO-like organizations that would be overseen by a “designated entity” – presumably Blue Cross. To-date, ACOs have shown little or no overall cost savings, have increased administrative costs, and have driven hospitals to merge and gobble up physician practices. The consolidation of ownership triggered by ACO incentives has raised concern that regionally dominant ACOs will use their market power to drive up costs. In Vermont, Dartmouth Hitchcock and the University of Vermont’s Fletcher Allen system dominate the market, and have initiated a for-profit, joint venture ACO.
 
The design for GMC incorporated several other features that increased the administrative complexity, and hence administrative costs of the proposed reform. The plan never envisioned including all Vermonters in a single plan, instead retaining multiple payers. Hence, hospitals, physicians’ offices, and nursing homes would still have had to contend with multiple payers, forcing them to maintain the complex cost-tracking and billing apparatus that drives up providers’ administrative costs. It proposed continuing to pay hospitals and other institutional providers on a per-patient basis, rather than through global budgets, similarly perpetuating the expensive billing apparatus that siphons funds from care. And hospitals would have continued to rely on surpluses from day-to-day operations as their main source of capital funds for modernization and expansion. This undermines health planning and raises bureaucratic costs by forcing hospital administrators to undertake the additional work needed to identify and pursue profit opportunities.

Some of this complexity was forced on Vermont by federal statutes that may preclude folding Medicare and the military’s Tricare program into a state single payer plan, and restrict states’ ability to outlaw private employer-provided coverage that duplicates the public plan. But the decisions to abandon lump-sum hospital payment, and separate grants for capital came from the governor and his advisers.

The End Game of Vermont’s Reform

Vermont’s November 2014 gubernatorial election had very low voter turnout, a circumstance that generally favors the right. Gov. Shumlin – who had hedged on health reform during the campaign – eked out a narrow plurality, leaving the state legislature to decide between him and the Republican candidate and greatly weakening Shumlin’s position. A month later, while awaiting the legislature’s decision (they elected him to a third term on January 9), Shumlin announced his pullback from reform.

Shortly thereafter, he released the detailed cost projections which he said had convinced him not to go ahead. The report by his staff estimated zero administrative savings from its proposed plan. It also projected zero savings on drugs and medical devices, tacitly acknowledging that GMC wouldn’t use bargaining clout to rein in prices, and ignoring the fact that Quebec, its neighbor to the North, has gotten big discounts.

The Shumlin administration’s cost estimates also incorporated an old (too high) estimate of the number of uninsured Vermonters, inflating the projected increase in utilization and cost. Finally, it assumed that doctors would expand their work hours (and incomes) to care for the newly insured, rather than maintaining their current work hours by seeing their other patients a little less frequently – as happened with the implementation of single payer coverage in Quebec.

But even the administration’s inflated cost estimates indicate that universal coverage under its quasi-single payer plan would cost somewhat less overall than the current system. The voluminous report includes detailed tabulations of new costs to the state treasury under the proposed reform. But the report scrupulously avoids providing any figures for the impact of reform on the total cost of health care (public and private) in the state. Economist Gerald Friedman has estimated these overall impacts using the report’s data, previous estimates of health expenditures in Vermont, and CMS figures on Medicare spending and expected health care inflation under the ACA. He estimates that even the diluted reform proposed by the governor’s team would cut overall health spending in Vermont by about $500 million annually.

So why did Gov. Shumlin declare the reform unaffordable? Many have noted that the $2.5 billion in new state expenditures required under the reform would nearly double the state’s previous budget. But these numbers are meaningless absent an accounting of the savings Vermont households would realize by avoiding private insurance premiums and out-of-pocket costs. As detailed above, these savings would more than offset the new taxes.

But although the total costs of care would have fallen even under the GMC plan, some – mostly higher-income, healthy Vermonters whose taxes would go up the most – would have paid more. Although the GMC tax plan was far from progressive, it was far less regressive than the current pattern of health care funding in the state. The GMC Board estimated that most of the 340,214 families earning less than $150,000 annually would have gained, while most of the 24,102 families above that income level would have lost. Overall, employers’ costs would have risen by $109 million – with many small businesses experiencing cost increases, a political sore point.

Conclusion

It’s a misnomer to label Vermont’s Green Mountain Care plan “single payer.” It was hemmed in by federal restrictions that precluded including 100 percent of Vermonters in one plan, and its designers further compromised on features needed to maximize administrative savings and bargaining clout with drug firms, and improve health planning.

But even the watered-down plan that emerged could have covered the uninsured, improved coverage for many who currently face high out-of-pocket costs, and actually reduced total health spending in the state – albeit far less than under a true single payer plan. A true single payer plan would have made covering long-term care affordable, and allowed the elimination of all copayments and deductibles.

Vermont’s experience holds important lessons for single payer advocates.

1. Effective grassroots organizing makes a difference. It got real health care reform on the political radar screen in Vermont, and can get it back on the radar there and elsewhere. Indeed, single payer forces in Vermont are already rallying to reverse Shumlin’s decision. The virtues, value, and simplicity of a single payer approach have broad popular appeal.

2. Federal restrictions impose significant compromises on state-level single payer plans. For this, as well as other reasons, organizing for single-payer state plans and organizing for national legislation are not competing strategies, but complementary ones. The ultimate goal for both is a single, inclusive program for the entire nation.

3. As single payer work advances, we need to anticipate that corporate opposition will mobilize – often behind the scenes. The only effective antidote is continued grassroots mobilization. Delayed implementation and punting key decision to the future opens the door for corporate influence and smear campaigns.

4. Beware of “experts” with a track record unsympathetic to single payer. Economic projections are always based on assumptions, which are often highly political.

5. Even when we don’t get the whole pie, demanding it often yields a significant piece. Although a major single payer effort was stymied in Vermont, it achieved substantial progress. It’s no accident that Vermont’s uninsurance rate has come down to 3 percent; that virtually all children in that state are covered; that its Medicaid program is among the best; that its hospitals have come under tighter fiscal regulation; and that single payer remains in the limelight there. Even as he backed off from single payer for now, the governor promised to press for future health reform.

Dr. Steffie Woolhandler and Dr. David U. Himmelstein are internists, professors at the City University of New York’s School of Public Health at Hunter College, and lecturers at Harvard Medical School. They co-founded Physicians for a National Health Program.

https://www.pnhp.org/news/2015/january/what-happened-in-vermont-implications-of-the-pullback-from-single-payer

Comment:

By Don McCanne, M.D.

The special weekend release of this commentary is designed for widespread distribution to help bring together members of the single payer community, not only within PNHP but also including all individuals and organizations that have been and will continue to be dedicated to the cause of health care justice for all.

The value of this commentary by Steffie Woolhandler and David Himmelstein is that it provides a general perspective on what actually did happen, and leaves us with a positive sendoff on the path forward.

Their description of the events that actually took place allows us to dismiss the tangle of minutiae that has not only been disruptive within the single payer camp but has also allowed the conservatives and libertarians to falsely label the single payer concept as an abject failure. Much more importantly, this commentary provides lessons that can help reunite all of us, on both the state and national levels, in our common quest for single payer reform.

Please share the commentary or the link to it with your single payer colleagues and organizations.

Onward together!

Variations In County-Level Costs Between Traditional Medicare And Medicare Advantage Have Implications For Premium Support

By Brian Biles, Giselle Casillas and Stuart Guterman
Health Affairs, January 2015

Abstract

Concern about the future growth of Medicare spending has led some in Congress and elsewhere to promote converting Medicare to a “premium support” system. Under premium support, Medicare would provide a “defined contribution” to each Medicare beneficiary to purchase either a Medicare Advantage (MA)–type private health plan or the traditional Medicare public plan. To better understand the implications of such a shift, we compared the average costs per beneficiary of providing Medicare benefits at the county level for traditional Medicare and four types of MA plans. We found that the relative costs of Medicare Advantage and traditional Medicare varied greatly by MA plan type and by geographic location. The costs of health maintenance organization–type plans averaged 7 percent less than those of traditional Medicare, but the costs of the more loosely structured preferred provider organization and private fee-for-service plans averaged 12–18 percent more than those of traditional Medicare. In some counties MA plan costs averaged 28 percent less than costs in traditional Medicare, while in other counties MA plan costs averaged 26 percent more than traditional Medicare costs. Enactment of a Medicare premium-support proposal could trigger cost increases for beneficiaries participating in Medicare Advantage as well as those in traditional Medicare.

From the Discussion

This analysis of the relationship between the costs to provide Medicare benefits by MA private plans and by traditional Medicare in the same county found that these costs varied widely by the type of MA plan and the level of costs in traditional Medicare at the county level.

Most notably, Medicare Advantage HMO plans had lower costs than traditional Medicare in areas in the nation where the average costs per beneficiary in traditional Medicare were relatively high compared to the national average. In contrast, the three less tightly organized MA plan types had higher costs than traditional Medicare in almost all areas of the nation, and their costs were much higher where the average costs in traditional Medicare were lower than the national average.

Although both traditional Medicare and MA plans are changing, these findings have broad implications for future Medicare policy, especially for proposals to transform Medicare into a premium support-based program.

Nationwide, MA plans in rural areas have costs that average 115 percent of local costs in traditional Medicare. In some metropolitan areas, MA plan costs to provide Medicare benefits are also higher than in traditional Medicare. In cities such as Rochester, New York; Sacramento, California; and Seattle, Washington, Medicare Advantage HMO plan costs are higher than costs in traditional Medicare by 18 percent or more. In these areas, with low costs in traditional Medicare, a premium-support program would not lead to an increase in the monthly Medicare premium to traditional Medicare beneficiaries. It would, however, reduce payments to MA plans, which would then need to raise their monthly premiums to Medicare members and reduce any supplemental benefits that they now provide.

Policy Implications

This analysis suggests that reform of Medicare based on the premium-support model will inevitably result in major changes in costs for health insurance coverage and health care services for elderly and disabled beneficiaries in substantial portions of the nation. The analysis finds that only the more tightly organized Medicare Advantage HMO–type plans have costs that are lower as a national average than traditional Medicare costs in the same area. Medicare Advantage HMO–model private plans, although very successful in some high-cost urban regions, have proved expensive and difficult to develop and expand in other areas with lower costs in traditional Medicare. After thirty years of federal and private support, the most tightly organized Medicare Advantage HMOs have achieved significant cost savings relative to local costs in traditional Medicare in only a limited number of urban counties.

The lesson is that these less structured MA plans, which mostly mimic the fee-for-service payment system for which traditional Medicare is criticized, have costs that are substantially higher than those of traditional Medicare in the same area and would not contribute to lower Medicare costs.

Finally, the analysis finds that the traditional Medicare program is not as universally inefficient and expensive relative to private plans as is often suggested. The findings described here indicate that MA plans have average costs that are higher than costs in traditional Medicare in five of the ten US county cohorts with the lowest traditional Medicare costs. In the three county cohorts with the lowest traditional Medicare costs, even HMO plans have costs that exceed those of traditional Medicare, by more than 10 percentage points.

http://content.healthaffairs.org/content/34/1/56.abstract

Comment:

By Don McCanne, M.D.

The contention that private Medicare Advantage (MA) plans competing with the traditional Medicare program are able to lower costs has been proven repeatedly to be a fiction. Yet there continues to be a push to convert Medicare into a premium support system in which patients would use vouchers to purchase private plans under the false promise of lower costs through market competition.

Although tightly organized HMO-type Medicare Advantage plans may have lower costs in areas where the costs of the traditional Medicare program were higher, more loosely structured PPO and private fee-for-service Medicare Advantage plans averaged 12 to 18 percent more than the costs of the traditional Medicare program.

Understanding the distinction between tightly organized HMOs and loosely organized PPOs and private FFS plans is important to be able to make sense of the economic impact of these models. PPO and FFS Medicare Advantage plans are business models of private insurance designed to be marketed as insurance products that partially cover losses due to health care. These models are associated with very high administrative costs, a fact acknowledged in the Affordable Care Act since similar plans are permitted to consume 15 to 20 percent of the premiums for their own administrative costs and profits. These administrative costs are far higher than those of the traditional Medicare program, as mentioned above.

Tightly organized HMOS, such as Kaiser Permanente, are designed as patient service models providing prepaid health care. These models have been shown to be effective in improving efficiency and sometimes reducing health care costs. What distinguishes them from the loosely organized models is that these HMOs are integrated health care delivery systems whereas the loosely organized models are simply intermediary insurance plans that contract with mostly non-integrated private providers.

Why is this important? Integrated systems such as Kaiser that are a part of the delivery system would be covered under a single payer national health program – an improved Medicare for all. The loosely organized models are simply private insurers that are not part of the health care delivery system. Under single payer they would be replaced by an improved Medicare. Thus we would be keeping efficient prepaid delivery systems while dumping the wasteful and intrusive private insurer intermediaries.

How would premium support change this? The advocates would provide generous vouchers for these wasteful intermediaries while failing to provide adequate cost adjustments for the traditional Medicare program. We know that they would do this because they already are doing it. Although the Affordable Care Act called for the reduction of the Medicare Advantage overpayments, a conspiracy between the insurance industry and the administration has resulted in various accounting innovations that have preserved these overpayments, though in a disguised form. So they would eventually displace traditional Medicare with a thriving market of private plans, but, as patients would eventually discover, plans with unaffordable cost sharing and limited choice of narrow networks.

This study is yet one more that demonstrates the irrationality of using wasteful private insurance plans in a public program. Yet it also shows that those who prefer to obtain care through an integrated delivery model, such as Kaiser Permanente, could continue to do so under single payer since it is a prepaid health delivery system rather than a private, superfluous, intermediary insurer. But, by all means, be prepared to protest vociferously when you hear talk of premium support.