PNHP

Kucinich wants government to oversee drug research

Kucinich wants government to oversee drug research

In follow-up to today’s message on drug patent monopolies:

By Susan Jaffe
The Plain Dealer
September 29, 2004

U.S. Rep. Dennis Kucinich proposed a new federal law Wednesday that would allow the government to take over private drug research and eliminate drug companies’ monopoly on high-priced, brand-name drugs.

His “Free Market Drug Act” would create a federal Institute for Biomedical Research and Development within the National Institutes of Health that would oversee pharmaceutical research by government labs, and universities and private companies working under government contracts.

Their research would be public, and the formulas they develop for new drugs would be available to any manufacturer approved by the U.S. Food and Drug Administration to make them.

http://www.cleveland.com/news/plaindealer/index.ssf?/base/news/109645024237250.xml

Comment:
One of the four proposals described in Dean Baker’s report is the Kucinich proposal.

http://www.cepr.net/publications/patents_what_are_the_issues.htm

Europe's Drug Import Example

Letter to the Editor
The Washington Post
September 30, 2004

Last year I led researchers at the London School of Economics in testing whether the practice of reimporting prescription drugs in Europe saved consumers billions in drug costs…

Reimporting prescription medicines has flourished in the European Union because national health policies in some member countries, such as Greece, Italy and Portugal, have led to declines in the local prices of patent-protected prescription medicines — as much as 70 percent in some northern E.U. member states. Those countries include two of the five largest pharmaceutical markets in the world, Germany and Britain. This is similar to the pricing imbalance between the United States and Canada.

We looked at 19 top-selling drugs in six Northern European “destination countries” of imports — Denmark, Germany, the Netherlands, Norway, Sweden and Britain. The 19 drugs — which treat heart, gastrointestinal and mental health ailments — account for almost a quarter of all prescription drug sales in Europe.

Our study found combined sales of reimported versions of these drugs saved health care payers in Northern Europe a minuscule 0.3 percent to 3.6 percent of their annual drug budgets, or slightly more than $100 million. Moreover, these savings were not passed on to consumers, and drug prices in Northern and Southern Europe did not become more similar.

The biggest gains from selling imported drugs — more than $650 million, or 46 percent of the sales of all products studied — went straight to the repackagers.

Panos Kanavos
London

http://www.washingtonpost.com/wp-dyn/articles/A60984-2004Sep29.html

And…

Prescription-Drug Prices
By Richard G. Frank, Ph.D.
The New England Journal of Medicine
September 30, 2004

A key feature of the pharmaceutical industry is that drugs can be manufactured at a variable cost of pennies per pill, but drug companies incur high fixed research-and-development costs to bring new drugs to market. If manufacturers were paid prices that reflected their variable costs, as other industries are, the average cost of a drug would not be covered, and the companies would lose money. The implication is that with lower prices, drug-company profits will diminish and research-and-development efforts may be reduced, resulting in a diminished flow of new drugs. There is therefore a constant tension between drug policies that control today’s prices and those that promote tomorrow’s innovative products.

Prices for brand-name prescription drugs are 35 to 55 percent lower in other industrialized countries than in the United States. The central reason for these price differentials is that Canada and most European countries (13 of the 15 countries in Western Europe) directly regulate the prices of prescription drugs. High U.S. prices are said to be necessary to cover the costs of research and development for new and better drugs…

http://content.nejm.org/cgi/content/full/351/14/1375

And…

Financing Drug Research: What Are the Issues?
Center for Policy and Economic Research
By Dean Baker
September 21, 2004

The immediate cause of high drug prices is government granted patent monopolies, which allow drug companies to charge prices that are often 400 percent, or more, above competitive market prices.

Patent monopolies are one possible mechanism for financing prescription drug research. Rapidly increasing drug costs, and the economic distortions they imply, have led researchers to consider alternative mechanisms for financing drug research. This paper outlines some of the key issues in evaluating patents and other mechanisms for financing prescription drug research.

As economic theory predicts, government granted patent monopolies lead not only to deadweight efficiency losses due to the gap between the patent protected price and the competitive market price, but also to a variety of other distortions. Among these distortions are:

1) excessive marketing expenses, as firms seek to pursue the monopoly profits associated with patent protection – data from the industry suggests that marketing costs are currently comparable to the amount of money spent on research;

2) wasted research spending into duplicative drugs – industry data indicates that roughly two thirds of research spending goes to developing duplicative drugs rather than drugs that represent qualitative breakthroughs over existing drugs;

3) the neglect of research that is not likely to lead to patentable drugs;

4) concealing research findings in ways that impede the progress of research, and prevent the medical profession and the public from becoming aware of evidence that some drugs may not be effective, or could even be harmful.

This paper examines four alternatives to the patent system… All four of these proposals finance prescription drugs in ways that allow most drugs to be sold in a competitive market, without patent monopolies. These proposals also would eliminate many of the economic distortions created by the patent system.

These proposals, along with other plausible alternatives to the patent system, deserve serious consideration. Current projections for drug spending imply that patent supported prescription drug research will lead to ever larger distortions through time. For this reason, it is important to consciously select the best system for financing prescription drug research, not to just accept the patent system due to inertia.

http://www.cepr.net/publications/patents_what_are_the_issues.htm

Comment:
As I’ve said before, “We don’t need to reimport drugs from Canada; we need to import Canadian drug prices.”

The greatest contributor to perverse drug pricing in the United States is patent monopolies. Dean Baker explains the reasons that the pharmaceutical industry is providing sometimes questionable quality at unacceptably high prices. He then discusses alternatives to the patent monopolies that would significantly improve pricing and quality while still enabling most drugs to be sold in a competitive market.

Baker provides us with a starting point on the path towards attaining greater value in prescription drugs through more rational financing of drug research. Let’s start down that path… ASAP!

CEPR Releases Report on Prescription Drug Research

CEPR Releases Report on Prescription Drug Research Economist Dean Baker examines alternatives to the drug patent system

CONTACT: Patrick McElwee, 202-387-5084

In a new report entitled, “Financing Drug Research: What Are the Issues?” Center for Economic and Policy Research (CEPR) Co-Director Dean Baker contributes to a growing public debate on alternatives to the current patent system as a mechanism to fund pharmaceutical research. Given the increasing burden on families and the economy of U.S. prescription drug prices, whose growth has been fueled in large part by government-granted monopolies to patent holders, several alternative mechanisms for funding bio-medical research have been proposed. Dr. Baker examines and rates four such proposals, and in the process articulates criteria by which any proposed mechanism should be evaluated.

Without some form of intervention in the market, such as granting and enforcing exclusive patent rights, economists agree that there would not be enough money to support pharmaceutical innovation.

However, Dr. Baker points out that, while the patent system is one method of intervention capable of generating funds for research and development, it also creates large economic distortions and inefficiency. Patent protection pushes drug prices far above the cost of production, often by 400 percent or more. Other distortions of the patent system include: unnecessary marketing expenses; a tendency to research duplicative, rather than breakthrough, drugs; neglect of fundamental bio-medical research unlikely to produce patentable products in the near future; and a perverse incentive for researchers to keep their research private, even preventing the public from becoming aware of potentially harmful side effects.

The four alternatives Dr. Baker examines include a proposal to require employers to contribute funds to drug researchers, a proposal to compensate patent holders based on the quality and extent of use of their drug, a proposal under which the government would purchase most drug patents and place them in the public domain, and a legislative proposal to establish a group of publicly supported pharmaceutical research centers, which would develop patents for public use.

Dr. Baker evaluates each of these alternatives, as well as the current patent system, based on ability to finance research, effect on the price of drugs, potential for political interference in research priorities, impact on international coordination, and incentives for excessive marketing, copycat research, and keeping research findings secret. Dr. Baker concludes that all proposed alternatives “hold clear advantages over the patent system,” in part because each would allow drugs to be sold in a competitive market unhindered by government-granted monopoly rights.

See the report: http://www.cepr.net/publications/patents_what_are_the_issues.htm
Or in PDF: http://www.cepr.net/publications/patents_what_are_the_issues_9-20.pdf

The Center for Economic and Policy Research is an independent, non-partisan think tank that was established to promote democratic debate on the most important economic and social issues that affect people’s lives.

Europe’s Drug Import Example

Letter to the Editor
The Washington Post
September 30, 2004

Last year I led researchers at the London School of Economics in testing whether the practice of reimporting prescription drugs in Europe saved consumers billions in drug costs…

Reimporting prescription medicines has flourished in the European Union because national health policies in some member countries, such as Greece, Italy and Portugal, have led to declines in the local prices of patent-protected prescription medicines — as much as 70 percent in some northern E.U. member states. Those countries include two of the five largest pharmaceutical markets in the world, Germany and Britain. This is similar to the pricing imbalance between the United States and Canada.

We looked at 19 top-selling drugs in six Northern European “destination countries” of imports — Denmark, Germany, the Netherlands, Norway, Sweden and Britain. The 19 drugs — which treat heart, gastrointestinal and mental health ailments — account for almost a quarter of all prescription drug sales in Europe.

Our study found combined sales of reimported versions of these drugs saved health care payers in Northern Europe a minuscule 0.3 percent to 3.6 percent of their annual drug budgets, or slightly more than $100 million. Moreover, these savings were not passed on to consumers, and drug prices in Northern and Southern Europe did not become more similar.

The biggest gains from selling imported drugs — more than $650 million, or 46 percent of the sales of all products studied — went straight to the repackagers.

Panos Kanavos
London

http://www.washingtonpost.com/wp-dyn/articles/A60984-2004Sep29.html

And…

Prescription-Drug Prices
By Richard G. Frank, Ph.D.
The New England Journal of Medicine
September 30, 2004

A key feature of the pharmaceutical industry is that drugs can be manufactured at a variable cost of pennies per pill, but drug companies incur high fixed research-and-development costs to bring new drugs to market. If manufacturers were paid prices that reflected their variable costs, as other industries are, the average cost of a drug would not be covered, and the companies would lose money. The implication is that with lower prices, drug-company profits will diminish and research-and-development efforts may be reduced, resulting in a diminished flow of new drugs. There is therefore a constant tension between drug policies that control today’s prices and those that promote tomorrow’s innovative products.

Prices for brand-name prescription drugs are 35 to 55 percent lower in other industrialized countries than in the United States. The central reason for these price differentials is that Canada and most European countries (13 of the 15 countries in Western Europe) directly regulate the prices of prescription drugs. High U.S. prices are said to be necessary to cover the costs of research and development for new and better drugs…

http://content.nejm.org/cgi/content/full/351/14/1375

And…

Financing Drug Research: What Are the Issues?
Center for Policy and Economic Research
By Dean Baker
September 21, 2004

The immediate cause of high drug prices is government granted patent monopolies, which allow drug companies to charge prices that are often 400 percent, or more, above competitive market prices.

Patent monopolies are one possible mechanism for financing prescription drug research. Rapidly increasing drug costs, and the economic distortions they imply, have led researchers to consider alternative mechanisms for financing drug research. This paper outlines some of the key issues in evaluating patents and other mechanisms for financing prescription drug research.

As economic theory predicts, government granted patent monopolies lead not only to deadweight efficiency losses due to the gap between the patent protected price and the competitive market price, but also to a variety of other distortions. Among these distortions are:

1) excessive marketing expenses, as firms seek to pursue the monopoly profits associated with patent protection – data from the industry suggests that marketing costs are currently comparable to the amount of money spent on research;

2) wasted research spending into duplicative drugs – industry data indicates that roughly two thirds of research spending goes to developing duplicative drugs rather than drugs that represent qualitative breakthroughs over existing drugs;

3) the neglect of research that is not likely to lead to patentable drugs;

4) concealing research findings in ways that impede the progress of research, and prevent the medical profession and the public from becoming aware of evidence that some drugs may not be effective, or could even be harmful.

This paper examines four alternatives to the patent system… All four of these proposals finance prescription drugs in ways that allow most drugs to be sold in a competitive market, without patent monopolies. These proposals also would eliminate many of the economic distortions created by the patent system.

These proposals, along with other plausible alternatives to the patent system, deserve serious consideration. Current projections for drug spending imply that patent supported prescription drug research will lead to ever larger distortions through time. For this reason, it is important to consciously select the best system for financing prescription drug research, not to just accept the patent system due to inertia.

http://www.cepr.net/publications/patents_what_are_the_issues.htm

Comment:
As I’ve said before, “We don’t need to reimport drugs from Canada; we need to import Canadian drug prices.”

The greatest contributor to perverse drug pricing in the United States is patent monopolies. Dean Baker explains the reasons that the pharmaceutical industry is providing sometimes questionable quality at unacceptably high prices. He then discusses alternatives to the patent monopolies that would significantly improve pricing and quality while still enabling most drugs to be sold in a competitive market.

Baker provides us with a starting point on the path towards attaining greater value in prescription drugs through more rational financing of drug research. Let’s start down that path… ASAP!

HSAs Save Millions, But Only For the Healthy

Business Wire
September 29, 2004

Golden Rule Customers Exceed $110 Million Saved in Health Savings Accounts; HSA Sales Reflect Growing Popularity of Lower-Cost Health Insurance

Golden Rule Insurance Company today announced that its customers have exceeded more than $110 million saved in tax-advantaged Health Savings Accounts (HSAs).

“On average, we find Golden Rule’s customers saving 45-55 percent on annual insurance premiums alone,” Andy Grim, Golden Rule vice president of marketing, said. “Our customers are getting the coverage they need without paying for coverage they don’t.”

http://home.businesswire.com/portal/site/google/index.jsp?ndmViewId=news_view&newsId=20040929005426&newsLang=en

Comment:
Step back and look at the broad picture. Imagine everyone having a health savings account (HSA) and a low cost, high deductible insurance plan. Now let’s fund our entire health care system, currently at $1.8 trillion, with the HSAs and high deductible plans. Keep in mind that 80% of health care costs are used by the 20% of individuals with serious acute and chronic disorders.

Current contributions for HSAs are capped at $2600 for individuals and $5150 for families. For illustrative purposes only, let’s assume that each individual has $2000 in an HSA. That means that the 294 million U.S. citizens would have $588 billion in HSAs. For the 20% with significant needs, their $117 billion would be rapidly depleted, having been spent of health care. The healthy 80% might use an average of $300 per person in incidental health care costs, depleting their accounts of $70 billion. The “beauty” of HSAs is that the $401 billion remaining in the HSAs of the 80% who are healthy will be converted into retirement pensions. That’s a great deal for the majority of individuals who remain healthy. But that removes about $400 billion from the $1.8 trillion that we are already spending.

HSAs will have funded $187 billion of the $1.8 trillion, leaving costs of $1.61 trillion for the catastrophic care of the 20% of individuals with greater needs. But after the HSA funds are removed from the equation, there is only $1.21 trillion left to pay for care that currently costs $1.61 trillion.

Where will the $400 billion shortfall come from? Not from most of those with greater needs since current health plans already fail to provide adequate financial security, and this would add an average additional burden of $6800 per person. The only practical solution would be to increase the premiums for the high deductible coverage to a level that would fund the full balance of the $1.8 trillion that we are spending.

There are two significant consequences of this. First, the low cost, high deductible plans would no longer be low cost. Second, there is a perversity of the fundamental principle of health insurance, in which funds of the healthy normally help to pay for care for the sick, in that, with HSAs, the funds of the sick help to pay for the retirement accounts of the healthy.

And that’s sick health policy!

Are You Better Off Today Than You Were Four Years Ago?

Families USA
September 2004

In 2004, there were 14.3 million Americans whose health care costs totaled more than one-quarter of their earnings-up from 11.6 million in 2000, an increase of approximately 22.9 percent.

Among insured people, the number with health care costs in excess of one-quarter of their earnings rose from 8.4 million to 10.7 million between 2000 and 2004.

The result of (the) combination of higher premium costs and thinner coverage is that insured workers with serious illnesses, those with chronic conditions or disabilities, or those who experience a one-time medical crisis often find themselves in real financial trouble. In 2004, having health insurance does not necessarily guarantee protection against high medical bills. A growing number of insured workers are facing catastrophic health care costs.

http://www.familiesusa.org/site/DocServer?docID=4601&JServSessionIdr005=sf27qmna31.app26a

And…

Rising Health Costs, Medical Debt and Chronic Conditions
By Ha T. Tu
Center for Studying Health System Change
September 2004

Between 2001 and 2003, the proportion of people with high out-of-pocket costs relative to income increased overall. The increase occurred almost completely within the privately insured group, and the increase was most pronounced for low-income people. The proportion of low-income, privately insured, chronically ill people with out-of-pocket costs exceeding 5 percent of family income increased from 28 percent in 2001 to 42 percent in 2003-an increase of 50 percent. This change likely reflects the impact of increased patient cost sharing for insured people, as well as the fact that health care costs increased at a much faster pace than incomes. By 2003, low-income, chronically ill people covered by private insurance had become as likely as their low-income, uninsured counterparts to spend at least 5 percent of income on health care.

http://www.hschange.org/CONTENT/706/

Comment:
Currently the rhetoric on health care reform centers around two
approaches. Some recommend that patients be “empowered” to pay more for
their own care. Only the “let them eat cake” ideologues can be serious about
this approach since all objective studies confirm that the negative impact
on the health of nation would be catastrophic.

Those who are serious about trying to address the unmet health care needs of
the nation are supporting expansion of our current fragmented system of
funding care, especially providing incentives to expand private health care
coverage. But these two reports add to the plethora of studies confirming
that private plans no longer protect individuals against catastrophic
financial losses, nor do they ensure adequate access to essential care.

We will attain our goals of comprehensive coverage for everyone only when we
address the real problems facing us. We must eliminate the $300 billion
waste in administrative excesses. We must provide incentives for a strong
primary care base which has been shown to improve quality while decreasing
costs. We must budget capital improvements to prevent the excess high-tech
capacity which results in much higher costs but with unimproved or even
detrimental outcomes. We’ll never be able to make these essential changes
until we establish a universal risk pool from which funds can be allocated
on a rational basis.

We don’t need more of the flawed coverage provided by private plans. We need
single-payer national health insurance. Nothing less will work.

(Please share this message with others. Thanks.)
Don McCanne

U.S. Health Plan Includes One With Catholic Tenets

By Milt Freudenheim
The New York Times
September 25, 2004

The Bush administration has broken new ground in its “faith-based” initiative, this time by offering federal employees a Catholic health plan that specifically excludes payment for contraceptives, abortion, sterilization and artificial insemination.

The new plan, announced last week, combines two White House priorities. It is part of a $1 billion project seeking to involve religious organizations in all types of federal social programs. At the same time, the plan is a new form of coverage – a health savings account combined with high-deductible coverage – that is being promoted as a centerpiece of President Bush’s health care policy.

…the new OSF health savings account plan will not cover contraceptives. But because the money in the savings account itself is controlled by the enrolled member, the member could use the account to pay for an abortion or for contraceptives, according to federal officials.

Kay Coles James, the director of the Office of Personnel Management (which manages the Federal Employee Health Benefits Plan, the nation’s largest purchaser of health insurance), said last week that the new additions to federal employees’ health benefits would “empower” workers to control their medical spending.

But some critics expressed concern that this trend in health care might grow into a wider phenomenon. Is this “explicit denial” the first step in “denying federal employees a normal benefit that has been traditional for 30 years?” asked Philip R. Lee, a professor of social medicine at the University of California, San Francisco and a former assistant secretary for health in the Clinton administration. “Is this simply the opening wedge?”

http://www.nytimes.com/2004/09/25/business/25care.html

Comment:
Today’s comments will not address the controversial issue of health plan coverage of reproductive services, other than to dismiss that issue with a restatement of our belief that we need a universal system that covers all beneficial services. Setting aside the issue of faith-based coverage, there is another extremely crucial health policy issue in this new FEHBP plan.

Much has already been said about the inadequacies of health savings accounts(HSAs) for those with major acute or chronic disorders. For these individuals, the HSAs would be rapidly depleted, and then the individual would be dependent on the high deductible plan that complements the HSA. We’ve already seen that these plans are not indemnity plans that cover all additional expenses, but they are managed care PPO plans with significant out-of-pocket expenses, restricted provider choices, and severe financial penalties for using non-contracted providers. But what is alarming is that the supporters of this version of consumer-directed health care (CDHC) call for increasing options in coverage. Why pay for services that you will not use? Parenthetically, this was Gov. Schwarzenegger’s message this week when he vetoed the bill requiring California health plans to include maternity benefits.

The FEHBP program has required plans to provide a minimum level of benefits. This new plan breaks ground by shifting the coverage for reproductive services from the high deductible plan to the individual’s own HSA. Very soon we can anticipate that patient-consumers will be further empowered by being offered a greater variety of high deductible plans with even lower premiums made possible by excluding benefits which they know or at least they hope that they will never need.

This is part of the agenda to break up all risk pools, whether public or private, and shift the responsibility of funding health care delivery in the United States. Instead of funding care in an equitable manner from a common pool based on solidarity shared with our fellow man, health care will become ever more the responsibility of the individual. The 20% of individuals who use 80% of all health care will find that the exclusions that made their premiums affordable will make their access to health care unaffordable.

Are we really a society that believes that we should cut the anchor ropes for those unfortunate enough to have significant medical needs and simply allow them to drift off into the seas of ill health, poverty, despair, and even death?

Do Bush and Kerry Offer a Cure?

Do Bush and Kerry Offer a Cure?
by Milton Fisk

A PERMANENT CRISIS has plagued American health care since 1981. It began with Ronald Reagan, whose tax cuts led to cuts in Medicaid as well as more stringent eligibility rules. The crisis has continued, even through the boom years presided over by Bill Clinton, to the present.

The current presidential campaign offers an opportunity to discuss the crisis and to agitate for resolving it. Yet the major political parties, the AFL-CIO, and other organizations like the AARP show little interest in opening a debate on whether still more incremental change–like computerizing health records or expanding
eligibility for the Children’s Health Insurance Program–will serve to end the crisis.

Dennis Kucinich, even after getting little support in the preference primaries for the Democratic Party presidential candidate, is trying to spark such a debate. Kucinich has emphasized the need for health care reform that would end the role of commercial insurers.

Al Sharpton and Carol Moseley Braun, who both dropped out of the race for Democratic presidential candidate, and now Ralph Nader, an independent candidate for president, have also contributed to the revival of the single-payer idea.

If in addition to these efforts, the few state AFL-CIOs and unions like AFSCME, UAW and UNITE that support basic change in the health industry were to become active on the issue, then indeed a debate on the crisis might ensue that goes beyond talk of incremental change.

Instead, we are being treated in the campaign to a celebration of “choice,” with each candidate claiming his tinkering with the industry would give people the most choice.

President Bush advocates personal Health Savings Accounts, pointing out that they give their owners the choice of whether they want to spend their HSA on health care or keep it to gather tax-free interest. Senator John Kerry wants to give any citizen the same choice a congressperson has, under the Federal Employees Health Benefit (FEHB) Program, among various plans from different
insurers, assuming he or she can pay for one of those plans.

The real issue posed by the crisis is not choice between one insurer and another or between one doctor and another. The issue, rather, is having affordable insurance. The choices the presidential candidates celebrate are the choices of individuals about their individual well-being. All these “choices” are
irrelevant to the individuals who can’t afford insurance.

The choice to have affordable insurance in our society, though, is not one that individuals make on their own nor is it merely about their individual well-being. It is a choice that we as a society must make together about the good of our society. This would be a choice worth celebrating–if only we had it.

Why the Disaster?

The health care crisis has two sides. One is the upward spiral of premium rates charged by commercial health insurers; the other is the increase of the uninsured, within only two decades, by some 15 million up to 44 million.

Moreover, in response to higher premiums for comprehensive plans, people have bought cheaper health plans with higher deductibles and co-payments and fewer covered conditions. Thus, even those who have insurance are often underinsured.

The roots of the crisis are in dispute. Some blame it on the high cost of malpractice insurance; some say it comes from the success of disgruntled consumers in ending various cost-saving features of managed care; some explain it as due to the expensive new technology that patients ask for; and still others say insurers are catching up on the profits they failed to make in the mid-1990s.

These accounts either fail to explain the depth of the crisis or explain only its short-term aspects. Working people–those employed as well as the frequently unemployed –are most affected by the crisis. Employers are shifting the costs
of health insurance to employees. The working poor can only hope they might qualify for the under-funded Medicaid program.

Those eligible for Medicare are under-insured since illness could leave them with devastating co-payments; and even when George W.Bush’s drug program finally kicks in many of them will still pay large amounts for medicines. A change is needed that would eliminate all these vulnerabilities.

Fear of Going Public

In view of the inflationary tendencies unleashed by commercial insurance, it is remarkable that the main presidential contenders still rely on commercial insurance to reduce health care costs. In his campaign for the presidency, John Kerry’s grand gesture concerning health care has been to promise to make a program universally available that is now available to the Congress and
nine million federal employees, the Federal Employees Health Benefits Program.

FEHB’s advantage is the large pool over which it spreads risk and hence keeps premiums lower than they might be for smaller pools. For those who are not federal employees, Kerry would set up a separate pool, which could attract significantly higher numbers.

Individuals as well as large and small employers could join the plan. If you or your employer were in the plan, there would be a variety of commercial insurers among whom you could choose. In an urban setting, you might have the option of choosing between an HMO, which charges a capitation fee but sends you no bills for services; a PPO, which gives discounts for services coming from a specific list of providers; and a non-PPO.

A federal employee in Indianapolis, for example, can now enroll in the M*Plan, a local HMO, for $336 a month to cover his or her family; or among other options, the family can enroll in one of several national Blue Cross/BlueShield fee-for-service plans for $245 a month. There would be a great deal more out-of-pocket expenditure with the cheaper plan.

What about people who can’t afford to join the proposed FEHB-style program? Outside this program, Senator Kerry would have the federal government pay for the cost of 20 million children enrolled in Medicaid in exchange for the states’ insuring both children in the Children’s Health Insurance Program, which would be expanded up to 300% of poverty, and working parents of children in Medicaid or CHIP up to 200% of poverty.

These expansions would put the United States nearer to universal insurance coverage. The Kerry plan does not require that they take place through public insurance, however, even though public funds would foot the bill.

A Tangled Web

Kerry wants employers who now provide money for their employees’ health insurance to continue to do so. To keep the cost of doing so from rising rapidly, he proposes that the government reimburse employee benefit plans by 75% of the expenses of catastrophic illnesses costing more than $50,000.

This would reduce insurance claims for catastrophic illnesses, thereby lowering premiums. The condition Kerry puts on this reimbursement is that employers use the resultant savings in insurance costs to reduce premiums paid by employees.

This reimbursement plan locks employee benefit plans in place without asking whether they might be part of the problem. Even with reimbursement of catastrophic expenses, the costs of employee health benefits will continue to rise due to the non-competitive nature of insurers.

Where employees are insured under employer self-insured plans, the costs of health benefits will also rise since the costs allowed by commercial insurers will act as the norm. As costs of health benefits rise, employees will have to battle with employers over threatened cuts in health benefits, as occurred recently with grocery workers in California.

The struggle for affordable health care, though, should be one that engages us all for the purpose of reaching a society-wide commitment, rather than one that pits a few workers at a time against powerful employers in relatively isolated struggles.

The main weakness in the Kerry plan is, though, the assumption that keeping commercial insurers in it will create the competition to control the rise of premiums. To stick with this assumption, he has to create a patchwork of measures in order to give the impression he is solving the problem.

The FEHB-style program does spread the risk. But the advantage of spreading risk diminishes quickly as the pool gets larger. In controlling insurance costs, spreading risk will only take us so far: It is easy to cancel out the savings from spreading risk by raising the unit charges made by providers.

This brings us right back to the non-competitive nature of insurers stemming from their need for an added boost to their profits from higher premiums. Even with millions of people in an FEHB-style program, the participating insurers will seek to make profits from increasing premiums. It is less painful for them to raise premiums when they can point to the increasing charges providers are making.

Kerry’s bold gesture doesn’t, then, touch the root problem that with profit-making insurers, premiums will continue to rise leaving a large number of uninsured. He, or those who wrote his proposal, surely know this, but they fear the consequences of advocating public insurance as the alternative.

Lag Effect and Hostile Intermediary
Shouldn’t, though, having individual choices keep both medical costs and insurance rates down? According to advocates of competition, with only one insurer trying to get my business, that insurer has no incentive to put pressure on health care providers to keep their charges for my services down.

The providers will get what they charge since the insurer has only to raise the premium rate. My insurance is important to me, so I’ll follow along paying higher premiums until I can no longer afford them.

Following this logic, we should have at least a second insurer who will also want my business. This insurer will try to take business away from the first one by charging a lower premium. This will force the first insurer to lower premiums as well.

These competing insurers will tell health providers that they have to lower their charges in order to get fully reimbursed. As a result, medical costs will go down and more people will be able to afford health insurance.

This is a fairy tale, of course, since selling insurance is different from selling most other things. Say you build a house and the suppliers of materials are charging more than previously. When you sell the house, you will include the additional cost in the price precisely so you can pay the bills from the suppliers.
Raising the price, however, gives you no additional money to play around with since suppliers won’t wait to be paid.

The case of insurance is different because of a “lag effect.” When I pay a higher premium to my health insurer due to health providers’ raising the prices of their services, these providers, unlike the suppliers of building materials, don’t expect to get the additional amount immediately: It may be weeks, months, or if I’m lucky, years before I have to go to a health provider.

When I pay my premium, that commits my insurer to cover my risk of incurring future expenses instead of my previously incurred expenses. The lag effect opens up the possibility that the insurer will become a hostile intermediary, working against my interests as an insured party.

The insurer can profit from investing–usually in stocks, bonds or real estate–a premium payment prior to the time a claim is made to pay for a covered service. This of itself doesn’t harm the insured.

Yet from this fact it follows that the amount by which the premium rises to cover increased provider charges can also be invested to make a profit. Insurers derive from this the perverse incentive to allow providers’ charges to rise; for once those charges rise insurers have an excuse to raise premiums, thereby providing them additional funds to invest.

Wouldn’t competition over premiums among insurers be strong enough to overwhelm this perverse incentive and hence keep insurers from acquiescing in higher and higher medical costs? It would indeed; but the health insurance industry cannot afford such competition.It relies for an important part of its profit on taking advantage of the lag effect to invest the higher premiums that increased medical charges seem to legitimate.

There is a reason why the profits derived from this acquiescence in rising provider charges are important. The lag effect in health insurance is shorter than it is in life insurance and liability insurance. One goes to the doctor more frequently than one has automobile accidents and one only dies once. In health insurance, then, a great deal of liquidity is called for, leaving less money for investment. Thus profits in those other areas of insurance tend to be higher.

How then do health insurers compensate for this drawback? They must do something to attract investors to buy their stocks. In competing for investors with insurers in other areas, health insurers need to make extra profits from raising premiums as provider charges rise.

A Shell Game

From time to time, frustration with rising premiums reaches such intensity that health insurers are led to take measures. The most obvious measure at their disposal is the subordination of providers to the insurance function.

An attempt of this kind took place in the 1980s and 1990s, with the corporatization of the health care industry. If successful, this would have freed insurers to compete on premiums or capitation fees. With providers under control, they would accept less remuneration so that stabilizing insurance rates would not lower insurers’ profits.

Providers, though, turned out not to be so easy to control. The result was a return to a truce among insurers based on accepting rising premiums as their way of life.

There is an important spillover from this non-competitive way of life among health insurers. If they can increase premiums when providers charge more without a competitive challenge, then they might be able to increase them even faster than providers are increasing their charges. All will profit, thereby discouraging any competitor to break ranks.

These gratuitous increases in premiums have actually become a cyclical feature in the history of health insurers. Premiums rose dramatically in the late 1980s leading to profits that were 44% higher than only several years earlier. Health insurance profits came down in 1990 as investments by the industry in real estate and stock lost value.

A decade later, starting in 2000, premiums were again increasing faster than payments to providers and insurers were showing large gains in profits. Apologists said that the insurers were merely catching up for their low profits of the mid-1990s. No competitor challenged the gentlemen’s agreement to have catch-up.

Meanwhile medical equipment, laboratory tests, consultations, and hospital rooms are priced high in the light of the knowledge that the demand for them coming through insurance will not be significantly lowered. The message, then, is that we commit ourselves to a continuing inflation in health care costs so long as commercial insurance plays a major role.

Just Say No to Insurance?

For its part the Bush right wing, despite its defense of the commercial health insurers, feels instinctively that there is something socialistic about insurance, which involves not pure self-reliance, but reliance on others to help us cover our risk of incurring expenses through illness.

Relying on others makes us profligate, according to these ideologues. When we undergo a medical procedure and are covered by insurance, we may never know how expensive it is. We don’t really care: we’re covered! George W. Bush philosophizes that with insurance “there is no demand for better prices.”

This is what I have been arguing here. Bush, however, sees the other-reliant individual as the culprit, whereas I’m pointing the finger at the commercial insurer. To make the individual self-reliant, Bush wants him or her to swear off insurance, at least partially. One can do this by setting up a tax-deferred
Health Savings Account (HSA) of $5,000 to cover many of the ordinary expenses needed to keep a family healthy.

One will think a second time about sending Johnny to the doctor with his earache. One may even scowl at the doctor when she recommends a panel of blood tests for Susie that will cost $1,000. If Johnny gets well at home and Susie doesn’t get the tests, then one’s HSA stays in tact and continues producing tax-free interest. With demand for health care reduced by self-rationing of this kind, the theory predicts that our doctors and laboratories will start charging less.

The Bush campaign knows that HSAs by themselves are not enough. People want to rely on others to pay for catastrophic health expenses. Thus along with HSAs, Bush says there will have to be insurance for major illnesses. This would be a high-deductible insurance with an accompanying HSA at hand to pay the greater part of the deductible.

Premiums for such a major medical plan would cost 30% to 50% less than those for a traditional low deductible plan. Insurance would then have been made more affordable.

HSAs plus major medical insurance make sense if one is healthy. If instead, one needs considerable health care, it may be cheaper to join a traditional plan in order to avoid using one’s HSA up every year to pay the high deductible of the major medical insurance. But HSAs will have a serious impact on the affordability of traditional plans, by taking the healthy who choose the HSA-plus-major-medical route out of traditional plans. Even if only a quarter of all those insured opt for HSAs, the premiums of traditional low-deductible insurance would go up by an estimated 50-60%.

There will be a greater concentration of the not so healthy left in the traditional plans. At the same time, those who opt for HSAs, while they may be healthier, will have an incentive to keep their savings accounts rather than spend them on physical checkups; they may also delay getting treatment for a condition until it calls for expensive treatment.

Their short-term thrift merely makes it more likely that they will incur expenses for which their major medical insurance will be needed. The tendency over time will be to make that insurance less affordable.

Bush’s proposal to promote HSAs parallels several of his other programs. First, it serves the same individualism that is appealed to in regard to Individual Retirement Accounts, with which he hopes to privatize Social Security. Like the retirement accounts, HSAs roll back cooperation in favor of self-reliance.

Second, they would promote individual choice between saving money and getting health care, in the way that the recent Bush reform of Medicare promotes choice between HMOs and fee for service. Third, HSAs entail a mini-tax cut, with the savings being tax-deferred until 65 when one would cash in the account as one became eligible for Medicare, with the interest on the savings being tax-free.

The Real Choice

Government–federal, state and local–already contributes half the money that is expended on health care in the United States. Its contribution is slightly more than that of employers for their employees’ health benefits.

Would it be possible to use what government already spends together with what employers already spend on employees’ health care as an adequate financial base for a more reasonable system? Specifically, could that sum support universal comprehensive coverage and at the same time rein in the inflation in charges coming from providers?

By most estimates, it could. There is, though, an important condition. That sum would be sufficient provided a major part of it does not go to commercial insurers as intermediaries, whose interest in profits from rising premiums overrides the interest the public has in controlling the charges made by providers.

Yet as far as the goal of controlling costs goes, neither Kerry nor Bush see anything problematic in using private insurers as intermediaries between either government or employer funds and providers.

Time to Decide

We are at a critical juncture. To save what we have in the way of public insurance, it has to be expanded to cover everyone. If the public insurance system is left as an isolated part of the overall insurance system, it will be underfunded, blamed for failure, and ultimately destroyed.

Medicare is in the crosshairs of the Bush sharpshooters. They want to use, not just part, but all of the funds it is based on to buy private insurance. This would be one of the largest privatizations in history. It would add, on a continuing basis, huge sums to the capital that circulates in the private financial system.

It is critical, then, that there should be a counter-offensive that would expand rather than privatize public insurance. The expanded system would be a Medicare For All. Defensive efforts will not suffice to protect Medicare.

Consider the sorry history of one such effort. In order to defend Medicare from rising costs, Medicare began during the Clinton period to pay private managed care companies to care for the elderly. That failed with the big insurers involved in managed care dumping millions of the elderly.

Now in the Bush period the Congress, still wanting to defend Medicare from rising costs, is having Medicare pay the same big insurers for managed care 7% more to enroll an elderly person than the per capita spending for traditional Medicare. In a twist of irony, this increase was used, shortly after its passage, to show that Medicare will be bankrupt by 2019.

We need, then, a public insurer whose mission would be to pay fairly for services coming from those professionals and institutions whose work is to provide health care, or to provide assistance or guidance in controlling behavior and environments which tend to create needs for health care. The likelihood that the services will be compensated fairly is increased when democratic
procedures are used.

Is, though, the idea of national health insurance realistic? This is the question people ask, often implying that they see a need for a public insurer as a way of putting an end to the seemingly permanent crisis. To respond, one must begin by recognizing the obstacles. In order of rising importance they are: distortions,
bribery, and inertia.

We can answer the distortions that the press distributes from places like the rightwing Fraser Institute in Vancouver about long waiting lists for MRIs in Canada. They are nowhere near as long as the lists of uninsured in the United States.

As to bribery, we can ask candidates for the Congress how much they have received from health sector corporations, and whether they plan to receive any more before the crisis of unaffordable insurance is really resolved.

The prods to reducing citizens’ inertia are multiplying: Employers are cutting health benefits, Medicaid is being cut back, Medicare funds are being squandered in subsidies to HMOs, and health corporations are regularly found guilty of fraudulent practices. Increasing numbers of people are no longer willing to accept the patchwork reforms offered by presidential candidates.

FEHBP: A Feeble Model for Universal Health Care!

Politicians are fond of saying that everyone should have a health plan as good as the one that Congress has. John Kerry, for instance, says that “all Americans should have access to the same affordable coverage policies that Members of
Congress get today,” and he proposes that any individual or business should be able to buy into it. This plan, which is available to Congress and all other employees of the Federal Government, is the Federal Employees Health Benefit Plan (FEHBP).

please click here to read the article

Is "Moral Hazard" Inefficient? The Policy Implications of a New Theory

By John A. Nyman
Health Affairs
September/October 2004

Excerpts:

Insurers call the change in behavior that occurs when a person becomes insured “moral hazard.” Moral hazard occurs, for example, when an insured person spends an extra day in the hospital or purchases some procedure that he or she would not otherwise have purchased. Insurers originally viewed moral hazard unfavorably because it often meant that they paid out more in benefits than expected when setting premiums – hence the negative term.

Economists also viewed moral hazard negatively because, under the conventional theory, the additional health care spending generated by insurance represents a welfare loss to society. When people become insured, insurance pays for their care. In economists’ view, insurance is reducing the price of care to zero. When the price is reduced in this way, consumers purchase more health care than they would have purchased at the normal market prices-this is the moral hazard. But because consumers purchase care when the price drops to zero that they would not have purchased at the market price, economists interpret this behavior as revealing that the value of this care to consumers is less than the market price. The additional care, however, is still costly to produce. The difference between the high cost of the resources devoted to producing this care (reflected in the high market price) and its low apparent value to insured consumers (reflected in the low insurance price) represents an inefficiency. Thus, health care spending increases with insurance, but the value of this care is less than its cost, generating an inefficiency that economists call the “moral-hazard welfare loss.”

Conventional insurance theory also provided the policy solution: Impose coinsurance payments and deductibles to increase the price of medical care to insured consumers and reduce these inefficient expenditures. In the 1970s many insurers adopted copayments to reduce health care spending. In the 1980s and 1990s economists also promoted utilization review and capitated payments to providers as further ways to reduce moral hazard. The managed health care system we have now is largely a product of this theory.

A fundamental ambiguity exists, however, in the welfare implications of moral hazard, which economists have, perhaps, always suspected but could never voice because they did not have the appropriate theory to explain it. That is, conventional theory makes sense for health care such as cosmetic surgery or drugs to improve sexual functioning or designer-style prescription sunglasses, but not for serious treatments such as coronary bypass operations or organ transplants. Clearly, insured people would purchase more of all these procedures than would uninsured people, so they would all be considered moral hazard to insurers.

Mark Pauly, one of the architects of the conventional insurance theory, recognized this ambiguity as early as 1983. He pointed out that his original theory of moral-hazard welfare loss was intended to apply only to “routine physician’s visits, prescriptions, dental care, and the like” and that “the relevant theory, empirical evidence and policy analysis for moral hazard in the case of serious illness has not been developed. This is one of the most serious omissions in the current literature.” This distinction, however, has been lost on most health economists. For example, health economics textbook writers continue to present moral hazard as being unambiguously welfare decreasing, and health policy analysts continue to use the conventional theory in developing their recommendations for optimal cost-sharing rates, managed care programs, and other policies designed to curb U.S. health care costs.

If insurers actually transferred income to an ill person in one lump-sum payment, the welfare implications of moral hazard would be unambiguous.

Health insurance policies, however, generally pay off by paying for the ill person’s care. The welfare ambiguity arises because of this payoff mechanism. …we cannot tell whether this additional moral-hazard spending represents a welfare loss or a welfare gain.

…there is some unknown portion of patients who would respond to insurance paying for their care in exactly the same way that they would respond to insurance paying them a cashier’s check for the same amount. For these patients, moral hazard is efficient and represents a welfare gain.

Implications For Policy

Cost sharing often not appropriate: Because some of the moral hazard that was considered a welfare loss under the conventional theory must now be reclassified as a welfare gain, health insurance under the new theory is generally much more valuable to consumers than economists have thought it was. Many of the more serious procedures – organ transplants; trauma care; many cancer treatments;and, indeed, a large portion of the costly, life-saving medical care that people could only afford to purchase with insurance – would now be tallied in a welfare gain column instead of a welfare loss column when determining the value of insurance. Because such a large portion of moral hazard spending represents a welfare gain, the recategorization of losses as gains dramatically changes the welfare calculations.

The new theory suggests that cost-sharing policies have been directed at problems that largely do not exist. Furthermore, it suggests instead that coinsurance is too blunt a policy instrument and that it should be refined to focus only on the inefficient moral hazard. Moral hazard that generates welfare gains should be left alone or even encouraged. That is, for those with serious illnesses, whose care might also be associated with a great deal of pain and suffering anyway, it makes little sense to apply copayments.

Subsidizing insurance premiums is beneficial: The new theory suggests that health insurance generally makes the consumer better off. Therefore, the subsidies that encourage consumers to purchase insurance voluntarily, or a national health insurance program for the entire U.S. population, would improve society’s welfare.

High prices are harmful: …under conventional theory, high health care prices are not bad. Indeed, a few economists have even argued that high prices should be encouraged because they reduce moral hazard. …according to conventional theory, any reduction of moral hazard is a welfare gain. Under the new theory, the high prices that providers charge because they have market power would again be considered harmful. With the new theory… economists would be able to revert to the standard analysis that monopoly pricing causes an undesirable reduction in use, even for the insured.

More than anything else, the new theory suggests that health insurance provides an economywide redistribution of income from those who remain healthy to those who become ill. Those who become ill use this income either to cover the costs of health care that they would otherwise purchase, or to purchase more care, often care that they would not be able to afford without insurance. Those who remain healthy simply pay into the system, but they do so voluntarily because everyone has a chance of becoming ill. Because people value the additional income they receive from insurance when they become ill more than they value the income they lose when they pay a premium and remain healthy, and because everyone has in theory an equal chance of becoming ill, this national redistribution of income from the healthy to the ill is efficient and increases the welfare of society. Thus, the new theory identifies efficiency as a new justification for adopting some form of national health insurance.

http://content.healthaffairs.org/cgi/content/abstract/23/5/194

Comment: Although steeped in the rhetoric of health policy economists, the concepts presented are fundamental to the health care reform movement. It is imperative that we have a solid grasp of the issues.

The decades old Rand studies are still frequently cited to show that cost sharing through deductibles, copayments and coinsurance is effective in reducing health care costs. Cost sharing has been widely adopted in response to concerns about rising health care costs. Some features of managed care were designed to further reduce utilization of health care services. Largely ignored has been the well documented fact that this reduction included a reduction in the utilization of truly beneficial services. Avoiding the “moral hazard” has proven to be too blunt of a cost containment tool, even though it is still widely supported.

Today, the consumer-directed health care (CDHC) movement expands on that concept. The supporters of CDHC and health savings accounts (HSAs) contend that the moral hazard is eliminated because individuals will not spend funds on care that they perceive to have a value less than its cost. A major flaw in this concept is that individuals with major acute or chronic problems would rapidly deplete their funds. CDHC supporters state that catastrophic coverage would then provide an umbrella to cover the losses. But these plans are high deductible, managed care PPO plans which provide protection that is about as effective as a sieve. Coverage under these plans has already proven to be inadequate to protect against significant financial loss or even bankruptcy. Again, this tool is too blunt because it prevents the delivery of welfare-increasing health care.

There are other mechanisms to reduce ineffective, welfare-reducing care that are much more precisely targeted. Pricing can be improved through negotiation with providers which takes into consideration legitimate costs and fair profits. Excess capacity which results in higher spending without a commensurate improvement in outcomes can be controlled through planning and budgeting of capital improvements. Physicians who inappropriately upcode or who provide an excessive frequency or intensity of services can be identified as outliers and provided with education opportunities or subjected to punitive measures if refractory to the educational process.

Global budgeting can slow the expansion of health care services down to levels closer to inflation and growth of the GDP. The $1.8 trillion that we are spending should be sufficient to ensure that there is adequate capacity in our system to meet our needs for beneficial services.

John Nyman has provided us with an invaluable contribution to the health policy literature. As he says, “There is a new argument for national health insurance: efficiency.”