It's The Prices and Volume, Stupid

Nearly five years ago, an article in Health Affairs by a group of leading economists sought to explain the wild disparity in health care spending between the U.S. and the rest of the industrialized world. The U.S. has fewer doctors, hospital beds, and nurses per person than other advanced industrial nations, and Americans see their physicians less often.

So what accounted for the fact that the U.S. spends 60 percent more than any other nation on health while obtaining outcomes -- lower life expectancy and higher infant mortality rates, for instance -- that put it in the second tier of the 30 nations in the OECD? The article's conclusion was encapsulated by its title: "It's The Prices Stupid: Why the United States Is So Different From Other Countries."

Yale political scientist Jacob Hacker drew liberally from that paper in his opinion piece in the Washington Post Sunday calling for a sharply expanded government role in providing health insurance. His plan, sponsored by the Economic Policy Institute, sets up a new government insurance program to cover all the uninsured, all Medicaid patients and a hefty slice of those who now get private insurance from their employers since many would opt for the newly expanded public system to escape escalating costs.

His new plan, he claims, will be able to "cover everyone without driving up costs." How?

By getting a better deal on service prices, drugs and by lowering administrative overhead. Earlier in the piece, he quoted a study that claims the major government program already in existence -- Medicare -- has grown at a slower pace than private health care since 1980. Expanding the government's role could do the same for the rest of the health care system and even save $50 billion a year, he asserted. Although Hacker was careful to distinguish between government-provided health insurance (like Medicare) and socialized medicine, where the government actually owns health care facilities, he goes with the flow (a recent poll revealed the power of Republican talking points: a majority of Americans now think Medicare is socialized medicine) and concluded "maybe socialized medicine doesn't sound so bad after all."

Elements of Hacker/Economic Policy Institute plan have been included in both leading Democratic Party candidates' health care proposals. But would it really be able to reap $50 billion a year in savings, which was projected by The Lewin Group in its analysis of the plan? The recent experience of Medicare isn't promising.

While Medicare cost growth has been slower than private insurers if you measure it from 1980, in more recent years the government program has been experiencing either the same or slightly higher growth. Why? The original "It's The Prices Stupid" paper pointed out that lower costs in Europe had been achieved through the "monopsony (single buyer) power allocated by these systems to the payer side," which "reduces the prices paid to providers for health care, thereby transferring wealth from these providers to the rest of society."

But if your public plan is part of a mixed system where provider groups like organized physicians, hospitals, drug companies, device companies and durable equipment suppliers can collude and can exercise considerable political clout to avoid price controls, it's hard to imagine achieving the same kind of purchasing power efficiencies here. Look at what is happening in drugs, where numerous best-selling drugs are coming off patent and industry's pipeline of new blockbusters has largely come up empty. This should have been an ideal scenario for lowering overall drug spending.

Yet Medicare hasn't been able to capitalize. The law that created the senior citizen drug benefit specifically forbade Medicare from negotiating lower prices. And in the wake of that decision, Big Pharma has been able to offset its losses to generics by raising prices on its remaining blockbusters. A recent survey by the AARP showed that the prices of the top brand drugs rose 7.4 percent last year. Bottom line: despite the shift to generics, overall drug spending held steady, according to a separate survey by IMS Health.

Meanwhile, the biotech industry has provided the playbook for the next generation of price-gouging, which is taking place in the emerging "personalized medicine" markets for cancer and rare disease therapeutics: never allow generics on the market. The Biotechnology Industry Organization has tied up Congress by arguing that any generic biologic is really a distinct molecule and must, therefore, go through virtually all the same safety and efficacy testing as the original molecule. If Congress goes along (if it ever even gets around to passing a bill), the follow-on biologic will have to be priced like a me-too drug. Consumers may see a 10 percent reduction in price, but not the 40 or 50 percent reduction typical of true generics.

Think what such a law would mean for the 5,000 or so Gaucher's disease patients on Genzyme's Cerezyme, whose travails in trying to hold down their $300,000-per-year costs were documented last week by Andrew Pollack of the New York Times. As a Times editorial on Sunday pointed out, that price tag is "hard to take, given that the federal government did much of the scientific work that led to development of the drug and provided contract money that got the company started." (For that whole story, see chapter two of "The $800 Million Pill" by yours truly).

The same thing is going on for the newer anti-cancer drugs, many of which are biologics. The Wall Street Journal last week had an interesting story on the steps insurers are taking to rein in sky-high costs of these new drugs, many of which are only marginally effective (like most anti-cancer drugs). Still, their makers aren't shy about charging $10,000 a month or more in the name of making up for their high research and development costs. It's an argument that Congress buys time after time, aided by hefty campaign contributions, which, as we commented on earlier this month, are now flowing as easily to the Democrats as they did to Republicans when they controlled both chambers.

It's one thing to editorialize, as the Times did Sunday, that "it would be wise to foster generic competition for biological drugs and allow government programs to negotiate for lower prices on drugs with no competitors." It's quite another, given the current political make-up in Washington, to actually achieve it.

But if a Democrat committed to health care reform actually took the White House this fall and enacted something like the Hacker plan, would this expanded government insurance program be able to bargain its way to lower prices? Exercising monopsony power to hold down costs will require redefining what constitutes quality care in the U.S., and that will require changing the way medicine is practiced, much of which is organized around enhancing physician income. Drugs, which account for about 15 percent of total health care spending, are just the tip of the iceberg.

Last fall, the Congressional Research Service published a sobering comparison of U.S. health care spending patterns to the other 29 nations in the Organization for Economic Cooperation and Development (OECD). Did you know that our physicians order 587 coronary artery bypass graft surgeries per 100,000 population compared to an OECD average of 352? (The next highest country after the U.S. was Germany with 357, barely above the average.) Did you know that we have 32 CT scanning machines and 27 MRI machines per one million population compared to an OECD average of 18.8 and 8.8, respectively?

More procedures and more tests equals more fees in our fee-for-service system. Average physician income in the U.S. (after adjusting for differences in the wealth of the underlying economy) was $50,000 a year greater than the OECD average for specialists in 2004 and $30,000 a year higher for general practitioners. Even if you adjust once more for the higher debt that American medical students must take on to get their education (the CRS estimated that at $7,000 to $18,000 a year in debt service depending on whether the physicians take ten or 30 years to pay off their loans), physicians here still earn a hefty premium over their European or Japanese colleagues.

The point is that coming up with $50 billion a year in savings, as estimated by the Lewin Group, isn't just about negotiating a better deal with the drug companies. It's about reining in needless procedures (hospitals as well as the doctors would take the hit there) and reducing the number of questionable tests (durable equipment suppliers would take the hit there), both of which reduce the volume of physician services and, hence, their income.

It's time to amend the title of that long ago Health Affairs article. It's the prices and volume, stupid.

Posted by gooznews at March 24, 2008 05:05 AM