The Hospital and Pharma Agreements to "Cut Costs"

There has been a lot of talk about the recent agreement between the Obama administration and the American Hospital Association promising a $155 billion decrease in hospital costs over the next ten years to help provide funds necessary for health care reform and increased access. This promise represents a lot of money – is it real?

The New York Times suggests, in both a news article and an editorial, that the real “savings” promised by the pharmaceutical industry and the hospital industry are less than they might first appear. I agree.

Much of the savings offered by the hospital association and the pharmaceutical industry are predicated on increasing coverage. The hospitals have agreed to a decrease in payments for uncompensated care – since there will BE less uncompensated care. For the pharmaceutical companies, more coverage means a larger market for their medicines and higher aggregate cost (not lower cost). The medicines that will now have higher adherence rates are generally cost-effective but not cost-saving. Therefore, using more of these medicines can help us achieve better outcomes at a higher (not lower) cost.

What we really need is not cost shifting (pay comes from insurance policies subsidized by the government, rather than directly from the government) but true cost savings. This will take real changes in clinical practice at hospitals. For instance we need efforts to

* Lower hospital-acquired infections and other errors
* Standardize practice, and increase adherence to evidence based guidelines
* Standardize purchasing – so that each surgeon can no longer demand her own brand and type of suture material or prosthetic
* “Downshift” work so that each employee is performing at the highest level for which she has training

Here’s a quote that really worries me, from the head of obstetrics at a hospital south of Boston that was recently noted to have a Caesarian Section rate of 45% (compared to a World Health Organization goal of 15%, and a national average of 28%)

“As long as women are receiving the proper education and the proper information so that they’re making the best decisions for them, then I’m OK with [the high c-section rate],” said Dr. Keith Merlin.

We won’t be able to lower costs at hospitals with attitudes like this. There is pretty good evidence that women don’t choose c-sections – and usually leave that choice to the professionals.

On the pharma side, we’ll also need more medicines that make life better and do so while saving dollars, rather than just costing a reasonable amount. This means quicker follow-on biologics, more generics, and lower initial prices on new entities. This will require wrenching changes in the business model – and could lead to enormous societal benefit.

So – these agreements are a good idea – and having the delivery system “on board” with health care reform is valuable. Obama and Congress will have to push for serious delivery reform, though, if we want truly affordable, reliable, high quality care.