What the CBO Really Said About Medicare Drug Premiums

The Congressional Budget Office released a preliminary analysis of the House health care reform bill on Medicare Part D premiums. The headlines are… confusing.

On one hand, seniors will pay more in Part D premiums (which cover 25% of the cost of delivering the pharmacy benefit to those on Medicare).

On the other hand, seniors will pay less out of pocket for their drugs under this bill (although they are likely to purchase more drugs and more expensive drugs.) So, the average senior will pay less all-in for medicines under this bill. Further, over the next 14 years the legislation will eliminate the “donut hole” where out of pocket costs between $xx and $xx are not covered at all.

But wait, there is more. The government, over ten years will also pay less – largely because the bill will substantially increase the rebate the pharmaceutical manufacturers return to the government for drugs purchased by patients who are “dually eligible” for both Medicare and Medicaid. The original Part D legislation had a huge giveaway to the pharmaceutical companies by moving dual eligibles from Medicaid drug programs, with large mandated rebates, to private Part D plans, which have less leverage and net pay more for medications.

The pharmaceutical industry loses – but to the tune of $30 billion – not the $80 billion that Billy Tarzin of PhRMA says he negotiated with the Obama administration. The difference is that new bill will decrease out-of-pocket costs for seniors, and this will lead to an increase in use of medications and new revenue to offset some of the revenue lost to increased rebates and mandated discounts.

A somewhat more obscure loser in this legislation is commercial (non-Medicare) health plans. The CBO estimates that the increased Medicaid-style rebates will encourage the pharmaceutical industry to enforce more price discipline (since giving anyone a big discount forces the industry to give extra rebates for all those covered in this mandatory rebate. Therefore, while patients will on average pay less, and the government will pay less, the pharmaceutical companies will recoup some of their losses through increased volume, and are likely to recoup additional revenue from higher prices for those not covered by this legislation.

There’s a history of exactly this happening.
In 1991, Congress passed a bill mandating large rebates to state Medicaid agencies. Between 1991 and 1994, the average discount achieved by nongovernmental purchasers decreased from 36% to 19%. This is a classic example where a well-intentioned regulation appears to disadvantage an industry – but it actually provides an unanticipated windfall to that industry. Game theory modeling predicted that this would happen – and that the mandatory rebates would benefit the pharmaceutical industry. Perhaps that’s why PhRMA is not aggressively challenging mandatory rebates – even though it would seem easy to make these appear to be a government “taking.”

Spending to Save?

The Obama administration has been lining up stakeholders to agree to contributing to health care reform by agreeing to financial concessions over the next 10 years.

But while the early adopters have promised to save money over the next ten years, they are privately counting on increasing their revenue as a result of health care reform.

On the pharmacy side, PhRMA has agreed to give $80 billion in discounts to senior citizens over 10 years. But these discounts will lead to higher revenues (otherwise known as higher overall costs. Oops) Further, some analysts believe that simply eliminating the prohibition of government negotiation would save as much as $156 billion.

Now, word is that the hospital industry’s promise of $155 billion dollars in savings is more than offset by $171 billion in new revenue from newly-insured patients. Net… more overall health care expenses.

This feels sort of like facing foreclosure on a car, and being offered a big discount on an even more expensive car!

The Conundrum of Health Care Reform- Expressed in a Single Local News Article

Southcoast Hospitals, a network of 3 hospitals in southeastern Massachusetts, has announced 93 layoffs (1 1/2 % of staff). The article in the local newspaper includes the following lines:

  • Southcoast Hospitals Group today announced it is eliminating 93 positions in a restructuring triggered in large part by lower expectations for state and Medicaid managed care reimbursements.
  • Southcoast also announced ...[it] will continue to reevaluate its health insurance benefits, which after wages is the single largest item in its budget, costing about $35 million annually
  • [Southcoast is] the region’s largest employer with some 6,000 employees

So - the hospital is being hurt by lower reimbursement rates -- but its health insurance budget is strained by the weight of high reimbursement rates. Those high rates are most likely charged in part by ... Southcoast Hospital, since many employees get their care from local providers. Further, the hospital system is the largest employer in the area.

My conclusions:

1) Providers face a paradox. They want and need high rates to sustain their costs of care delivery, but chafe at paying high rates for their own employees. In this way, health care providers look just like all other employers.

2) It's painful to take a big bite out of rates, because hospitals are a major employer in every community that has a hospital. Remember the 30% of health care costs that could be eliminated when we reduce variation and decrease waste? That will cost a lot of jobs.

Right now we have a special problem in the US. States are running short of money, and they are cutting Medicaid reimbursements, which can be devastating for hospitals serving poor neighborhoods. Things are worse still for "safety net" hospitals in Massachusetts, where we just about eliminated the uncompensated care pool -since so many fewer people are uninsured. But it turns out that uncompensated care at these hospitals has not decreased as much as policymakers had hoped.

RAND estimates of Massachusetts Cost Savings 2010-2020

Massachusetts' Division of Health Care Policy and Finance released a 244 page summary of RAND's evaluation of 21 initiatives which have been proposed to save health care costs. RAND started with 75 potential initiatives, narrowed this down to 21, and did literature reviews and developed projections based on optimistic and less optimistic scenarios for total savings possible over the 10 year period from 2010 to 2020 for Massachusetts health care excluding Medicare. The projections take into consideration the lead time required for many changes - and the results will surprise some.

1) The most impressive initiative would be effective bundling of payments. This could save as much as 5.9% of total costs
2) Three much-touted methods of saving money in health care showed estimates of increased costs with the less optimistic projection. This includes implementation of health information technology, disease management, and implementation of medical home.
3) Two of the initiatives, to decrease reimbursement to academic medical centers, are more applicable in Massachusetts than other areas with lower penetration of AMCs.
4) The RAND projections suggest middling to no savings from hospital rate regulation. Next month's Health Affairs will have a report from Maryland that might change this point of view.

RAND did not offer projections on 9 of the 21 initiatives - stating that either the literature was not promising in terms of cost savings or that there just wasnt' enough data.

In some ways - this is disappointing. Policymakers, insurers, providers, employers - pretty much everyone - wants a magic bullet. This set of projections suggests that payment reform should be part of the equation of efforts to manage health care costs. It also offers a well-referenced critical review of how difficult it will be to achieve meaningful cost savings.

A Black Eye for Health Insurers - and Why We Need Group Health Plans

Anyone who is wondering why the Obama administration is demonizing health insurance plans should listen to Act 3 of This American Life from late July “The Fine Print.” [The piece is around minute 33 of the radio show.] Host Ira Glass interviews Congresswoman Jan Schakowsky, and plays selected clips from her subcommittee, which interviewed CEOs of insurance companies that offer individual policies. The first patient interviewed was a woman whose individual health plan was rescinded (recission) because she had not divulged seeing a dermatologist for acne prior to applying for the policy. Her aggressive breast cancer was not excised for a few months while she fought the insurer – she believes the cancer spread during that time.

The insurance company executives argued that they needed to protect all of their policyholders from fraud – and that these recissions allowed them to offer less expensive policies. The execs argued that they gave the boot to only 1/10 of a percent of policyholders. However, this represents a significant financial boost for these plans. The top ½% of patients represent about 20% of costs in a commercially insured population – so it doesn’t take many recissions to boost a bottom line. The personal cost is enormous for patients with serious illness having to battle their illness and an insurer simultaneously.

I believe that there will be increased regulation of insurers stemming from the problem of recission. This might be a good idea, but doesn’t address the root cause.

The underlying problem here is that individual health insurance policies are subject to gaming on both sides. People with illness wish to hide their illness to gain coverage, and people with no illnesses take the gamble and don’t pay for coverage. Health insurance should be the transfer of wealth from healthy people (who pay premiums and get little benefit) to sick people (whose premium payments will never cover their illness). This requires large, stable insurance groups, such as employers, so that individuals with known illnesses can maintain coverage. Optimally this also requires an individual mandate, so that the Americans who have already won the “health lottery” by being healthy continue to pay into the system. Some have advocated individual policies so that patients (aka consumers) have skin in the game. Recissions of individual policies shows the need for stable insurance groups to maintain equitable affordable coverage.

Insurers Vs. Providers: Will Consumers Win?

The real battle for health care reform has begun.

As Barack Obama heads to New Hampshire to stump for health reform, his administration has been taking a hard line on health insurers. However, Business Week has declared that the insurance companies have already won the war. Business Week notes that more Americans covered (and skimpier coverage) is helpful for insurance company bottom lines – and points to a multimillion dollar investment by United HealthCare to provide data and talking points for conservative Democrats, who hold the key to the evolving health care reform bill.

Meanwhile, America’s Health Insurance Plans has just released very telling data about provider prices that should make physicians and hospitals blush. As Gina Kolata recounts in tomorrow morning’s New York Times some procedures are charged at over ten times what Medicare allows. This is the ugly other side to Andrew Cuomo’s prosecution of Ingenix, a United HealthCare subsidiary, for calculating inappropriately low “usual and customary” fees. Some of the existing fees are utterly ridiculous. (For instance, in Massachusetts, a provider billed an insurer $10,000 for minimally invasive knee surgery for which Medicare pays under $700!). Of course, there is plenty of blame to go around – insurers pay the lesser of “allowed” and “billed charges,” encouraging providers to bill high amounts so that they leave no money on the table.

The more the public learns about the seemy underbelly of medical billing and reimbursement, the more support will grow for government intervention. Past efforts to regulate prices were largely regarded as failures – although interestingly recent reports of costs of bariatric (obesity) surgery pointed out that Maryland, the only state with remaining hospital price regulation, had the lowest prices for this procedure.

By the way – great 2006 article by Uwe Reinhardt entitled The Pricing Of U.S. Hospital Services: Chaos Behind A Veil Of Secrecy helps explain this crazy-quilt irrational system we’ve got.

We're Not the Only Ones with a Health Care Inflation Problem

The Wall Street Journal had a thoughtful piece on Friday about how France is having trouble coping with runaway medical inflation. Maternity wards are closing, and copayments are going up to try to tamp down demand. Patients are aghast at $2/hour parking at some health care facilities. It seems a different world than when Michael Moore filmed Sicko. The journal shows cumulative health care inflation in the UK, US, France and Japan since 1992.

A better way to look at this would be showing cumulative health care costs over some recent period. I've taken OECD data (as reported June, 2009, using purchasing power parity and adjusting all costs to 2000 dollar values to account for inflation and relative wealth of countries. I have used excel to autofill 2008 results for some countries based on 2000-7 data). You can see that this shows that health care inflation is pretty much a problem everywhere - and the slopes are pretty consistent. There are a few countries with much higher health care inflation than the US (Slovakia, Korea, Greece) - these have generally had high growth rates.

The most striking thing the first chart shows is that the US starts at such a high cost that even if our inflation rate is not the highest in the world, the absolute impact on our economy is substantially greater than in other OECD countries. (Note that from 2000-2007, health care inflation in France has been substantially lower than in the US).

Double click on the charts below to enlarge.

Controlling Costs: No Easy Answers

Dan Callahan has a good perpective piece at the New England Journal web site pointing out how difficult it will be to control costs in health care. Two quotes worth pulling out:

“Cost controls that are likely to be politically acceptable will not be very effective, and what might be effective will not be acceptable."

“Achieving [decreased growth of costs in health care] will require nothing less than changes in medical and professional values, patients’ demands and expectations, industry profit seeking, research aims and aspirations, and the culture of American medicine.”

Callahan goes back to the December, 2008 Congressional Budget Office menu of 115 ideas to lower health care costs. Callahan highlights the (painful) fee reductions that look most promising in that document. Bundling payments (or even capitation) also figures in the CBO options – and might be more promising. Massachusetts’ health care payment reform commission recently proposed a transition away from fee-for-service payment. More on this in the next post.