Good News Day Three: The Return of Provider Risk

Today’s Managing Health Care Costs Indicator is $1.1 billion

The Centers for Medicare and Medicaid Services recently announced that the Pioneer ACOs could save $1.1 billion over the next five years.   Blue Cross Blue Shield of Massachusetts has declared its Alternative Quality Contract a big success.  Physicians and hospitals across the country are at least asking the question “Can we deliver excellent health care and use fewer resources?”

Do I believe that the Pioneer ACO will save $1.1 billion?  I do not.

Did the AQC in Massachusetts save any money in its first year?  No

Still, this is great news!  Physicians and hospitals determine the resources that will be used in delivering health care.  The combination of the Affordable Care Act, state government shortfalls, and pressure from employers unable to tolerate continuing increases in health care expenses is driving the provider community to consider global budgeting – which was known in a different bygone age as capitation. 

Providers have shown that they can lower costs and improve quality when the incentives are aligned. See this post on Caremore earlier this fall.  Providers also can make health care a fertile environment for disruptive innovation – just as our current fee-for-service system only encourages accretive innovation.

Increased provider risk-sharing is highly likely to lead to improvements in the value delivered by our health care system.  And this year there seems to be substantial movement toward more provider risk sharing.

Who says I can’t be optimistic?

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Day Two of Things That Work: Preventing Early Elective Deliveries

Today’s Managing Health Care Costs Indicator is 39

Something is broken with deliveries in the United States.  Our Caesarian Section delivery rate has increased to over 34% - and the VBAC rate (vaginal birth after C-section) has plummeted.  Caesarian sections are a major abdominal procedure, requiring significant recovery time, and raising health care costs.  Further, women who have had C-sections are more likely to have placenta previa complicating later pregnancies, which can threaten the life of the mom and the baby.

Early elective inductions – done for convenience of patient or physician without medical indications – are an important cause of preventable C-sections.  Attempting an induction when the cervix isn’t ready is more likely to result in failure of labor to progress –which can trigger the cascade toward C-section.  Early elective inductions also lead to premature births that require extra days to weeks in a neonatal ICU.   Again, this leads to higher costs and worse outcomes.

Here’s what’s working.  The Leapfrog Group began publicizing voluntarily-reported early induction rates earlier this year – and hospitals are taking notice. WBUR’s Martha Bebinger reported late last week that top Massachusetts maternity hospitals are prohibiting early elective deliveries.  In her report some expectant moms argued that they wanted ‘control’ over when to deliver their babies.  But excellent medical evidence suggests that early inductions increase adverse outcomes – and physicians shouldn’t offer patients options that increase the risk to them and their unborn babies. 

It’s important that the approach of hospitals is to administratively interdict unindicted early inductions.  Clark et al showed that a “hard stop” is substantially more effective than peer review or physician education.  These researchers also showed a 16% decline in NICU use associated with implementing this hard 

There are many other issues with organizational structure and payment methodology that drive increased C-section rate. These include lack of obstetrical practice integration and labor coverage, underuse of nurse midwives, and higher hospital payments for C-sections.  So – there is plenty more work to do.  Catalyst for Payment Reform recently published a tools for employers to promote maternity payment reform.   

For now, we can celebrate that many hospitals are doing serious work to prevent early inductions that are not medically indicated.

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Mercury Regulation – Good News and Real Cost Savings

Today’s Managing Health Care Costs Indicator is $90 billion

These are power plants likely to be closed by the new EPA regulations.  Click image to enlarge.  Source 

It’s a light week – and in the spirit of the holiday season, the rest of my posts this year will be positive. No more blogging about pharmaceutical company price yields or insurance plan positive selection. No more greedy self-interested physicians or businessmen. No more hopelessly flawed studies that purport to show the magic solution to our health care cost crisis – but really just show data manipulation. 

Just five full days of stories about things that are working!

First up is news from last week, when Washington Post reported that new EPA regulations to limit future mercury emissions will provide between $37 and $90 billion in health benefits by 2016 – and will cost a bit under $10 billion to implement.  The regulations will also save 11,000 lives and prevent 4,700 heart attacks, and 130,000 asthma attacks each year. 

I often talk about how most of the best health care interventions give us QALYs (quality adjusted life years) for a reasonable price, but it’s rare to get QALYs AND actual cost savings.  But this intervention –forcing utilities to shut or substantially renovate some of the oldest and dirtiest coal-fired power plants- -saves money AND saves lives.

And there’s more.  These regulations save money even without quantifying the value of saving children from mercury-related brain damage, or decreasing the carbon dioxide emissions from the exceptionally inefficient plants that will be closed.  The actual societal benefits are even larger than the stated billions of savings.

The stated savings from this regulation:

Avoided Outcome	Savings Range (3% discount rate)
IQ loss from mercury	$4-6 million per year
Adult premature death	$34-87 billion per year
Infant premature death	$1.4 billion per year
Heart attacks	$900 million per year
Hospitalization for respiratory or heart disease	$40 million per year

It is typical that public health efforts – even those which have a high initial cost – are often cost-saving, while interventions within the medical sphere tend to be cost effective rather than cost saving.   Hoorah for preventing 11,000 deaths per year AND saving money at the same time.


The EPA has an exceptionally good web site explaining savings - and segmenting these by state. 

Four more days of positive news on the way.  Stay tuned.

Avoided Outcome

Savings Range (3% discount rate)

IQ loss from mercury                

$4-6 million per year

Adult premature death

$34-87 billion per year

Infant premature death

$1.4 billion per year

Heart attacks

$900 million per year

Hospitalization for respiratory or heart disease

$40 million per year

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Greece – The Impact of Austerity on Health and Health Care

Today’s Managing Health Care Costs Indicator is 13%

Click image to enlarge.  Source: OECD (see below)

Greece has been grabbing the headlines for months, as we’ve learned about widespread evasion of taxes, rampant government accounting fraud, shady bank deals to obscure the actual debt, and the threat of default which could throw the Eurozone into disarray and perhaps catapult the world into another severe recession.

Today, the New York Times has helped put a face on what austerity has meant for Greeks needing health care.   The Greeks have decreased their health care expenditures by 13%, from $19.5 to $17 billion.  They plan almost a billion more in cuts next year. 

The result isn’t a pretty picture.

•        Diabetics running out of insulin
•        Women with breast cancer waiting three months for surgery
•        Cancer patients having to pay up front for chemotherapy drugs – if they can even find them. At last one global pharma company (Roche) is no longer selling its chemotherapy agents in Greece.
•        Increasing rates of HIV infection and suicide
•        Children going unvaccinated.

The Times referenced an article in Lancet in October, which cited 40% cuts in some hospital budgets , elimination of many addiction treatment programs, and a tenfold increase in attendance at street clinics run by Non Governmental Organizations.

I know the word on the street is that the Greeks have overspent for decades –and it’s time for them to start being responsible.  But reports from the Organization of Economic Cooperation and Development (OECD) demonstrate that many of these changes in the health care system are in the exact wrong direction.

Click image to enlarge. Source OECD

Greece historically spent substantially less on health care than other European nations, yet had pretty good outcomes.   Public spending on health care has actually been low (5.6% in 2006) – while out of pocket spending has represented a high portion of the total cost of health care (38%).  (OECD p 8)  So increasing out-of-pocket spending is not likely to help reform the Greek system.

The Greek health care system does have some substantial problems:

• Too many physicians and too few nurses
• Too many specialists and not enough generalists
• Too few physicians in rural areas
• Drug spending that is too high – with far too little generic substitution (a bit over a third in 2008  -while the rest of the OECD was close to half).
•  Fragmented regulation – with multiple overlapping ministries with conflicting responsibilities
• Fragmented financing – with hospitals getting some of their payment from insurance-type funds, and other payment directly from the government budget.
• Informal payments – bribes – required for patients to get care.
• Some National Health Services physicians work part-time, and divert patients to their private practices.
•  Terrible data collection –making it difficult to assess program effectiveness.
• Outmigration of physicians to other countries.
•   Low immunization rates
•  High smoking rates and low tobacco costs (due to low taxation)
• High rates of use of MRI scans

The austerity spending limits WILL lower health care costs; there is no question about that.  It's likely to improve a few of Greece's problems, like overuse of brand name medications and high cost imaging. However, the price of lowering health care costs is likely to be worse health outcomes, growing disparities based on wealth, and higher future social burden from poor health.

Note public spending low compared to OECD countries, while private spending high. Click on image to enlarge. Source: OECD

A crisis might be a terrible thing to waste.  But the Greek health system (and Greek patients) doesn’t look likely to benefit from this one.

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Cost shifting vs. Cost Saving

Ezekiel Emanuel has a commentary in the New York Times criticizing plans to convert Medicare to vouchers (aka ‘premium support.’ He reminds us that we really need to control costs – not merely shift them. Austin Frakt of The Incidental Economist has also just wrapped up a series on Medicare premium support – which points out that premium support could be designed so that it didn’t cost shift (although that seems unlikely given political realities).


We have a multi-payer system, and there are many opportunities to shift costs from one party to another. No value is created in the system by cost shifting. Private health plans and the government both practice robust cost-shifting in our system. They do this because it is far easier to shift costs than to genuinely lower costs.

The Affordable Care Act takes aim at some of the cost shifting in the current health care market. However, it does not do nearly enough. It’s possible that regulatory action alone won’t be the cure for cost shifting.

Let me review some additional examples of cost shifting in the US health care system:


Medicaid Underpayment

Medicaid pays quite low rates in many states to most providers – rate that are below the real cost of providing care. Providers bill extra to private insurers to make up this shortfall. The state balances its budget by cutting Medicaid provider payments, but this makes private health insurance in the state even more expensive. Employers who might benefit from a tax subsidy that forces budget cutbacks pay for the health care of the uninsured through a nontransparent extra fee added to their health care premiums. Voila. Costs are shifted.


The Affordable Care Act addressed a very small segment of this problem by fixing Medicaid primary care payments and Medicare rates for a limited period of time with full federal funding.

However, states continue to ratchet down Medicaid fees to address their current budget shortfalls. More cost shifting is in the wind.


Dependent Audits

Many employers have been performing audits to be sure that their employees are not enrolling ineligible dependents. That makes sense – why should the employer pay for an uncle or a godchild that is not an actual dependent? On the other hand, when ineligible dependents are removed, there is no cost saving in the health care system unless they no longer access care. The cost is merely shifted to another party – in some cases to ‘free care’ which is an invisible surcharge on all health care charges.


The Affordable Care Act specifies that children up to age 26 can stay on their parents’ health plan regardless of college status, work status, and even their own marital status. This is not very expensive – since the average cost of those between 18-26 is very low. It gets rid of a whole series of administrative hurtles to coverage – so that parents don’t have to get paperwork from their children’s college.


Medicaid Funding

Many states have developed ingenious ways to get the Federal government to pay for a larger portion of total medical care. Massachusetts managed to get Medicaid to fund replacement of a University of Massachusetts hospital fascade based on some fancy legislative dance in 2001.  In some instances, states agreeing to pay providers a higher fee (with the feds picking up more than half of the cost). Then, the states tax the providers to recoup some (but not all) of the excess costs. http://www.washingtonpolicy.org/publications/legislative/state-lawmakers-propose-using-phony-bed-tax-and-provider-tax-secure-more-fe The total cost of medical care goes up, but the state has constrained its own outlays.


Lifetime Limits


One thing that’s certain about hemophiliacs is that without blood factor concentrates they will have bleeding episodes, which can threaten their lives and cripple their joints. Many hemophiliacs require over $100,000 in biopharmaceuticals each year – so it’s easy to hit lifetime limits very quickly. This is a cost shift either to patients (few of whom could afford this) or more likely to state Medicaid programs, for which some hemophiliacs qualify if they hit the lifetime maximum in their employer-sponsored plan. The Affordable Care Act eliminated lifetime maximums as of this year – although there are still some employers who are “grandfathered” and will be allowed to maintain
Mini-Med Plans


These are health plans with very low premiums which pay benefits up to a very low total limit – as little as $5000 or even $1000. They are marketed to low-wage employees –often in retail or service industries, and often by companies that for competitive reasons simply can’t afford to pay the employer share of a more conventional health plan. The problem is that this is “upside down” insurance, which max out if a member has any significant illness at all. If a member gets leukemia – costs are not “controlled,” but are shifted to the patient, or again to state Medicaid plans if the member qualifies after hitting the employer plan maximum.



Raising Eligibility Age for Medicare

Austin Frakt has previously published data showing that raising Medicare eligibility age would save the federal government $5.7 billion, while it would cost individuals and businesses $11.4 million. A bad deal indeed.



Not all cost shifting is necessarily evil – and there are some examples which seek to change behavior by making health plan members responsible for a larger share of the costs.
For instance, reference pricing requires that health plan beneficiaries pay for any excess cost if they get elective care from providers who charge more than an allowed amount. These can save money for employers by shifting costs to the employees – but can also save money in the system by encouraging beneficiaries to choose lower cost providers. Reference pricing thus saves money for health plan sponsors through a mixture of cost shifting and actual cost saving.


Advocates also suggest that high deductible health plans save money through encouraging more responsible resource use. Studies have shown consistently that these plans do overall reduce utilization, but recent studies also suggest that these plans reduce both unnecessary and beneficial care.
Cost shifting will be a continued reality in our fragmented, multipayer system. Shifting costs to others is almost always easier than genuinely lowering health care costs, so we’ll need to continue to develop regulations to discourage cost-shifting. The Affordable Care Act is at least a start.

The managed care indicator will return with the next post. 

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Who's Responsible for the Rise in Medicare Costs

Today’s Managing Health Care Costs Indicator is $300 billion

Click image to enlarge

Today, the New England Journal e-published an evaluation of which states and which specialties have “overspent” in Medicare, leading to the SGR (sustainable growth rate) cuts of 27.4% as of January unless Congress acts to overturn this. Congress is having trouble – because eliminating the SGR and freezing physician payments would cost $300 billion over the next ten years.   Ali Alhassani et al have shown huge discrepancies.  This article is a good demonstration of how the threat of across-the-board cuts is unlikely to drive diverse providers to diminish their utilization.  

Excess expenditures in Alaska from 2003-2009, for instance, are 130% of total 2002 expenditures, while Maine has increased its spending at such a low rate that they are responsible for ‘saving’ almost half of 2002 expenditures over the same time period.   I’m guessing that former Senator Ted Stevens’ securing a 35% permanent rate increase for Alaska providers probably plays some role for overspending in the frozen northwest.

The authors also show that large states like Texas, Florida and New York drive much more of the total Medicare costs – but of course these states will also see a larger portion of the total across-the-board cuts. 

The authors also show that radiation oncology has driven very large increases in Medicare expenditure, while thoracic surgery costs have substantially lagged the SGR target.   Of course, there have been huge improvements in radiation therapy over the last decade, while the decrease in smoking and improvements in less-invasive techniques have happily led to much less work for thoracic surgeons.  

The current impasse in Congress makes it more likely that the SGR will not be fixed for the thirteenth or so time since 2003 – which could lead to these across the board cuts. This could well lead to access problems for Medicare beneficiaries – it’s a terrible way to lower health care costs!

There is a better way.   This is reprinted from a 2009 post:

The SGR was not a “glitch,” but it was a poorly designed way of trying to prevent overutilization.  The problem is that the benefit of increased revenue to individual providers overwhelms the risk of a pay cut due to overall higher than expected utilization.  This is a classic “tragedy of the commons” problem – where it pays for each individual provider to do more procedures, knowing that her contribution to the “overgrazing” will be overwhelmed by the practices of the general population. 

SGR is poorly designed because the group of procedures it applies to (the equivalent of the “pasture” in the tragedy of the commons) is too big – and no physician would rationally think about cutting back on utilization to prevent future fee cuts.  There is a better way.  Japan has an SGR-equivalent which is by individual service –not generic across all services.  

Prices are revised individually, adjusted for each procedure and drug, and not by an across-the-board conversion rate. In particular, the prices of procedures that show large increases in volume tend to be decreased. (Ikegami  and Campbell, Health Affairs, 2004)       Harvard Link 

As a practical matter, procedures with large increases in utilization are sometimes those where there is new evidence of efficacy, but they are likely to be procedures with an exceptionally high margin.  This method of adjusting helps diminish the excess margin associated with particular services, so there is less likelihood they will continue to be overused. 

So – we should get rid of the SGR – it’s not effective at changing physician utilization, and would cause politically infeasible across-the-board cuts.  As long as we are using primarily fee for service payments, Medicare should adopt the Japanese approach to targeted fee cuts for certain procedures if the volume increases. 

Click image to enlarge.

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Generic Biosimilars: Good News Buried in Today’s Newspaper

Today’s Managing Health Care Costs Indicator is 27%

The best news about managing health care costs this week is probably buried on Page B6 of today’s New York Times. Amgen – the maker of epogen and other biologic medications, has formed a joint venture with generic pharmaceutical manufacturer Watson Pharmaceuticals, to manufacture and market biosimilars- the equivalent of generics for the biologic medications. They’ll be looking to make biosimilars of drugs that competitors to Amgen currently market – which is fine because other biopharmaceutical companies including Biogen-Idec have also begun to enter this market.

Why is this such good news? The biologic medications – including medicines for multiple sclerosis, rheumatoid arthritis, hemophilia, other rare genetic diseases and certain forms of cancer represent a larger and larger portion of the total pharmaceutical budget. Many people aren’t aware of this because these medications are often administered in a physician’s office- so the costs of them are not obvious when patients go to their local neighborhood pharmacy. Many of these medications cost $30-$40,000 per year – and drugs for hemophilia and other rare genetic diseases can cost hundreds of thousands of dollars per year.

CVS Caremark estimates that specialty medicines – the kind of drugs that Amgen and Watson have agreed to market – will be up from 13% of total pharmacy cost (2005) to 27% of total pharmacy cost (2015). I’ve already seen some instances where specialty pharmacy spending for certain employers was that high. These are good drugs – delivering longer and better quality life to many patients. But they are enormously expensive.


Biosimilars won’t be cheap like generic “small molecule” drugs – but they will be less expensive than the current specialty medications, and they will help pressure brand name biopharmaceutical manufacturers to constrain their own prices.

The Affordable Care Act requires that the FDA chart a path for marketing of biosimilar medications. The government should get these regulations out quickly so that we can let the competitive market work its magic.

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magicalcraftsfortnightlychallenge

magicalcraftsfortnightlychallenge

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Why Quality Assurance Doesn’t Save Much Money

Today’s Managing Health Care Costs Indicator is 30%

A perspective e-published by the New England Journal yesterday asks a challenging question:

Why haven't nearly two decades of work on improving health care quality had a measurable effect on health care costs?

The article answers the question, too. 

The authors note that truly variable costs like supplies and medications – which are saved if utilization decreases – are pretty small.  While economists and accountants frequently say “there are no fixed costs,” that is over a long time horizon.   Today and tomorrow, there are many costs that are fixed in health care.  We can’t close hospital real estate or fire clinical and nonclinical personnel based on just a LITTLE less utilization – we need to have a LOT less utilization to get rid of many of the costs of our system. Quality improvement can lead to small incremental decreases in utilization, but these are often not enough to let us diminish the underlying cost of delivering care.

Let me give two examples.

If a quality assurance program keeps a patient out of the emergency department – what cost savings would you expect to receive? All numbers are illustrative only.

-        $1000 (likely charges for an emergency department visit)

-        $600  (average allowable cost of an emergency department visit)

-        $400 (average allowable cost of a lower intensity visit that is preventable)

-        $100 (cost of the time that the nurses and physicians spend with the patient)

-        <$5 (cost of the electricity used, tylenol dispensed and the wax paper from the exam table)

The emergency department would have been there, as would the doctors and nurses, regardless of whether that patient was seen unnecessarily.  So it’s only fair to credit the quality assurance program with a small amount of “real” savings.

Here’s another example.  Many have suggested that electronic medical records will decrease the duplication of laboratory tests.  This is a good idea – people shouldn’t be stuck with needles because we’re bad at keeping track of lab tests!  But if a physician doesn’t order an unnecessary blood count, what will be the savings?

-        $50 charge

-        $12 allowable

-        <$0.50 cost of reagent to perform the test.
 

The real savings are probably under a dollar - unless a LOT of blood counts are eliminated. 

I’m told by my friends in hospitals that the marginal cost to deliver additional hospital services is generally about 30%.  (This is assuming there is some surplus capacity in the system, which is usually the case.)  That means that preventing overutilization might decrease billings and decrease the amount paid by health insurers. But the nasty secret is that lowering this utilization only lowers the actual resource cost of hospitalization by about 1/3 of the amount of saved billings.

The authors of the article are skeptical that the time-defined activity based costing suggested by Kaplan and Porter can significantly lower health care costs.  I'm more optimistic that engineering studies of health care can save dollars. If TD-ABC is really effective, organizations could diminish more of the formerly-fixed costs.  But that’s a hypothesis – and we need to measure true cost savings carefully before we prematurely declare victory over the high cost of medical care.

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House Republicans Strike a Blow for Self-Referral

Today’s Managing Health Care Costs Indicator is $300 million

Really?

The House passed its payroll tax reduction extension – and it’s got a provision that repeals elements of the Affordable Care Act that restrict physician-owned hospitals. These are the hospitals that were immortalized in Atul Gawande’s Cost Conundrum, which described how physician-owned hospitals lead to overutilization in McAllen, Texas.

[Renaissance Hospital] is the newest hospital in the area. It is physician-owned. And it has a reputation (which it disclaims) for aggressively recruiting high-volume physicians to become investors and send patients there. Physicians who do so receive not only their fee for whatever service they provide but also a percentage of the hospital’s profits from the tests, surgery, or other care patients are given. (In 2007, its profits totalled thirty-four million dollars.) Romero and others argued that this gives physicians an unholy temptation to overorder.

Self-referral leads to more utilization. The CBO estimates that this provision will increase costs for Medicare alone by $300 million.

If we want to control health care costs and control the federal deficit, this is the wrong direction.

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How Would You Price the Cure for Hemophilia?

Today’s Managing Health Care Costs Indicator is $20 million

The New England Journal this weekend published an exciting small series showing that a genetically engineered virus can infect the liver of hemophiliacs and produce the missing protein that can prevent abnormal bleeding.  This was covered in the New York Times, and an accompanying NEJM editorial calls this a landmark study – the first evidence that we can use the body as a factory for deficient proteins, rather than manufacturing them outside and administering them artificially.

Granted, it’s a small study – a total of six patients – and only two got the highest dose therapy.  One of those had only a brief positive response before his immune system destroyed the (good) infected liver cells, and those who got a lower dose had relatively small responses.  This viral infection can only be administered once – as future doses would be rejected by the immune system.

The editorialist points out that the annual cost of factor to treat this type of hemophilia is $300,000, and the lifetime cost can be up to $20 million.  She writes

Since the vector [engineered viral infection]  is estimated to cost $30,000 per patient, dramatic cost savings have already been achieved.

 Will this dramatic advance lead to lower health care costs?

I doubt it.

First of all – it’s likely this treatment will only work in a portion of patients with this disease, and will only work for a limited period of time. Further – there will undoubtedly be some adverse effects, possibly even induction of liver cancer.  Most of those treated continued to need some factor concentrate – just not nearly as much.

More importantly, the cost of the injection was stated to be $30,000 in this government-funded study. That's probably just for the marginal costs of each injection - and doesn't include any of the earlier research that led up to this point.   The treatment will need considerably more testing – it’s not yet ready for widespread use.  

If the treatment is commercialized by a private company, the price would not be based on the resource cost of production, but rather based on the value created by the treatment.   I’d argue the true value of such an injection, assuming it worked in 50% of patients with few side effects and assuming it was effective for 5 years would be about $650,000 – or the net present value of $150,000 of savings each year for five years. (I used a discount rate of 5%).   

So – if the pharmaceutical company which commercializes this treatment is rational in setting the price for it – it will capture most of the social value of the innovation.  Of course, our current health care system financing will have a difficult time dealing with a one-time $650,000 injection, in a world where many people change employer or change insurance frequently. 

The likely high price for a cure for hemophilia isn't bad – it’s part of why we have such intense innovation and so many life-saving innovations in the biopharmaceutical space.  However, we can’t count on these innovations to lower cost – because they will be priced to capture a substantial portion of the value for those who own the patent.

We can count on innovations like this, over time, to improve the quality and perhaps quantity of life for those who suffer from this and other genetic deficiencies.  And that’s the purpose of health care – to make life better, not to save money.  

It will be a long time before such an innovation is available as a generic!

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Generic Atorvastatin: Expensive Delays

Today’s Managing Health Care Costs Indicator is $324 million

This week New England Journal has a simulation showing the value of the introduction of generic atorvastatin in terms of lowering health care costs. 

Some numbers:

·        Pfizer had revenue of $7 billion last year from Lipitor. It was the top selling medication in America

·        Judging from generic simvastatin introduction in 2006, the cost will decline by 16% one month after generic introduction, 19% at six months after generic introduction, and 60% by 12 months.   

·        Savings from the introduction of the generic medication will be over $2 billion next year, and will be over $4.5 billion in 2014.

·        Pfizer’s agreement with Ranbaxy to delay the introduction of generic Atorvastatin by 6 months cost Americans $324 million in savings. (I suspect this understates the lost savings – since the delay will continue to increase costs for an entire year or longer after the final introduction.)

Generic drug introductions continue to remain one of the major sources of new value in the health care space.  Vigorous antitrust enforcement and regulatory actions to speed introduction of generics is important to be sure we get the maximum value from generic introductions.

Pfizer’s efforts to lower the profits of the generic companies that brought the first atorvastatin to the market might seem like a good deal at first. Consumers can purchase brand name Lipitor for as low as $4 per month – as opposed to $160 per month at Drugstore.com today.  However, these efforts will lower the profits of the initial two generic manufacturers and could dissuade generic manufacturers from pushing hard for early generic introductions in the future. 

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Affordable Care Act and Pharmacy Savings

Today’s Managing Health Care Costs Indicator is $1.5 billion

I’ve been on the road early this week – where I see a lot more of USA Today. The top of the fold Tuesday trumpeted “Health Care Law Changing Behavior.”    The article itself mostly recounts pharmacy savings from the ACA, and briefly mentions full coverage for preventive care in some of the last paragraphs.

The article states that Medicare beneficiaries saved $1.5 billion this year (through August) because of the 50% discount on brand name drugs that are purchased within the “donut hole,” where cost of outpatient drugs are entirely the patient’s responsibility. The donut hole is between $2700 and $6154.  CMS states that the average saving was $569 per person.

Where did these savings come from?   The ACA included mandatory price cuts for seniors who are in the “donut hole,” and thus the funding for this comes from the brand name pharmaceutical industry.   This isn’t all a giveaway, though, by any means.   Lower priced brand name drugs for those on multiple prescriptions is a great deal if there are no generic equivalent.  However, generics tend to be 90% less expensive than brand names – so a 50% discount on a brand name remains a bad deal for seniors.

I suspect the $569 is the average savings for those who had any savings – because a bit over half of Medicare beneficiaries does not hit the $2700 in eligible outpatient pharmacy expenses.

The pharmaceutical industry made a deal early to support what became the Affordable Care Act.  PHaRMA agreed to some price concessions, but gained many more elderly with meaningful drug coverage. Out of pocket costs went down by more than 20% for seniors, leading to a bit over a 5% increase in overall drug utilization.    Marginal costs to produce drugs are very low- so these extra customers are very important to industry profitability.

Has there been behavior change?  Perhaps.  But the USA Today reporter didn’t probe very hard. Catch this quote.  

“Seniors are becoming more engaged in their care, [CMS director Jonathan] Blum said, citing the hundreds of forums Medicare has conducted about the changes.”

I’m guessing the benefit design of full coverage for preventive care might change behavior more than the hundreds of forums!

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Further Evidence that Self Referral is a Bad Idea

Today’s Managing Health Care Costs Indicator is 86%

An enterprising radiology resident reviewed a series of 500 imaging studies (lower back MRIs) ordered by orthopedists; half had a financial interest in the scanner, and so made more money when a scan was ordered. The other half had no financial interest in the scanner, and their income was independent of MRI scan volume.

	Self Referral	No Self Referral
Average Age	50	57
% Negative Scans	42.45	22.8%

The results are exactly what you’d expect. The physicians with a financial interest in the MRI scanner ordered scans on younger patients. The scans they ordered were 86% more likely to be negative -- suggesting overutilization. 

This is a small study- done by a single researcher – and he was likely not blinded to which group the orthopedists belonged to.  Still, this is consistent with all the other evidence available. Doctors make different clinical decisions based on their financial interests. 

Physician financial interest in enterprises they refer to continues to be an ethical and financing dilemma.  I don’t believe that many physicians who own imaging consciously believe they are ordering extra tests.  However, there is plenty of evidence that they are.  Here are just a few links to past chapters of this sordid tale:

Nuclear cardiology ordered more by those who own scanners

Urologists who own IMRT radiation therapy have higher costs

Orthopedists who own a share of a surgical center do more surgery

Some potential solutions

Incidentally, you might worry for the intrepid radiology resident who did this study. Will he be shunned by colleagues for exposing their dirty laundry?

By no means.  Radiologists have been aggressive at pointing to inappropriate self-referral incentives for specialties that compete with them for some time! Harvard Link 

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