School 2 Flashcards
(147 cards)
1
Q
why did insurance companies lobby for Obamacare?
A
also lobbied aggressively to keep Obamacare, which delivered millions of new customers to them and has the potential to deliver millions more. What industry wouldn’t want the enormous weight and power of the federal government forcing every person in the United States to purchase its products? And, for those unable to pay full freight, the government helped cover the premiums and out-of-pocket expenses.
2
Q
Impact of lobbyists on Trump drug price regulation
A
President Trump’s about-face on drug price regulation provides more evidence of how things work in Washington, D.C. Right after taking office, he held a press conference at which he accused pharmaceutical companies of “getting away with murder” and threatened to authorize Medicare to bargain down prices.6 But, when a draft of his executive order was floated a few months later, the tough talk had disappeared. In its place were proposals written by the Pharmaceutical Research and Manufacturers Association (PhRMA), the drug industry’s lobbying arm. Vinay Prasad, a professor of medicine at Oregon Health and Sciences University, remarked that “[the] six-page document contains the kind of solutions to the cost-of-drugs problem that you would get if you gathered together all the executives of pharma and asked them ‘What sort of token gestures can we do?’”
Why?
The usual reasons. Former industry insiders appointed to powerful positions in government dominated the task force that produced the draft, and the industry spent $10 million more on lobbyists than it had the year before.
3
Q
hospital-owned urgent care price of bill and response example
A
Consider what happened to a mutual friend of the authors, whose stitches gave out after he sustained a minor wound. He went to a hospital-owned urgent care center in a strip mall and spent 30 minutes having his injury treated. He subsequently received a bill for $3,000, which he thought was absurd on its face, and likely fraudulent. However, the center granted a $1,170 discount based on its relationship with his insurance company, which then unquestioningly paid the “allowed” amount—$1,770—leaving him with a nominal bill of $60. When he saw that he personally owed so little, he shrugged his shoulders and paid the balance. Does anyone believe his reaction would have been the same if he had been responsible for the full $1,830 the center received—let alone the $3,000 list price? Does anyone believe that health care providers would send out such inflated bills if third-party payment were not the rule?
4
Q
why are medical services expensive?
A
Medical services became expensive after and because they were insured. Before the role of third-party payers expanded dramatically during and after World War II, health care was cheap and people paid for it directly.
5
Q
medicare impact on hospital prices after its creation?
A
In the first year of Medicare’s operation, the average daily service charge in American hospitals increased by an unprecedented 21.9%. The average compound rate of growth in this figure over the next five years was 13%. . . .
6
Q
Spending on health care after medicare began?
A
In 2016, Americans spent about $3.4 trillion on health care. In 1960, we spent only $27 billion. That’s an average increase of 9 percent per year. Had health care spending grown at the same rate as the general economy, it would have been about $220 billion in 2016, just under 7 percent of the figure it actually was.
7
Q
share of medical costs paid by patients overtime
A
In the early 1960s, patients paid about $1.80 out-of-pocket for every $1 spent by third-party payers. After Medicare and Medicaid were created, that ratio declined so steeply that, by the end of the decade, it was approximately $1 to $1. Today, consumers directly contribute less than 20 cents for every dollar shelled out by a third-party payer.
8
Q
What should insurance be used for, according to Silver
A
We should pay for most medical treatments directly, the same way we pay for housing, transportation, electricity, water, food, and clothes. Insurance should be reserved for calamities.
9
Q
what was required to get Medicare to pass?
A
To get the program enacted, President Lyndon Johnson and Congress effectively gave doctors and hospitals the keys to the federal treasury. At the outset, there were no controls on the prices providers could charge, the services they could perform, or total funding for the program. Medicare even guaranteed that hospitals would be profitable, and that as their costs rose their profits would increase. No one should have been surprised that prices and spending quickly spiraled out of control.15 Over time, controls were added on the prices that providers could charge—but there were still no restrictions on the volume of services that could be performed or total funding. Medicare also has few quality controls. It pays doctors who deliver services that are unnecessary, unproven, and even negligent.
10
Q
how much does unecessary treatment cost the US?
A
An even worse problem is that it is often hard to tell the career criminals from the legitimate health care providers who happen to bill the Treasury for all manner of unnecessary services. The cost of unnecessary treatments and other forms of waste far exceeds the cost of fraud. Reputable authorities believe that the annual combined cost of fraud, waste, and abuse is $1 trillion or more. That’s one dollar out of every three spent on health care in the United States.
11
Q
why is price gouging common in medical industry?
A
The dominance of open-ended third-party payment allows providers to charge whatever they want because patients are so insulated from prices they don’t care enough to resist.
12
Q
buying car, computer etc vs getting heatlhcare price difference
A
No consumer would buy a car, a computer, or any other costly item without knowing the price in advance. But, when it comes to medical treatments that cost thousands (or tens of thousands) of dollars, it is all but impossible to get a single, all-inclusive price for most things that will be done even at the time a service is delivered.
13
Q
who sets price Medicare pays
A
In the crazy world of health care, doctors even set the prices Medicare pays for their services. Everyone else, from accountants to zookeepers, has to compete on price and gets what the market bears. But not physicians. The amounts they receive from Medicare are set, in large part, according to estimates of the time required to perform procedures. The estimates are prepared by a secretive American Medical Association (AMA) committee whose members know that higher estimates mean higher pay.
14
Q
medicare prices impact on private insurance?
A
Worse, by jacking up the prices Medicare pays, doctors also rig the rest of the market. Private insurers follow Medicare in rough lockstep: a $1 increase in Medicare payments predicts a $1.30 increase in the price paid by private insurers.
15
Q
how should heatlh insurance work according to silver? How will this come about?
A
Insurers should pay for highly complex and expensive procedures that relatively few people need in any given year. Patients should pay for routine stuff—like check-ups, diabetes monitoring, and allergy medications—just like they pay for gym memberships, running shoes, and other things that contribute to good health.
This will happen naturally if consumers purchase health insurance themselves. We expect the high price of first-dollar coverage will lead most consumers to purchase coverage only for remote health risks that involve expensive treatments.
16
Q
how should Medicare operate if the goal is to make it cheaper without cutting services to seniors? What about Medicaid?
A
To really help seniors, Medicare should operate like Social Security. It should give beneficiaries money and let them decide how to spend.
What would work for seniors would work for everyone else too—particularly the poor, who are covered by Medicaid. Government would still play a role by distributing money to persons in need. Recipients could use their stipends to purchase insurance against catastrophes or pay for ordinary care out of pocket. This approach isn’t new. Food stamps enable poor people to buy groceries wherever they want, so they can look for the best deals.
17
Q
how much would it cost to replace all anti-poverty programs with cash transfers?
A
One source reports that, if all anti-poverty programs were replaced with simple cash transfers, at current spending levels, a poor family of four would receive an annual income near $70,000.37 And those dollars would go a lot farther than they currently do.
18
Q
how profitable is phramaceutical manufacturing compared to other industries?
A
After paying all research costs and other costs of doing business, pharmaceutical manufacturers earn profits that average close to 20 percent of sales. The industry has consistently ranked as one of the most profitable industry sectors with returns that are more than double the median return for all industries.”
19
Q
what happens if a business has a monopoly? Relevance for patents?
A
a business—any business—a monopoly and it will extract wealth from consumers by charging the monopoly price. And that is what patents do: they give drug companies monopolies on the sales of new medications.
20
Q
how much does the pharmaceutical industry donate to congress? Impact?
A
Open Secrets data show that, between 1997–2015, Congress accepted $3.3 billion in campaign contributions from the pharmaceutical/health products sector, 43% more than they received from insurance, the second most politically influential industry. That averages out to about $181 million annually over that 18-year period.14 Although large in absolute terms, these dollars are chump change for Big Pharma. That is why reforms with real potential to bring down drug prices are never seriously proposed at the federal level, despite the number of scandals in which drug companies are involved.
21
Q
why are competitive markets good for consumers?
A
The “value a product provides” sets a ceiling on the amount that a consumer would rationally pay for it, but it does not dictate what the price should be and has little bearing on the price a product will command in a competitive market. The competitive price is the smallest amount that a manufacturer can accept while still making a profit. That is why competitive markets are good for consumers. They force prices down to the lowest levels that sellers will accept for the last unit produced, not up to the highest prices that consumers will pay.
22
Q
How to price gouge if you’re a pharmaceutical company
A
Identify a “sole-source” drug—a drug that has only one manufacturer. Verify that the drug is the “gold standard” for treating an illness. This ensures that doctors will keep prescribing it if the price rises. Determine that the market for the drug is small. Competitors are unlikely to enter small markets even when prices are high. Plus, small patient populations lack political power and can’t protect themselves from price gouging. Acquire the right to produce the drug and close the distribution network. This prevents patients from acquiring the medicine other than via approved outlets. It also makes it hard for potential competitors to acquire the samples they need in order to gain U.S. Food and Drug Administration (FDA) approval for generic equivalents, in the event the market is large enough to justify entry. Maximize profits by raising prices, and keep prices high as long as possible. When challenged, deflect criticism by emphasizing the value the drug has for patients and cite the high cost of research and development (R&D).
23
Q
why does parallel pricing happen in the drug market?
A
Many medicines are made by only a few companies, all of which are repeat players in pricing games and have learned to employ a strategy known as “tit for tat.” Whatever one company does, the others do in turn. When one raises prices, the others follow suit, knowing that if they play follow the leader, they will all get rich. The incentive to steal the market by charging less disappears because every manufacturer knows that other makers will cut their prices too, if it does. An outbreak of price competition would leave all manufacturers poorer—so they all raise prices instead of reducing them.
24
Q
why don’t insured patients switch to cheaper drugs if the price rises?
A
Third-party payment contributes to this failure of competition. Heavily insured patients who fork over the same copays regardless of which drugs they use will not respond to rising prices by switching to lower-cost alternatives. They will buy what their doctors recommend, and their doctors will not care much about price, knowing that their patients are insured.
25
evergreening
A common strategy in the pharmaceutical game—known as “evergreening”—is to obtain a second patent before the first one expires.51 Drug companies can obtain these secondary patents by tweaking their drugs in various ways. For example, the original patent on Prilosec, a remedy for heartburn, expired in 2001, but the manufacturer effectively extended its monopoly by getting a second patent on the pill’s coating.
26
time-release formula and maintaining market control after losing patent
Another common tactic is to develop and patent a timed-release formulation. In each case, the drug manufacturer aggressively markets the new drug to physicians, switching as many patients as possible to the new pill. Once patients have been switched, generic entry (which is, by law, limited to the previous version of the drug) has a far smaller impact on the drug manufacturer’s profits.
27
percentage of drugs patented each year that aren't new drugs
Every year, at least 74% of the drugs associated with new patents in the FDA’s records were not new drugs coming on the market, but existing drugs. . . . Of the roughly 100 best-selling drugs, almost 80% extended their protection at least once, with almost 50% extending the protection cliff more than once. . . .
28
patent for proving a drug works?
And there are more tools than just patents and cornering markets for generics. Another option involves proving that existing drugs work. We are serious. A drug maker can gain a monopoly on the supply of an existing drug just by showing that it helps patients.
29
unapproved drug initiative
Because colchicine was so old, no company could patent it, so no company had ever tested its efficacy in the sort of clinical trials the FDA requires for new drugs. Although the FDA requires proof of effectiveness for drugs brought to market after 1961, drugs already being sold to the public at that time were grandfathered. Consequently, many old drugs had no formal FDA approval. Colchicine was one of them. The FDA wanted to do something about these unapproved drugs, so in 2006, it launched its Unapproved Drugs Initiative. It warned manufacturers that, because colchicine and other old drugs were technically unapproved, their grandfathered status could be revoked at any time. It then offered the companies a bribe in the form of a three-year exclusive on the right to sell any old drug they proved to be effective.
30
orphan drugs
Orphan drugs are medicines that treat rare diseases. They are called orphans because when an illness affects few people, the market is too small for most drug companies to take on the expense of developing and obtaining approval for new treatments. To encourage the development of drugs to treat these orphaned populations, Congress enacted the Orphan Drug Act (ODA), which gives manufacturers seven years of marketing exclusivity plus other incentives, including federal grants, tax credits for clinical trial costs, and a waiver of application fees.
31
how long do medical patents last?
like standard utility patents, generally last for 20 years from the date the application is filed. However, the actual market exclusivity period for pharmaceutical products is often shorter, typically ranging from 7 to 12 years. This is due to the time required for clinical trials and regulatory review processes, which can significantly reduce the time a drug is on the market under patent protection.
32
impact of Medicare not negotiating prices? Why do insurance companies go along as well?
“The incentive is to price it as high as they can,” said Jim Yocum, senior vice president of Connecture, Inc., a company that tracks drug prices. Medicare is barred from negotiating prices, “so you max out your pricing and most of that risk is covered by the federal government.”
But Gilead had payers over a barrel. Sovaldi and Harvoni were the only effective hepatitis C treatments available. Consequently, they set the standard of care, and doctors immediately began prescribing them. Payers that denied access to these medications would be forcing hepatitis C victims to suffer physically and emotionally, and they would have sentenced some of them to death.
33
what percentage of retail drugs does medicare pay for?
Of course, with all pharmaceutical companies jacking up their rates, the impact on total spending is enormous. Medicare pays for almost one-third of all retail drugs, and spending through Part D is rising at 7 percent per year.15 Sen.
34
why is it difficult to quantify risk incurred by pharma companies?
Because pharma companies draw heavily upon public-funded research, it is difficult to quantify the risks they incur.
35
how much do doctors get reimbursed by medicare for giving a drug?
Under Medicare repayment rules for drugs given by physicians, they are reimbursed for the average price of the drug plus 6 percent. That means a drug with a higher price may be easier to sell to doctors than a cheaper one. In addition, Genentech offers rebates to doctors who use large volumes of the more expensive drug.67 Got that? Medicare pays doctors far more for administering Lucentis than Avastin to patients with wet macular degeneration because Genentech charges more for the former than the latter.
36
medicare price taker vs price setter?
Medicare is a price taker, not a price setter. It pays the prevailing rates for drugs, the prevailing rates being whatever manufacturers want to charge for them. In the case of patented drugs, this means that manufacturers can effectively set prices as high as they want and Medicare has to pay. Medicare also has limited ability to dictate which treatments it will pay for, lest it be seen as preventing doctors from recommending or using whatever medications will work best for their patients.
37
what percentgae of stents are uneccessary? Why so many?
Don’t think that doctors would stick devices into people who don’t need them? Think again. According to a Bloomberg News article, “Two out of three elective stents, or more than 200,000 procedures a year, are unnecessary.”
Doctors get paid more for doing more.
38
A clever group of researchers compared the 30-day all-cause mortality rates for Medicare recipients with these problems who were admitted to hospitals during the conventions to those for patients who were admitted three weeks before and three weeks after the conventions. The latter groups were treated when the hospitals’ staffs were at full force. The researchers “hypothesized that mortality would be higher . . . during the cardiology meeting dates” and “that differences in outcomes would be largest in teaching hospitals, where a disproportionately larger fraction of cardiologists may attend cardiology meetings.”57
To their surprise, patients suffering from heart failure or cardiac arrest who showed up at major teaching hospitals while the conventions were underway fared better than those who arrived on other dates. Their 30-day mortality rates were lower, not higher, when fewer doctors were in town. Why? Although the researchers qualified their answers carefully, the most plausible explanation was “that the intensity of care provided during meeting dates [was] lower and that for high-risk patients with cardiovascular disease, the harms of [more intensive] care may unexpectedly outweigh the benefits.”
39
Payment conflicts and doctors services?
Given the uncertainty that attends medical assessments, it is critical for doctors to be unconflicted when diagnosing patients and recommending treatments—particularly when they will perform the treatments they recommend. But existing compensation arrangements create strong conflicts that incline doctors to recommend more treatments than patients need. The result is an epidemic of overuse that kills tens of thousands of patients, injures hundreds of thousands of others, and wastes perhaps a trillion dollars a year.
40
politiccal contral and medical industry incentives
Unfortunately, political control of health care spending makes it hard to get the incentives right. Providers who are overpaid (relative to the true market value of their services) will not volunteer that fact. Instead, they will lobby aggressively to maintain the excess payments. And, when the government pays too little, they will vigorously lobby for more, arguing that patients are unable to access needed care. Finally, when the government pays for the wrong thing or pays for the right thing in the wrong way, many providers will happily deliver the specified services and pocket the money. In our politically controlled system, it takes a long time for mistakes to be identified and corrected. By contrast, when services are sold in competitive markets to patients who pay directly, providers are automatically encouraged to figure out what works best and deliver it.
[if patients can compare quality and cost then they'll end up at hospitals that get better results cheaper, same is true if insurance companies are free to tell patients where they need to get a surgery done (but that could incentive insurance companies to require service at cheap but bad hospitals) and it might be hard for patient to know quality of hospital they can use before getting insurance) and when were talking about intensive care like stents, were talking about the sort of thing you would expect insurance to cover]
41
principal-agent problem with regulation of medical industry incentives
Worse still, the project of aligning the interests of providers and patients is intrinsically hard. No compensation arrangement can motivate an agent to serve a principal well in all circumstances and, because technologies, knowledge, and other important factors change over time, an arrangement that works well today may perform poorly tomorrow. Markets deal with both problems by creating always-present incentives for sellers to take buyers’ interests to heart. Providers that serve patients well and adapt quickly to changes win customers and thrive. Those that serve patients poorly or seek to exploit them for financial reasons lose customers and fail. Markets do automatically what regulators don’t do at all.
42
unecessary antibiotic prescriptions
Every year, doctors prescribe more than 133 million courses of antibiotics to nonhospitalized patients. Depending on the source, between one-third and one-half of these prescriptions are unnecessary.6 That’s somewhere between 44.3 and 66.5 million useless prescriptions per year, counting only antibiotics. One conservative estimate put the price at $500 million a year but noted that the actual cost could be 40 times as much, or $20 billion. The report added that 5 percent to 25 percent of patients given antibiotics experience diarrhea or other side effects, and many require follow-up treatments. Indeed, “[m]ore than 140,000 people, many of them young children, land in the emergency room each year with a serious reaction to an antibiotic.
Doctors may prescribe antibiotics and other medications too often because insurers pay them extra when they prescribe drugs. In 2008, Medicare paid $63.73 for a low-complexity office visit (Current Procedural Terminology [CPT] code: 99213), but $96.01—almost 50 percent more—for a visit that involved “a new diagnosis with a prescription, an order for laboratory tests or X-rays, or a request for a specialty consult” (CPT code: 99214).10 The premium that private insurers paid was nearly the same.11 The incentive to dole out drugs should be apparent.
43
what happens if a type of treatment is shown to not work in medical industry?
You might think that, when better studies show that treatments don’t work, doctors would stop recommending those treatments. The problem is that the early, less reliable studies spawn whole industries because doctors rush to perform services and prescribe medications that they expect to help patients. Years later, when better research reverses the initial study, shutting down the industry is hard because so many providers depend on it for their livelihoods.
44
medical neccesity and cost
How did we get into this fix? By basing insurance payments for services on providers’ assessments of “medical necessity.”35 For much of the 20th century, doctors enjoyed great freedom to decide which treatments patients should receive. When they recommended treatments, patients went along. In effect, physicians controlled the level of demand for the services they supplied, constrained only by the state of medical science and patients’ ability to pay.36 The rise of third-party payment, including Medicare and Medicaid as well as private insurance, accelerated the pace of medical science and reduced patients’ incentive to scrutinize physicians’ recommendations. This disabled whatever brakes there were on health care spending. Predictably enough, demand went through the roof.
45
why don't insurance companies fight high prices more?
First, private insurers typically get paid a small percentage of the amount of money they pay out. The more money they pay out, the more money they make. When private insurers cut back on the stream of payments, they lower their own take. Just like everyone else in the health care system, their incentives point in the wrong direction.
Second, the last time insurers did try to step up to the plate (in response to pressure from employers), they got their heads handed to them. During the 1990s, private insurers tried to use managed care to clamp down on the provision of unnecessary services by requiring pre-approval for some treatments, limiting the facilities at which doctors could provide certain procedures, and denying coverage for extended hospitalizations. The resulting “managed care backlash” was real—and it made it clear to insurers that there would be real costs in trying to reduce health care providers’ revenue streams.
46
Who supplied Daniela and her coworkers with all the free food she gets at the capital
lobbyists
47
Providers ceaselessly lobby Congress and state legislatures to ensure that
the flow of taxpayer money continues undiminished, and that no one holds them accountable for what they do with it. No matter how egregious the fraud, waste, or abuse, or the exploitation of consumers, providers and their lobbyists have a stock set of plausible-sounding justifications for leaving the payment and regulatory systems exactly as they are.
48
In 2015, health economist Paul Keckley and his coauthors observed that unnecessary medical care, “usually associated with excess testing, surgical procedures or overprescribing[,] accounts for up to
30% of what is spent in health care.”28 With total spending now north of $3 trillion, this means Americans waste $1 trillion on health care in just one year. That’s $400 billion more than the U.S. government spends on national defense. Keckley’s 30 percent figure is an all-in number. It includes things like fraud losses and costs stemming from failures to deliver appropriate medical services, as well as overtreatment. It’s a conservative estimate too.
49
“Our main problem in health policy,” he contends, is a huge overemphasis on medicine. The U.S. spends one sixth of national income on
medicine[healthcare], more than on all manufacturing. But health policy experts know that we see at best only weak aggregate relations between health and medicine, in contrast to apparently strong aggregate relations between health and many other factors, such as exercise, diet, sleep, smoking, pollution, climate, and social status.
50
“upcoding
manipulating patients’ records to trigger larger payments from Medicare and other insurers.
Upcoding is possible because Medicare doesn’t know whether a given patient has acute heart failure as a secondary condition. Medicare doesn’t even know whether a patient has the coded primary condition.
Upcoding is so widespread that it may be the industry standard. Studying the first decade of the 21st century, CPI found that hospitals added more than $1 billion to the cost of Medicare by using the most remunerative billing codes more often. “Use of the top two most expensive codes for emergency room care nationwide nearly doubled, from 25 percent to 45 percent of all claims, during the time period examined.”12 In many instances, the patients for whom these codes were used were not seriously ill. “Often, they were treated for seemingly minor injuries and complaints” and sent home without being admitted to the hospital.
51
Consider the amounts that hospitals charge for their services. These figures are found on “chargemasters”—lists of charges (i.e., prices) that all hospitals maintain. At one point, these charges may have been closely related to hospitals’ actual costs, but over time they took on a life of their own. A study published in Health Affairs found that chargemaster prices are, on average,
3.4 times the actual cost of patient care. At the 50 greediest hospitals, charges are more than 10 times actual costs.21 Into the 1980s, Medicare paid hospitals on a cost-plus basis, so hospitals profited by inf lating their costs. Medicare no longer uses that arrangement, but hospitals still gain by exaggerating.
52
hospitals use high list prices to gain leverage over insurers. They do this in a surprising way:
by exposing patients to high out-of-network charges unless their insurers include them in their networks.
53
Payers’ ability to monitor the accuracy of doctors’ bills is limited, so as a practical matter, doctors can
pick the codes they want. Not surprisingly, thousands pick the codes that generate the highest payments.
[letting patients sue if they find out the doctor is lying could prevent this]
54
In 2012, Medicare paid an average of $1,300 for colonoscopies performed in doctors’ offices, but it shelled out $1,805—39 percent more—when these procedures were delivered at hospitals.29 That is why
only 4 percent of all colonoscopies were performed in doctors’ offices that year.30 By performing them in hospitals, doctors and hospitals were able to split the extra money. Because it is financially advantageous for hospitals to bring gastroenterologists (and other doctors who perform lots of colonoscopies) onto their staffs, colonoscopies don’t generate lots of balance bills.
55
Medicare typically pays hospitals a fixed amount, based on patients’
discharge diagnoses. The payments, called “DRGs” (for diagnosis-related groups),24 reflect the expected cost and duration of the hospitalization. Thus, the DRG is a fixed fee that does not vary with the actual number of days that a patient is hospitalized. Previously, Medicare paid for the actual number of hospital days, which caused hospitals to inflate their bills by keeping patients hospitalized for longer than their treatments actually required. The fixed-fee DRG approach has the opposite shortcoming. It encourages hospitals to discharge patients early. Suppose a DRG required Medicare to pay a hospital $15,000, reflecting the expectation that a patient with a particular diagnosis would need five days of inpatient care at $3,000 per day. By discharging the patient to a hospice in fewer than five days, the hospital would be paid the same $15,000 but would have an empty bed that it could fill with another paying patient.
56
When left unsupervised and put in charge of vulnerable patients, the devils will exploit those patients for personal gain. They’ll
pump them full of drugs they don’t need; subject them to treatments that do not work; lie to them about how long they have to live; move them like cattle between nursing homes, hospitals, and hospices; and leave them to rot in filth and be harassed by flies. The puzzle is not that such people exist. The puzzle is why Congress creates and defends government programs that allow and even encourage the devils to operate in this fashion.
57
Policies that criminalize access to controlled substances create
lucrative black market opportunities for people willing to sell them illegally. Consider OxyContin. Its street value is about ten times the price at a pharmacy.7 Arbitrageurs (i.e., middlemen) can make an enormous amount of money on the spread, and the harder law enforcement officers crack down on illegal sales, the higher street prices rise, automatically rewarding dealers for running greater risks.
58
The government says that fraud accounts for x percent of the dollars it pays out to health care providers
The government says that fraud accounts for 10 percent of the dollars it pays out to health care providers.1 This implies that criminals steal more than $100 billion a year from Medicare and Medicaid alone. Some experts believe that the toll is far higher. Malcolm K. Sparrow, a professor at the Kennedy School of Government at Harvard University whose book License to Steal is a classic in the field, thinks that Medicare’s fraud-related losses may run “as high as 30 to 35 percent” of its budget.
59
Every filed claim has the potential to be fraudulent in numerous ways. Doctor?
A doctor may have rendered a service that was unnecessary or inappropriate, delivered a less-expensive service than claimed, performed a service poorly, supplied no service at all, or paid a kickback to a patient in return for an insurance number.
60
Every filled claim has the potential to be fraudulent in numerous ways. Hospital?
A hospital’s bill could include inflated charges, result from an illegal referral arrangement with a physician, seek compensation for medical conditions a patient did not have, or be wholly fictitious.
61
Every filled claim has the potential to be fraudulent in numerous ways. Parmacist?
A pharmacist may have filled a prescription with a generic while billing for a name brand, be part of a ring that supplies drugs to the street by filling phony prescriptions written by corrupt doctors for phantom patients, or have created additional doses by diluting drugs.
62
bills for Medicare in 2015?
In 2015, the outside contractors that handle bills for Medicare processed 1,222,500,000 claims. That’s almost 3.4 million claims per day.3 And that was just for Medicare Part A and Medicare Part B, which cover treatments delivered by hospitals and physicians, respectively. Medicare Part D, the prescription drug program, generated hundreds of millions of additional claims.4 Medicaid must be considered too. Because each state runs its own system, comprehensive statistics for this program are not available. But Medicaid is now almost as large as Medicare in terms of the total number of dollars that are paid out. So the flow of claims relating to that program is presumably at least as great.
All things considered, Medicare and Medicaid receive something like three billion claims a year. For a human being to spend five minutes reviewing each claim would require 125,000 people each working 2,000 hours a year.
63
But health care providers that harm patients can make more money by doing so.
They get paid once for delivering services that injure patients and a second time for treating the injuries they inflict. This may explain why health care providers harm patients so often. How often? The matter is subject to disagreement, but, as Scientific American reported, “every time researchers estimate how often a medical mistake contributes to a hospital patient’s death, the numbers come out worse.”2 A decade ago, the Institute of Medicine made front-page news when it conservatively estimated that medical errors killed 44,000 to 98,000 hospitalized patients each year.3 Just four years later, HealthGrades, a private organization that rates health care providers, doubled the count, putting the annual death toll at 195,000.4 Then, in 2013, the Journal of Patient Safety published a meta-analysis of prior studies that said “preventable harm to patients” causes more than 400,000 premature deaths per year.5 (A 2016 study by researchers at Johns Hopkins University School of Medicine broke the upward spiral of estimates by putting the tally of error-related deaths at 250,000.)
64
Rosenberg’s study didn’t connect individual hospitals to their results, and it seems likely that few hospitals know where they stand.30 Why?
For most health care entities, unlike most non-health care entities, they simply can’t make money by measuring or improving quality.31 A coffee shop owner knows that quality is a key to success. Happy customers will buy lots of coffee and tell their friends about the great place they found. Unhappy customers will take their business elsewhere and publish negative comments on Yelp. In the health care sector, the connection between quality and revenue or profit is far weaker. Sometimes, there is no link because no one knows whether particular providers are good or bad.
65
Regulators don’t monitor quality either. Although facilities that receive federal funding are subject to government oversight, “the law allows hospitals, ambulatory surgery centers, home health agencies and hospices to pay private, national accrediting organizations for such oversight instead.” These private accreditors “often
[miss] serious deficiencies found soon after [their reviews] by state inspectors,” who examine a sample of hospitals and other facilities each year. They also keep their findings secret. When CMS floated a proposal to require accreditors to release reports about errors and other quality problems at specific facilities, hospitals and accreditors vehemently objected, arguing that disclosure would “adversely affect the collaborative efforts
66
The real reason that health care providers can force the government to pay them to improve is that
poor performance usually costs them little or nothing. Mediocrity may kill businesses of other types, but it seems to have little or no impact on health care providers. As David Goldhill observed in Catastrophic Care, “the reason hospitals kill so many patients is that they can—killing patients doesn’t mean they have less loyal customers or that their profits decline.”
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Entry is the engine that drives economic progress. Entrants bring new technologies to manufacturing and new service models to sales. Threatened by entry, incumbents strive to innovate and improve customer service. . . . [I]n a typical manufacturing industry, fully one third of established firms are replaced by entrants within five years. . . . Turnover in the service sector is likely even higher. If entry is the engine that drives change, the health care sector is
out of gas. Turnover in the health care sector is slow to nonexistent. Ask yourself, who are the biggest health insurers today? In nearly all states, the answer is the Blues. Who were the biggest health insurers 50 years ago? The Blues. Now name the biggest hospital in your home town and then look up historical data to find the biggest hospital in your town in 1960. Odds are good it is the same hospital.11 Other researchers agree.
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Imagine my father’s hospital had to present the bill for his “care” not to a government bureaucracy, but to my grieving mother. Do you really believe that the hospital—forced to face the victim of its poor-quality service, forced to collect the bill from the real customer—wouldn’t have figured out how to make its doctors
wash their hands
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Even consumers who pay a larger share of their health care costs themselves were likely to? Quality?
equate high cost with high quality.”14 Patients’ wariness of cheap providers makes it hard for innovators to compete on price. Now consider innovators who might compete on the basis of quality. Patients should care about quality because their health is on the line. Unfortunately, many quality differences are hard for patients to assess. Consider hospital-acquired infections (HAIs), discussed in Chapter 13. Many patients don’t know about HAIs. Even fewer know how their hospital stacks up against other hospitals. And no one knows how to balance the risk of contracting an HAI against any of the other relevant attributes (i.e., quality of the surgeon and nurses, service quality, distance from one’s home, and so on). Most patients just go where their doctors send them.
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The report cards provide a great deal of information about the performance of cardiac surgeons. They are also easy for physicians to access. The states send them to cardiologists in hope of influencing their referral decisions. But doctors
rarely use them. Surveys conducted in the mid-1990s found that cardiologists in both New York and Pennsylvania ignored the report cards when referring patients for CABG procedures. A study published in 2004 also found no change in referral patterns.
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the Leapfrog Group, and U.S. News and World Report. There is little evidence that any of these rankings influence referrals. If new entrants can’t rely on superior quality to change doctors’ behavior and generate a flow of patients, they
aren’t going to enter the market in the first place.
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Duke and the University of North Carolina. These institutions can extract top dollar from insurers by threatening to leave their networks unless
paid to stay.30 But North Carolina also has many smaller hospitals located in rural areas. Those hospitals can’t steer big patient populations toward or away from insurers. Lacking leverage, they get bargain-basement rates. When “[a]sked why some hospitals [in North Carolina] charge so much, Gerard Anderson, director of the Johns Hopkins Center for Hospital Finance and Management, said, ‘Because they can. It’s not any more sophisticated than that.’”
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The same goes for physician practice groups. Those with strong reputations and lots of patients receive
larger payments than others. Because leverage and payments are connected so strongly, hospitals are consolidating and buying physicians’ practice groups.
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The health care sector is a rough-and-tumble world where bargaining power matters and the strong players control large patient flows. This makes the sector
hard for new entrants to break into. Upstarts with small numbers of patients are paid less than existing health care providers even when their services are of higher quality.
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Health insurance and public programs like Medicare and Medicaid stimulate demand for more and more expensive health care. Increased demand for more and more expensive health care drives up prices. Rising prices inspire fear in consumers, who
worry that they won’t be able to afford health care when they need it. Fearful consumers demand more health insurance, insurance that covers more things, and more lavish public programs. Tax preferences for employment-based health insurance add fuel to the fire, by encouraging people to buy more insurance and more comprehensive insurance than they otherwise would. More and more comprehensive health insurance and more lavish public programs stimulate demand for more and more expensive health care. Return to Step 2.
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Helping patients and consumers isn’t the top priority for third-party payers of either type. This goal matters to them only when, by pursuing it, they can get what they really want:
money, bigger budgets, reelection, or something else they care about.
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The more expensive health care becomes, the happier
payers are. The more medical services cost, the more people will want the protection from risk that Medicare, Medicaid, and private insurers provide.
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Because expensive health care makes third-party payers’ services essential, their business model depends on
fear. They need patients and consumers to be terrified that health care expenses will ruin them. Consequently, they won’t work to change the system in ways that would put consumers at ease.
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Insurance generates demand for medical treatments in the same way. You pay a monthly premium over which you have little control, often because the dollars are withheld from your salary. And, once that money is spent on insurance,
it isn’t coming back, whether or not you actually use any health care. However, you do get to decide whether to have knee replacement surgery or not. The evil genius of health insurance is that, at the point of delivery, it encourages patients to overconsume by making medical services seem cheap.
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It strikes us as a bad idea to give 325 million Americans the means with which to buy all the mediocre, unnecessary, harmful, and overpriced medical treatments they want, while also funneling hundreds of billions of dollars to
providers and criminals who commit fraud
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Americans hold two related beliefs. One is that medical services are too complicated and too expensive for consumers to buy directly. The other is that the more we rely on third-party payment arrangements, the better. Both beliefs are
wrong. Simply stated, providers perform better and charge less when consumers buy medical treatments directly, and health care can and should be sold in competitive markets.
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Things that impact health other than healthcare
Americans preserve and improve their health and their children’s health by spending money on food, water, shelter, clothing, electricity, education, sanitation, gym memberships, and many other things. For most of us most of the time, these other expenditures affect our health far more than dollars spent on insurance or health care. Investments in public health also often impact our health more than medical treatments. Many of the increases in life expectancy and quality that Americans have enjoyed over the years are due to investments in sanitation, personal hygiene, anti-smoking campaigns, housing, policing, and regulations like mandatory seat belt laws—things not ordinarily thought of as health care. Markets deserve an extraordinary amount of the credit for improvements in Americans’ health too. By offering employment opportunities that raise people out of poverty and by delivering pure foods and other high-quality items at affordable prices, markets have contributed greatly to Americans’ well-being.
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public option
With this approach, the government provides insurance to anyone who wants to purchase it. Consumers could still purchase insurance from private insurance companies.
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Whatever the model, the main argument for universal coverage is that
it’s cheaper. Its proponents contend that it generates fewer administrative costs than private insurance arrangements and that it maximizes the government’s ability to bargain with providers over prices.
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The most obvious problem with this measure is that it rewards Medicare for squandering taxpayers’ dollars. Suppose that Medicare incurred $30 million in administrative costs while paying out $1 billion in claims. Total spending would be $1.03 billion, and the ratio of administrative spending to total program dollars would be roughly 3 percent. Now suppose that, by spending an additional $30 million on audits, Medicare could discover that half of filed claims are fraudulent and pay nothing on them. With that additional money invested in fraud prevention, Medicare’s administrative spending would rise to $60 million and its payments on claims would fall to $500 million.
The ratio of administrative spending ($60 million) to total program dollars ($560 million) is now 11 percent—almost four times higher than before. Medicare looks less efficient even though it saved $470 million ($500 million saved on fraudulent claims minus $30 million spent on claim audits) that would otherwise have been squandered.
A correctly designed efficiency index would put dollars paid out on valid claims in the denominator and dollars spent on everything else in the numerator.
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Considering that loss alone, Medicare spends 50 cents on such overhead for every $1 it pays out on appropriate care. To make matters even worse, fraud, waste, and abuse persist because the U.S. Centers for Medicare and Medicaid Services spends
too little money policing the system it oversees. Proponents of Medicare for All treat the paltry amount that Medicare spends on administration as evidence of superior efficiency when it actually reflects the government’s staggering profligacy with taxpayers’ money.
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The appearance of superior efficiency arises because
Medicare pays out far more dollars per patient than private insurers do. Its relatively old and infirm beneficiaries tend to receive more expensive treatments than the general (insured) population.
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Relative to governments in other developed countries, the U.S. government appears to be
unusually subject to pressure from special interests and uniquely incapable of rationing.
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In fact, in countries such as Australia, Germany, Japan, the Netherlands, and Switzerland, consumers cover
a greater portion of health-care spending out-of-pocket than do Americans.30
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Why is that? In the retail segment of the health care market, patients are
price sensitive because they spend their own dollars. Low prices attract customers, so retail providers offer discounts and other incentives that bring patients in. Hospitals, by contrast, gear their pricing strategies toward insured patients, the most lucrative ones for them to treat.
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The now-classic example of declining retail prices is LASIK, an outpatient surgical procedure that ophthalmologists perform to improve patients’ vision. LASIK isn’t covered by insurance, so patients pay for it directly and price competition is fierce. Google “LASIK” and you’ll find
lots of advertisements from doctors who offer the service. Many ads include information about prices—the very information hospitals claim to be unable to provide about other surgeries.
You’ll also save money on LASIK if you buy it today because, from 1996 to 2005, the real price of the service fell by nearly 30 percent.12 Competition made LASIK cheaper, thereby making it more easily available to millions of Americans who would otherwise have done without it or, at least, put it off until they could afford it.
Can you think of a single hospital-provided service whose price, like LASIK, is 30 percent lower today than it was a decade ago? We can’t. Prices rise even for services that use old technologies. Computers are faster and cheaper today than ever before, but the same cannot be said for magnetic resonance imaging (MRI), CT scans, electrocardiograms, or ultrasound tests when performed in hospitals.
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Unfortunately, there are limits on how effective this strategy can be, at least as long as the American Board of Obstetrics and Gynecology caps the number of new doctors that can be trained in the field each year: “The competition in fertility cannot develop if an
organization can limit the number of people providing the service
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Hospitals impose absurd markups because
they can, and because by doing so they maximize their revenues and their managers’ and employees’ salaries. As the authors of the Health Affairs article concluded, the main causes of high markups are pricing opacity and hospitals’ superior bargaining power. Another factor, discussed in Chapter 8, is that Medicare literally rewards hospitals for increasing their chargemaster prices.
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In the retail sector, ridiculous markups are impossible to maintain. Walgreens can’t charge $100 for a few aspirin tablets when
CVS sells a bottle of 100 pills for $5. To compete with their many rivals, whose prices are low and easy to find, retail pharmacies have to sell medical goods and services as cheaply as they can.
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For decades, the medical profession has kept the number of doctors artificially low, by preventing new medical schools from opening and limiting the number of graduates. The Association of American Medical Colleges predicts a shortfall of 12,000 to 31,000 primary care doctors by 2025.41 Most newly minted physicians receive
50 or more job offers during their residencies. Half receive 100 or more.42 This induced shortage makes doctors wealthier than they would otherwise be.
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Delays are especially long in Boston, where patients often wait two months to see their family physicians.44 That’s why, in the 2010–2012 period, CVS could
profitably open 37 new MinuteClinics in Massachusetts, a state that had only 13 retail clinics total in 2009.45
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Retail clinics are staffed by
nurse practitioners, who have been shown in many studies to deliver primary care that “is as good as and sometimes better than care given by physicians” and “patients often express higher satisfaction with care delivered by nurses.”
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The contrast with American hospitals could hardly be sharper. Here, quality improvement is a nightmare. Many administrators have little idea how well or poorly their hospitals are doing. They don’t even collect data. U.S. hospitals also refuse to adopt new technologies that benefit patients unless paid extra for doing so. In India, quality improvement is data driven and routine. The reason?
Like other consumer-oriented businesses in the United States and elsewhere, private hospitals in India make money by avoiding mistakes: Because Indian hospitals compete on both quality and price, hospital managers have instituted quality assurance and improvement as integral to the business models. In a low-price setting, these hospitals must maintain high-quality services to minimize adverse events, which generally raise the costs of care. Acceptance of financial risk by hospitals within capitated models for care delivery in India has added another driver for quality and efficiency. This concept was aptly summarized by N. Krishna Reddy of Care Hospital, who stated that in this business model, “we can’t afford to have complications.”
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As this example reflects, in a well-functioning market, hospitals have to compete for business—and they have to eat the costs of errors instead of
passing them on to insurers
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Reference pricing alters this dynamic. By requiring patients who use overpriced providers to pay extra, it discourages
profligacy. It also tells providers who want to hold onto their patients and attract new ones that they will have to compete. Reference pricing is an incomplete strategy, however, because it is all pain and no gain. It discourages insureds from using providers whose charges exceed the reference price, but it does not reward them for using providers who charge less than the reference price. Even if the reference price seems like a good deal, some doctors or hospitals might be willing to undercut it.
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Employers could easily take advantage of this possibility by encouraging workers to be good shoppers. They need only give employees a portion of any discounts they obtain on
reference prices. For example, if a worker negotiated a deal on a minor operation that reduced the employer’s cost by $500, the worker might receive a check for $250.
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Having people pay for most medicines themselves would
lleviate many of the abuses that pharma companies commit. The average wholesale price (AWP) scandal discussed in Chapter 3, in which drug companies posted phony list prices that enabled them to take taxpayers to the cleaners, would never have happened. Neither Medicare, nor Medicaid, nor any private carrier would have relied on the phony numbers published in a manual when deciding how much to pay. Prescription drugs would have sold at real retail prices, just like pain relievers, cold remedies, and other nonprescription items. Drug prices would have a natural limit too: consumers’ willingness to pay.
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“Americans spent $250 billion on prescription drugs in 2009, but would have spent just $25 billion had all drugs been
sold as generics, meaning without patent protections.”1 The difference, $225 billion, was the revenue that the elimination of patents would have cost name-brand pharmaceutical companies in just one year.
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A well-designed prize regime would
eliminate the need for drug monopolies, thereby reducing prescription drug prices to competitive levels. It would also create incentives for innovation, including incentives to develop orphan drugs for small populations, and could also be tailored to encourage drug companies to test the efficacy of old drugs. Finally, if funded openly by the federal government, a prize regime would place the costs of drug innovation on-budget, where they would be borne by all taxpayers—rather than just by the consumers who happen to need drugs (and their insurers).
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Of course, a prize system would cost taxpayers money, because the dollars needed to fund the prizes would come from them. But, in light of the many problems existing arrangements generate, it seems better to use the tax system to
fund prizes than to impose costs as the patent system does. Today, those costs fall on consumers, insured populations, and taxpayers, whose dollars buy drugs at inflated prices for millions of people, support research, and also fund drug-related tax preferences. This scattershot approach has many downsides. It creates problems for people with diseases that require expensive medications. It creates problems for insurers, who must figure out how to deal with these people while pricing insurance in ways that maintain stable risk pools. It creates problems for the public, which shares the cost of developing new drugs only to find itself exploited by drug companies when discoveries pan out. Finally, it creates problems for orphan populations that are too small to motivate drug companies to look for needed treatments.
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One reason is that existing patent monopolies let pharma companies capture 100 percent of the returns on new drugs even when they bear
far less than 100 percent of the R&D–related risk. Taxpayers already bear a large fraction of the cost of drug-related R&D through research grants and other means. But taxpayers currently get little financial return on these outlays because the dollars generated by sales go to drug companies. A prize system would compensate drug companies for only the R&D costs they actually bear. Consumers would keep the rest of the gains.
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Regrettably, the most effective options with which to address generic drug prices require governmental action. For example, many of the problems we identified in Chapter 1 are attributable to insufficient competition in the generic drug market. Substantial price hikes occur and stick because only one company makes a drug or because manufacturers adopt tit-for-tat strategies or play other pricing games. Illegal, anti-competitive conduct may underlie some of these problems. Only
aggressive antitrust enforcement can discourage this type of behavior. [which can only happen if you get rid of lobbyists and close the revolving door]
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Why not let a company that qualifies to sell a generic drug in Canada, England, France, Israel, or some other developed country automatically
qualify to sell the same drug in the United States—at least so long as the branded drug has already been approved by the FDA, and the marketing exclusivity provided by the Hatch-Waxman Act has expired? These countries have the expertise needed to protect their citizens from excessive risks and the desire to do so.
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Another option is ordering prescription medications from online pharmacies in other countries, which ship drugs into the United States. Although it is illegal to do so,
the practice is flourishing
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That’s one thing that most whistleblowers have in common: a strong interest in
spotting a fraud
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The best sign that the FCA is working well is that businesses in fraud-ridden industries want it to go away. Corporate America hates whistleblowers for the same reason it dislikes tort plaintiffs:
it doesn’t control them or the courts. Like tort litigation, qui tam litigation—the Latin name given to cases filed by whistleblowers under the FCA—is a species of private law enforcement. Instead of government officials holding wrongdoers accountable through the federal and state regulatory apparatuses, citizens represented by private, contingent-fee attorneys do the job via the courts. And unlike regulators, who are routinely captured and bribed by the industries they’re supposed to police, the citizens, lawyers, and judges who figure in FCA lawsuits aren’t so easily corrupted.
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Again looking at 2010–2015, private whistleblowers brought 2,613 suits versus 189 DOJ-filed complaints (almost 14 to 1) and
$13.6 billion in qui tam–initiated recoveries versus $1.6 billion in DOJ cases (8.7 to 1).27 Why do whistleblowers uncover so many more frauds than the government? One reason is that there are more of them. Every person who works in an organization where a fraud on the public might be committed is a potential informant. Private enforcers therefore outnumber public monitors by at least 100,000 to 1. Another reason is better access to information.
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Private enforcement is more successful than public enforcement because
whistleblowers are more motivated, have more eyes and ears, and are more likely to know what’s going on.
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One such possibility would be to grant whistleblowers who were personally involved in frauds immunity from prosecution.
The knowledge that the first person to rat out his or her friends would be immune from prosecution would discourage people from working with others to commit frauds. Every additional conspirator would be another person who, at some point, might think it advisable to turn everyone in. The destabilizing effect would be especially great in corporate America, where the prospect of doing jail time is the only real deterrent.
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But it is important to see that this game occurs only in the part of the health care sector where third-party payers predominate. There are no comparable stories of fraud, game playing, or predation in the retail sector, where
people buy things directly. Nor do any comparable statistics exist regarding dollars lost to fraud, waste, and abuse. No one contends that fraud accounts for 10–20 percent of retail medical spending. Nor does anyone argue that one-third of all dollars spent at retail medical outlets are wasted.
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Yet fraud would be much easier to police in a system where the government gave beneficiaries
money. First, the variety of frauds would be greatly reduced. It is easier to police one relatively simple payment to each of Medicare’s 55 million enrollees than to police 1 billion claims, each of which could be false or misleading in countless ways. Second, individual beneficiaries could not possibly engage in the massive fraud schemes Medicare currently enables, and professional fraudsters would have far more difficulty collecting the information they need to mount such schemes. Finally, once most Medicare and Medicaid bureaucrats are freed from the impossible task of policing millions of health care providers and scrutinizing billions of bills, there would be more manpower available to focus on the frauds that remain. CMS could also police all of these forms of fraud without incurring the wrath of legitimate providers, who have a huge stake in CMS’s easy payment rules.
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To sum up, health care coverage works well for
low-probability, high-cost events (Cell 2), but like other types of insurance it has little to offer for other probability/cost combinations.
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But insurance is a bad way of dealing with losses that do not fit this description, including inexpensive medical treatments and treatments for chronic illnesses and other maladies that people are certain to need. The way to deal with these costs is
simply to pay for them. The money can come directly out of consumers’ pockets or it can come from somewhere else, as it does when people who are too poor to pay for the needed services receive financial support—welfare or charity—from others.
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Catastrophic coverage is cheap because
insurers expect people to use it infrequently. The type of insurance that doesn’t work is called comprehensive coverage. It combines catastrophic coverage with a prepayment plan for medical expenses that fall into Cells 1, 3, and 4. This is the type of insurance that most people have and that Obamacare requires them to purchase.
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t should now be clear that both Medicare and Medicaid are hodgepodges of three different things: insurance, prepayment plans, and welfare
Both programs provide protection from low-probability catastrophic risks, and, to the extent they do, they provide insurance. But they also pay for many inexpensive treatments and services, like X-rays for strains and sprains and medications for aches and pains, while also covering things that people are certain to need, such as treatments for chronic illness. So they are prepayment plans too. Both programs also transfer wealth. Medicaid does so overtly. It uses general tax revenues to pay for health care for the poor. Medicare is stealthier. It fosters the impression that beneficiaries pay for the services they receive by contributing tax dollars throughout their working lives and by paying Medicare premiums in their later years. In fact, the typical beneficiary takes out far, far more than he or she puts in, meaning that Medicare has an enormous welfare component.
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Although the United States now spends an average of more than $10,000 per person on medical services each year, most of this spending is concentrated on a small fraction of the population. For most Americans, the annual cost of health care is slightly below
$1,000, an amount that most can afford to pay out of pocket.9 If you sort the population by health care spending, the lowest-spending half accounts for a mere 3 percent of the nation’s total annual health care bill.10
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All it takes is a bad case of trauma or an emergency surgery for appendicitis to move a person from the average category into the highest cost group—the 5 percent of Americans whose medical treatments account for
50 percent of total spending.12 The mean annual expenditure for that group is about $43,000.
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There’s a lot of turnover in these high-cost groups too. Although nearly two-thirds of the members of the top 5 percent group suffer from
long-term illnesses, every year about half of that share gets better and drops down to a lower bracket. Of course, this implies that lots of new people move into the high-cost group every year too.
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When someone is highly likely to need expensive medical services year after year, there is no risk to
insure. There is only a need to pay for the treatments. This is true, for example, of uninsured children born with significant, lifelong health problems. The medical services they require must be paid for somehow, and we should make it as easy and affordable as possible for people, including hopeful or expectant parents, to insure before health losses occur. But in cases where they don’t, we shouldn’t call whatever mechanism pays for their health care “insurance” because the need for the services is certain.
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Most of the expense and problem in our health care system involves
treatment of chronic conditions or (what turns out to be) end-of-life care, and involve many difficult decisions involving course of treatment, extent of treatment, method of delivery, and so on. These people can shop. Our health care system actually does a pretty decent job with heart attacks.
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When your car breaks down at the side of the road, you’re in a poor position to negotiate with the tow-truck driver. That is why
you join AAA. If you, by virtue of being human, might someday need treatment for a heart attack, might you not purchase health insurance, or at least shop ahead of time for a long-term relationship to your doctor, who will help to arrange hospital care?
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In a competitive, transparent market, a hospital that routinely overcharged cash customers with heart attacks would be creamed by
Yelp.com reviews, to say nothing of lawsuits from angry patients. Life is not a one-shot game. Competition leads to clear posted prices, and businesses anxious to gain a reputation for honest and efficient service.
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The first leg is catastrophic coverage for remote risks with the potential to inflict large losses. The second leg
is having people pay out of pocket for medical treatments that are expected and predictable. And the third leg is an explicit on-budget welfare system that provides financial support to people who are poor or otherwise deemed deserving of public support.
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Medicare is an intergenerational
Ponzi scheme that moves dollars from younger people who are relatively poor to older people who are relatively rich, while making health care more dangerous and expensive for everyone and wasting one-third of the dollars it doles out.
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Medicaid helps the poor, but it does so
inefficiently and is needlessly paternalistic. Poor people would fare better if the program was replaced with cash grants. The VHA suffers similar deficiencies. Veterans should receive cash so they can buy medical services anywhere.
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Medicare discourages workers from saving during their income-generating years by assuring them that the government will
give them heavily subsidized health care when they retire. And it encourages profligacy in old age by telling seniors that, no matter how they spend their retirement dollars, their access to medical services won’t be imperiled.
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Singapore, an Asian city-state with a population of roughly 5.6 million, requires residents to put a defined share of their earnings into tax-free “Medisave” accounts, from which
funds can be withdrawn only to pay for health care. To prevent Singaporeans from depleting their Medisave accounts too early, the spending rules require them to pay out of pocket for most of the ordinary medical treatments they need. To encourage thrift, the law also allows Singaporeans to bequeath any funds left in their accounts at death to their heirs. Singapore provides for its poorest citizens by topping up their Medisave accounts, operating a safety net of public hospitals that provide standardized care at bargain-basement prices and, on rare occasions, by dipping into a fund and helping to pay some of the bills.11 But treatments are not doled out for free. All Singaporeans must contribute something to the cost of their care.
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Singapore’s Medisave is much better than our Medicare. It
prevents people from overspending during their fruitful years, encourages prudent purchasing of medical services when illness strikes, and reinforces the ethic of personal responsibility for health and health care.12 Medicare does none of these things. If anything, Medicare discourages saving and encourages irresponsibility by telling people that, when they are old, the government will give them health care for free.
Finally, and perhaps most important, Singapore lets patients decide how their health care dollars are spent. Unlike the Medicare program, which puts health care dollars under the control of bureaucrats, Singapore’s mandated savings program leaves consumers in charge. They decide which services to use and how much to pay for them. This approach encourages providers to compete for business by improving quality of care, cutting their fees, and offering guarantees. First-party payment also makes life much more difficult for fraudsters.
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Poverty is a money problem. Poor people have too little of it, and the solution is
to give them more. Medicaid doesn’t do that. Not a single dollar winds up in any poor person’s hands. Instead, Medicaid pays health care providers to treat poor people for free. The health care industry likes this arrangement, which ensures that its members receive every one of the nearly $600 billion that Medicaid pays out each year.
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Across the United States, the average amount spent per Medicaid enrollee per year is about
$6,500.17 Suppose that poor people were offered a choice: receive $6,500 in cash and use it to buy an insurance package equivalent to Medicaid or receive $6,500 in cash and use it some other way. If you think that some, many, or most poor people would spend the money some other way, you’re with the majority and you should agree that forcing them to take Medicaid in lieu of cash isn’t the welfare-maximizing approach.
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First, health care does not equal well-being but is only o
one of many means by which well-being might be maintained or improved. Second, Medicaid policy is fundamentally paternalistic. If the program were actually devoted to the well-being of fellow citizens, it would hand out cash and let people spend it on goods and services that, from their perspective, have the most potential to help.
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What’s true of Medicaid also applies to Medicare. Instead of paying for seniors’ health care,
the federal government could give them money and let them decide how to spend it.
The vast majority of seniors are competent and make important choices for themselves. They decide whether to sell their homes and move closer to their grandchildren or into retirement centers, whether to draw money out of their retirement accounts, and whether and where to take vacations. There is little reason to fear that they would spend Medicare dollars unwisely if given control of them.
Some people, elderly, poor, or otherwise, lack the competence needed to handle their own affairs. These people require special arrangements, which typically include judicial proceedings and the appointment of legal guardians. But, even for these people, there is no moral argument for bestowing benefits in-kind rather than in cash. Once a guardian is appointed, a competent decisionmaker exists and the need for governmental paternalism disappears.
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When people spend their own money, they purchase things whose subjective value
exceeds the dollars they have to give up. Rather than spend $10 on an item that bestows only $5 worth of value, a person would hold onto the cash. But, when a third party pays for an item or service, a beneficiary will rationally accept it even if the cost exceeds the subjective benefit by far. Who cares if a medical service that costs $10 conveys only $5 worth of value when the government foots the bill? And who cares if the service actually costs $100 or even $1,000? By accepting the service, the recipient would still be $5 better off. The cost to taxpayers is irrelevant.
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The authors concluded: “All of our estimates indicate a welfare benefit from Medicaid to recipients that is below
the government’s cost of providing Medicaid.”24 In plain English, if we took the money the government is spending on Medicaid, gave it to Medicaid enrollees, and offered them the right to buy into Medicaid, the people who purportedly benefit from this program wouldn’t buy it. Think about that. The people receiving Medicaid don’t think the benefits are worth what the government is spending. Indeed, we think it is likely that Medicaid recipients derive less than the 40 cents of value the researchers estimated recipients derive from one dollar of Medicaid spending.
[why, because it's the only way lobbyists and special interests would support this arrangement]
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that Medicaid spends as much money as all other forms of public assistance
combined. In 2016, combined federal and state spending on Medicaid totaled about $575 billion.30 Federal spending on Medicaid alone ($369 billion) exceeded all other federal welfare outlays in 2016.31 Instead of paying for medical services for a selected group, the hundreds of billions spent on Medicaid could have been used to provide a financial cushion for all of America’s poor.
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assertion that Medicaid protects people who become ill from financial ruin is also overstated. Medicaid absorbs only
their medical expenses. But many sick people experience financial ruin for other reasons, even when their health care costs are covered. Consider victims who suffer from post-traumatic stress disorder, paralysis, fibromyalgia, back pain, or other maladies that are cheap to treat but that can prevent people from working. Medicaid covers the relatively minor costs of pills and wheelchairs for these people but otherwise leaves them in poverty.
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To the contrary, it found that, even though people who were treated for free used more medical treatments,
their health was effectively the same as that of people who had to pay.
Although participants in cost-sharing plans used fewer medical treatments, the HIE found that, “in general, the reduction in services induced by cost sharing had no adverse effect on participants’ health.”
hat’s because, when health care is free, everyone uses more of everything. But giving away health care for free has enormous downsides too. It encourages people to use treatments that are ineffective, harmful, and wasteful, and to rely on intensive medical treatments to cure what ails them instead of doing other things that would be cheaper and more efficacious, like exercising, dieting, sleeping more, and cutting back on smoking. The lavish public spending that is needed to make medical treatments free also diverts enormous amounts of money from other public health priorities that deliver more bang for the buck, like sanitation, housing, education, school lunches, and pollution abatement.
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person who wanted to maximize the use of medical treatments would
make health care free at the point of delivery; a person who wanted to make people healthy would not.
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The key is that the HIE didn’t ask whether participants in cost-sharing plans made
cost-effective choices—decisions that maximized their expected health status given the positive cost of health care and their other needs and priorities. It also didn’t ask whether participants in the free plans made cost-effective choices. It just found that participants in cost-sharing plans used fewer services that doctors ranked as effective. Given the HIE’s failure to find significant health effects, the natural inference to draw is that participants in cost-sharing plans found other uses for their dollars that they rightly thought were better for them.
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Some medical treatments are so cost effective that everyone should have them, including people who are so poor or so short sighted they might not buy them on their own.
Vaccinations against childhood diseases fall into this category. Solving this problem doesn’t require third-party payment. Instead, we should identify the few treatments that fit this description and design means of delivering them.
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Insofar as poor veterans are concerned, history provides the only reason for having a separate VHA system:
neither Medicaid nor Medicare existed when the VHA was created. But, now that these programs do exist, the need for a separate system for veterans with low incomes has disappeared. And, if (as we recommend) Medicaid and Medicare were both converted to cash-grant programs, poor veterans would have the same access to medical services as everyone else—better access, if (as we would suggest) their grants were significantly topped up in recognition of their past service.
One is inevitably led to the conclusion that the limitations on the Choice Act are there to protect the VHA—and the jobs that VHA facilities provide in congressional districts—rather than to ensure that veterans receive the high-quality care they deserve at convenient locations.
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