Rethinking the healthcare system - Part two

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After the Republican effort to “repeal and replace” GovCare fell short in 2017, we surveyed the situation and found no obvious alternatives. See summary below. Rethinking the healthcare system - Part one, 1/22/18.

The US healthcare system is unreasonably expensive and produces indifferent results. Basic decisions are made by healthcare bureaucrats and their surrogates (e.g., insurance companies) rather than by the patients who pay a relatively minor portion of the overall costs

We would favor an overhaul of the healthcare system, which would give patients more choices in what kind of healthcare arrangements they would be allowed to make, foster more competition between healthcare service providers, and empower patients to make informed choices about their own treatment

There is currently more support for expanding the government’s role in healthcare, however, than there is for cutting it back. And if “single payer” healthcare wins out, as it has in most advanced countries, healthcare services will necessarily be rationed (by manipulating wait times for treatment, imposing age limits on expensive procedures, etc.) to blunt the fiscal effects on government.

Major healthcare legislation continues to seem unlikely. Not only are the two parties at odds as to what kind of policy changes should be made, but Democrats aren’t likely to go along with any healthcare legislation for which Republicans could take credit. In theory the GOP could unite behind a healthcare bill and avert a Senate filibuster by using the reconciliation process, but a mere two GOP defectors would ensure defeat. Doubts swirl around effort to revive Obamacare repeal, Philip Klein et al., Washington Examiner,

Some pending administrative actions may modestly improve the situation. But structural changes are taking place, which threaten to make the healthcare system increasingly top-heavy and underscore the urgency of a fundamental change in direction. Discussion follows.

A. Drug prices – On May 11, the administration rolled out 28 proposals (13 for “immediate action,” 15 labeled “future opportunities”) aimed at lowering the high cost of prescription drugs. Approvals of generic drugs would be speeded up when the patent lives of high-cost drugs expired. US trade negotiators would seek to persuade other countries to pay higher prices (or licensing fees) for US-developed drugs. Drug companies would be encouraged to set lower list prices for their products (which are generally reduced by rebates in practice, but nevertheless set a ceiling on drug prices). Steps would be taken to create greater awareness of the profits of pharmacy benefit managers, which serve as an intermediary between drug companies, healthcare insurance plans, and retail pharmacies. Etc.

Many observers have suggested that this American Patients First plan would have largely cosmetic results, i.e., would do relatively little to bring down drug prices being charged to US consumers. We concurred in this conclusion. The high cost of prescription drugs, blog summary,

The administration's plan to bring down drug prices seems relatively sensible, as far as it goes, but the promises being made of quick and dramatic results are unrealistic.

Many details of the plan remain to be spelled out, however, so it’s difficult to be sure what effects it may have. And according to the president, drug price cuts will be coming soon. Trump teases announcement of big drop in drug prices, Robert King, Washington Examiner,

President Trump said Wednesday that in two weeks some big companies would announce voluntary massive drops in prices. Trump said during a bill signing Wednesday [“Right to Try” bill, which will eliminate legal obstacles to dying patients trying out experimental drugs that have not yet been cleared for normal production and distribution] that we are “seeing a tremendous improvement” in the cost of prescription drugs since he announced his blueprint to clamp down on high drug prices last month.

It may turn out that the envisioned reductions are primarily in list prices versus effective (after rebates or discounts) prices, but it’s also possible that the administration’s drug price plan will prove more fruitful than we predicted. Stay tuned.

B. Alternative insurance arrangements – GovCare has achieved a reduction in the number of Americans without healthcare insurance (HCI) coverage in two ways, both of which have proven costly and generally ineffective:

#Encouraging the states to expand eligibility for Medicaid coverage to higher income individuals - Lured by the promise of almost full federal funding of the Medicaid expansion for the first few years, many states have gone along with the program. If Virginia passes implementing legislation, as now appears probable, it will be the 33rd state to do so. Virginia Senate passes Medicaid expansion, Robert King, Washington Examiner, 5/30/18.

Medicaid provides a relatively low-quality form of HCI coverage due to cut-rate payment policies (details vary from state to state). Medicaid: Obamacare pushed more Americans into a low-quality care system, John O’Shea & Robert Moffit,,
7/11/17 (download PDF).

Medicaid’s low physician reimbursement rates and administrative hassles make it difficult, if not impossible, for many physicians to incorporate Medicaid patients into their practices. Moreover, the Medicaid population disproportionately resides in medically underserved communities with serious shortages of primary care providers. These factors result in low participation rates, which in turn lead to reduced access to care for Medicaid beneficiaries.

Since Medicaid participants receive the coverage for free, there haven’t been many public complaints about the expanded coverage. Note that taxpayers are covering the cost involved, however, e.g., $73 billion in fiscal year 2015 ($69B federal, $4B state). Kaiser Family Foundation, accessed

#Providing government exchanges in which workers whose employers don’t provide group HCI coverage can purchase qualifying HCI policies on an individual basis – The available terms (premiums, deductibles and co-pays) for these exchange policies are set based on supply and demand, and they are becoming increasingly unattractive for younger/relatively healthy individuals who earn too much to qualify for government subsidies.

Even with an individual mandate (tax levied on individuals not having HCI), many of “the invincibles” were not signing up – and now this mandate has been repealed (effective for 2019 et seq.). Another round of premium increase announcements is expected shortly before the mid-term elections, which is of particular concern to Republican candidates because their party has been running the government for the past two years. Obamacare repeal effort quietly poised for success [this headline seems to be based on wishful thinking], Quin Hilyer, Washington Examiner,

The Congressional Budget Office reported on Wednesday that premiums for the basic Obamacare plan will rise 15 percent next year, despite overall price inflation in the rest of the economy remaining at or below 2 percent. *** And this comes on top of whopping premium hikes averaging 25 percent in 2017 and 34 percent in 2018. These cost increases are not just unsustainable, but arguably immoral. Public policy that allows, or even drives, such repeatedly unsustainable costs for healthcare is public policy which fails every test of competence and decency.

If alternative HCI coverage could be offered, not subject to the stringent GovCare requirements, the prevailing terms for exchange policies could be substantially undercut. And a workaround seems to be available for doing exactly that.

“Short-term limited duration” HCI would be exempted from the GovCare regulations. This coverage could be renewed on an annual basis, and consumers could purchase “renewal guarantees” that would preserve their ability to renew it at normal rates it they developed expensive medical conditions.

Legislation not being required, the plan could be put into effect before the November elections – providing some good news for the Americans concerned. How to provide relief from Obamacare while Congress dithers, Michael Cannon,,

By November, Republicans could boast that their ideas reduced premiums for the vast majority in the individual market while Obamacare continued to cause premiums to skyrocket. Conservative states and states with vulnerable GOP members like Florida, Illinois, and Pennsylvania would see the largest premium reductions.

The estimated cost savings are about 30% (see table below). A chance to overcome Obamacare, Michael Cannon, Wall Street Journal,

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Moreover, consumers could potentially dispense with the short-term HCI coverage and simply buy renewal guarantees for protection against the risk of developing an expensive medical condition that could cause their healthcare costs to sky-rocket and force them to sign up for GovCare coverage.

This is a far bigger opportunity for healthcare cost savings, according to Mr. Cannon, than going after drug costs.

[HHS Secretary Alex] Azar’s greatest test will not be whether he saves the government a few billion dollars on prescription drugs. It will be whether he seizes this opportunity to foster something better than government-run healthcare.

Last week, the president hinted that the “short-term” HCI proposal will be finalized in June. President’s remarks at “Right to Try” bill signing,

Secretary Azar is here. *** Please stand up. You have worked so hard on this [Right to Try]. *** And we’re going to have another exciting news conference over the next, what, three weeks? *** We’re going to have great healthcare. *** Without [getting rid of the individual mandate], we couldn’t be doing what we’re doing in a few weeks. We’re going to have great, inexpensive, but really good healthcare.

The other side characterizes short-term HCI coverage as “junk insurance,” says the proposal would drives up premiums for GovCare policies purchased on the exchanges, and predicts a $38B increase in federal government deficits over the next 10 years.

Also, “thousands of comments from insurers, providers, patients and members of Congress opposing the rule” were supposedly ignored, including the concerns of “a group of 113 patient organizations” that “the rule would undermine critical consumer protection for people with pre-existing conditions.” It is therefore urged that the proposed rule be republished with an “updated” economic impact analysis, and that the period for public comment be reopened. [Good luck with getting anything done before the elections!] Press release,
6/1/18 (download letter of 5 Democratic congressional leaders).

C. Structural changes – It would appear that the GovCare legislation and regulations have supported a consolidation trend in the healthcare industry, with some players (drug companies, hospitals, pharmacy benefit managers) becoming bigger and more powerful while the influence of other interested parties (notably doctors and patients) wanes.

This doesn’t bode well for the quality of healthcare services provided, in our view, and it also means that top-down measures will be necessary to hold down medical costs because demand will not be limited by patients who perceive that most of the cost involved is coming out of someone else’s pocket.

Consider the growing power of PBMs in the distribution of prescription drugs, which results from being able to negotiate rebates from drug manufacturers and then decide how much of said rebates will be paid out to payers (government agencies & private HCI companies) and to pharmacies vs. being pocketed by the PBMs. This conceptual diagram of how the system works may be helpful to set the stage. Drug pricing: American Patients First,,
5/11/18 (download PDF).

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Such a complicated network wouldn’t be necessary in a truly competitive market, but the reality is that the “payers” – especially government agencies like Medicaid & Medicare - are not in a position to effectively negotiate prices for proprietary drugs. Politicians jack up Medicaid and Medicare prices, Devon Herrick,,

Medicare and Medicaid often lack the political will (and sometimes the legal right) to preclude drugs when the price is egregious. By contrast, private drug plans run by PBMs at least have the ability to pit one drug in a given class against similar drugs. This forces the drugs’ manufacturers to compete by bidding lower prices if they want to be included in the formulary of preferred drugs to which plans steer most members.

A recent study in Ohio shows that the biggest PBM in the state (owned by CVS) has been exploiting its position to cut the profits of local pharmacies and in some cases buy them out – thereby reducing retail competition. Why CVS loves Obamacare, Wall Street Journal,

Dominic Bartone has been a pharmacist for 41 years and operated three retail pharmacies in Dayton and two in Lebanon. After CVS cut payment rates last fall, his Lebanon pharmacies were losing money on between 40 to 50 prescriptions a day. When Mr. Bartone complained to the MCOs [medical care organizations] about below-cost reimbursements, he didn’t get a response. Eventually he had to stop delivering prescriptions to patients in institutions. In February he and his business partners sold the stores to CVS.

A somewhat analogous relationship exists between hospitals and doctors, with the traditional situation (“hospitals were facilities into which doctors admitted their sick patients”) having been turned up upside down in recent years. “Large hospitals are buying doctors,” now, “so that they can control the flow of patients into their facilities. Sixty-five percent of doctors now work for hospitals.” President Trump needs to do to healthcare what he did to banking, Hal Scherz,,

Government policies are driving this role reversal. Doctors have been placed under increasing pressure by the GovCare legislation to do more for less. They aren’t well equipped to deal with the growing record-keeping burden, reduced reimbursement rates negotiated by government agencies or insurance companies, etc. Allowing the hospitals to handle the headaches has become increasingly attractive. Other options are early retirement or setting up a concierge medical practice (no insurance) for patients who can afford the annual cash retainer

For their part, hospitals are legally required to provide a lot of services to people who may not be able to pay for them. But as an implicit offset, government regulators have shown little interest in monitoring prices charged for hospital services or ensuring that hospitals are subject to price competition. As a result, hospitals can and do charge very high prices for their services with the only effective limit being what government agencies and/or insurance companies are willing to pay.

There is no “quick fix” for rising prices and declining services in the healthcare industry, but recognizing the existence of a problem would be a worthwhile first step. Once this has been done, perhaps our political leaders will find the will to start shifting power from hospitals, insurance companies, PBMs, etc. back to patients and their doctors. Democrats push idea of “Medicare for all,” Dr. Marc Siegel [a critic of said idea],, video (2:28),


#My primary care doctor is retiring at age 40; she is exhausted by the number of patients she has to see. I understand this is because of the low reimbursement she is provided from taking care of senior citizens on Medicare and all the overhead cost. If the reimbursement rate is so low, and the overhead is so high, it won’t be long before senior citizens will have a difficult time obtaining a primary care doctor. – SAFE member (DE)

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