How to Destroy a Healthcare System II

At this point we are all able to recite the litany of healthcare horror talking points that foam from the mouths of rabid statists determined to do for healthcare what they have done for education, the auto industry, commercial air travelers, the banking industry, real estate, the environment, the Israelis, immigration etc. Space is somewhat prohibitive but a few of the more familiar refrains are worthy of deconstruction.

Myth #1: Medical Expenses are Responsible for the Majority of Personal Bankruptcies

Citing a 2005 study from Harvard the President regularly states that “half of all personal bankruptcies stem from medical expenses.” He has also stated, “"The cost of health care now causes a bankruptcy in America every 30 seconds. By the end of the year, it could cause 1.5 million Americans to lose their homes." This is pure political deception from the President. From Gary Langer at ABC News, the extrapolation of Harvard’s data to “a bankruptcy every 30 seconds,” which the President has mentioned on numerous occasions is from from a 2005 Washington Post piece by Prof. Elizabeth Warren, a co-author of the Harvard paper. Fact-check.org reports that even using Harvard’s numbers, it’s more like a bankruptcy every minute; indeed if you add up all bankrputcies in a year you barely get one every 30 seconds. (I've e-mailed Warren for comment.) But more to the point is that the Harvard data are clearly inflated, or at best, mischaracterized.

Even if one accepts fully the study cited, at best it supports a bankruptcy occurring only once every minute. While more dissembling from the great dissembler, the details are less critical than the fact that the whole concept is complete prevarication. Here is more from Gary Langer at ABC News, citing the response of Professor David Dranove from the Kellog School of Business at Northwestern published in the journal Health Affairs in 2006:

The Harvard report claims to measure the extent to which medical costs are “the cause” of bankruptcies. In reality its survey asked if these costs were “a reason” – potentially one of many – for such bankruptcies. Beyond those who gave medical costs as “a reason,” the Harvard researchers chose to add in any bankruptcy filers who had at least $1,000 in unreimbursed medical expenses in the previous two years. Given deductibles and copays, that’s a heck of a lot of people.

Moreover, Harvard’s definition of “medical” expenses includes situations that aren’t necessarily medical in common parlance, e.g., a gambling problem, or the death of a family member. If your main wage-earning spouse gets hit by a bus and dies, and you have to file, that’s included as a “medical bankruptcy.”

When I asked the lead author, Dr. David Himmelstein, about his definitions of medical bankruptcy back in 2005, he said, “It’s a judgment call,” and added that any death, for example, “to our mind is a medical event.”

A last problem was sampling: The Harvard researchers surveyed bankruptcy filers in five federal court districts accounting for 14 percent of bankruptcies nationally; projecting this to the other 86 percent is sketchy. Said Himmelstein: “Obviously the extrapolation is rough.”

In the end, based on the Dranove analysis of the Himmelstein study, perhaps 17% of bankruptcies might be linked to medical care costs. A more recent study by the Center for Studying Health System Change indicates that in 2007 about eight-tenths of one precent of Americans lived in families that filed for bankruptcy as a result of medical costs. This represents a total of 5% of bankruptcy cases. The authors noted that the vast majority of cases resulted from personal debt accumulation followed by unemployment.

Myth #2: Administrative Costs are Lower in Government Healthcare Plans

Candidate Obama’s health care proposal stated the following:

One-quarter of all medical spending goes to administrative and overhead costs…Insurance administrative overhead has been the fastest-growing component of health spending. The 2007 Commonwealth Fund Commission on a High Performance Health System reported that between 2000 and 2005, administrative overhead – including both administrative expenses and insurance industry profits – increased 12.0 percent per year, 3.4 percentage points faster than the average health expenditure growth of 8.6 percent.

Since his election the President has made similar references to the potential savings to be realized from a system that simplifies healthcare and reduces administrative costs. Recent Medicare Trustee reports describe such costs as 1.5 to 3% of total expenditures. For private health care, supporters of a government system report such costs at 10-20% of expenditures. Not discussed by same supporters are studies from the Council for Affordable Health Insurance that shows Medicare costs at 5.2% and private admin costs at 8.9%. Price Waterhouse Cooper has demonstrated that 6% of private healthcare fees go to overhead and that 86% of premiums go to the provision of actual medical care.

From the Heritage Foundation’s Walton Francis:

As the case of Medicare's anemic anti-fraud efforts painfully illustrates, less manage­ment and lower administrative costs do not neces­sarily mean the program is really less costly. Many argue that a public plan would cost less than private plans because its administrative costs are lower. This is a terribly misleading assertion and entirely an artifact of false comparisons that do not include all public and private costs. For example, assuming that fraud levels in Original Medicare are 10 percent of payments after spending 5 percent on adminis­tration, and in private plans fraud levels are reduced to 5 percent of payments after spending an extra 1 percent on administrative costs for effective fraud prevention (some think the differential is far greater), Original Medicare's failure to have effective fraud controls raises the denominator while lower­ing the numerator. On these numbers, for $100 of delivered care, Medicare seemingly spends $5 but actually spends $15 ($5 in administrative costs and $10 in fraud), while the private plan spends $11 ($5 plus $1 plus $5 lost to fraud) for the same $100 of delivered care. What is worse, the higher the actual fraud level, the "better" the Medicare administrative cost appears as a percentage of total spending.

So the purported administrative savings are entirely illusory when both numerator and denominator are appropriately adjusted.

There are many other missing or misrepresented costs in direct Medicare–private plan comparisons. For example, average enrollee medical costs in Medicare are roughly double those in the private sector simply because of enrollee age, so Medicare achieves per-enrollee economies of scale unavail­able to any plan (including Medicare Extra) cover­ing a less elderly population. Unlike private plans, Original Medicare does not cover most prescription drugs, small claims where administrative costs are much higher as a fraction of benefits. Government accounting does not assign the costs of capital to federal programs, or even estimate the economic welfare burden costs of using taxes to finance public programs.

Most important, the administrative costs that Medicare imposes on providers are not accounted for in government budgets. If a Medicare claim costs the government $2 to process, and the provider $3 to prepare, the administrative cost of a $100 claim is counted as $2, not $5, in the federal budget. Again, the purported lower cost of Medi­care administration is overstated.

Some of these factors have been adjusted in com­parative studies. But no existing study accounts for all these differences, or for some of the largest ones, such as fraud control.

Finally, government healthcare attempts to control cost via cost cutting or rationing. The inadequate payment schedules set by government entities results in hospitals, in order to maintain income, charging private insurers more for the same procedure. This cost shifting (well documented by the NY Times) from Medicare, Medicaid, and Tricare to private payers shifts an estimated $5 billion in California alone to the private sector. On top of this is the $45-50 billion annual bill for healthcare for the uninsured (illegal aliens) that hospitals subsidize via costs not to government programs (those rates are fixed), but by increased rates for private payers.

None of these factors are ever considered by those touting the administrative and overhead savings supposedly unique to government health plans. It really is an apples and oranges comparison. Government administrative healthcare costs are simply not visible.

Myth #3: The Magic of Health Information Technology

The belief that we can drive down healthcare costs with the magic of information technology is a concept espoused by President Obama, “We will restore science to its rightful place, and wield technology’s wonders to raise health care’s quality and lower its cost.” The Department of Health and Human Services received $167 billion in the National Recovery (Generational Theft) Act. A part of that funding is committed to, “Computerizing Americans’ health records, which will improve the quality of health care, reduce medical errors, and save health care costs.”

This all could be possible, and if so with proper planning should be done. American health care is comprised of a patchwork collection of proprietary electronic and paper systems with limited ability to interact and analyze data in a manner which would promote the greatest health care value. The question is not whether a revolution in healthcare technology would be advantageous? The question is why would we assume that the government is the best entity to create such a revolution, and more importantly, could government intervention actually hinder needed progress in our healthcare system?

As is often the case, history provides some insights to the real questions we should be considering in the discussion. In 1996 the government passed the Health Insurance Portability and Accountability Act (the dreaded acronym is HIPAA and is familiar to all working in health care). The effective date of HIPAA legislation was 2001. HIPAA addressed three areas that were intended to revolutionize healthcare. First was portability and limitations on the ability of employers to exclude employees from insurance coverage based on existing conditions. The second was to guarantee patient privacy in the health care system. Third, HIPAA was to streamline communication across the healthcare industry.

From Scott Withrow, author of Managing Healthcare Compliance:

The final HIPAA privacy rule estimates net costs (not savings) of $17.5 billion over ten years (2003-2012). Industry estimates of the cost of HIPAA compliance exceeded the government's estimates by up to six-fold. The proposed security rule recognizes, but does not attempt to estimate, the significant costs to comply with the security procedures. HIPAA's only hope for achieving savings lies in standardization of electronic transactions. DHHS estimates were that electronic processing would generate savings of $1.00 per claim for health plans, $1.49 for physicians and $0.86 for hospitals. HHS assumed that electronic processing would grow with standardization, creating a total savings of $29.9 billion over ten years (2002 to 2011), before the offsetting costs of implementing privacy and security protections.

A major study of HIPAA impact was undertaken by the American Hospital Association (AHA). Amongst the findings was this:

Given that the five major hospital system vendors cannot currently provide all of the functionality implied by the proposed HIPAA privacy rule, hospitals could require more significant upgrades, potentially making the information system costs substantially higher.”

Substantially higher would be higher than the $22.5 billion cost identified in the study. The DHHS estimated that HIPAA implementation would cost $3.8 billion. Their analysis amazingly did not include the most costly HIPAA provisions. From the AHA Report:

By excluding from its impact analysis the most costly and burdensome provisions of HIPAA privacy on providers (such as the minimum necessary use standard, the monitoring of business partners and state law contracting), HHS’ projected 5-year total cost of $3.8 billion to all covered entities (health plans, providers and clearinghouses) cannot be considered comprehensive.

Many of HHS’ cost calculations are derived from dollar and percentage numbers that lack a stated or logical source, and some specific assumptions appear inappropriate. Calculations are not based on an approach that reflects the likely tactical and operational approach that hospitals will take to comply.

HHS assumes an alignment in the timing of the HIPAA privacy rule with that of other HIPAA components that will not likely occur. HHS grossly underestimates the likely costs of the technical requirements.

Eight years after implementation the health care industry is still reeling from and paying for the cost of HIPAA. From Sally Pipes, health economist, in The Top Ten Myths of American Health Care:

There are currently 12 different federal agencies with overlapping oversight when it comes to health information technology (HIT). The dirty dozen already produces a mountain of red tape…This is hardly the best way to spur HIT innovation. With all these different governing bodies private IT companies have an even harder time creating solutions because their products need to comply with a morass of regulations.

Some postulate a partnership between government initiative and private know how. Its one thing for an HIT product to succeed as a result of competition in the marketplace; its quite another for an HIT product to be the outcome of complying with complex government mandated specifications.

We don’t need government to bribe companies to innovate. The $2.3 trillion health care marketplace is already an enormous opportunity for the HIT sector and private companies realize this. Google has announced a service that will allow people to track and monitor their health records.

Somewhere down the road advancements in HIT may truly revolutionize medicine. And make it more affordable. Its already starting to happen. The irony is that by trying to speed up HIT innovation, government may end up slowing it down and costing taxpayers a boatload of money in the process.

Myth #4: Big Pharma is Killing American Healthcare

On the campaign trail, President Obama made clear his feelings about one of his pet peeves…profit:

Another, more controversial area we need to look at is how much of our health care spending is going toward the record-breaking profits earned by the drug and health care industry. It's perfectly understandable for a corporation to try and make a profit, but when those profits are soaring higher and higher each year while millions lose their coverage and premiums skyrocket, we have a responsibility to ask why.

The free market, capitalism and profit are what have made this nation great and unique. The net effect of individual pursuit of prosperity has been the evolution of a nation which has been an economic tour de force unsurpassed in human history. The innovation nurtured by the free market has led to some of the greatest advancements in the history of humankind…light bulb, assembly line production, automobile, steam boat, airplane, vulcanized rubber, telephone and cell phone, air conditioning, MRI scanner, and computer operating systems…to name a few. All of these efforts have been enormously profitable.

While American industry is on increasingly unstable ground, we continue to lead the world in innovation. We are in this position because those innovations, at least for the moment, remain profitable. Statements from those making the case for more government health care cite the profit margins of leading industry sectors as a remedial element in the healthcare debate.

Health care is expensive, so goes the argument, because of profits being generated by these sectors. The demagoguery in this debate focuses on “Big Pharma”. There’s always a “big something” bent on our destruction in the name of the unspeakable notion of "profit." The "Bigs", “Big Oil” or “Big Banking” or “Big Energy” or "Big Tobacco" are all committed to our ruin and their own success. “Big” in liberalspeak is a synonym for “profitable, despicable and taxable." When "Big" is spoken, brace yourself, the demagoguery is about to begin.

One might assume Big Pharma was the most profitable industry sector in the nation based on the demonizing rhetoric promulgated by President Obama and his staff. In fact it was the third most profitable sector in 2008 according to Fortune Magazine. Network and Other Communications Equipment was number one, followed by Internet Services and Retailing sectors at number two. These sectors generated profits of 20.4 and 19.4% respectively. How about some individual companies? Microsoft, a member of the Software sector which didn’t even make the top ten for profitable industry sectors, had profits of $17 billion or 18%. If Microsoft were a pharmaceutical firm, they would have led all companies in profit. We don’t hear much, however, about “Big Networking” or “Big Internet” or “Big Software” right now. If I were them, though, I would be very nervous.

The President, ala Saul Alinsky, has aggressively attempted to isolate, freeze, demonize and attack the pharmaceutical industry. The welfare of the citizenry would be best served by an honest discussion of the economics of drug costing and the value many, admittedly not all, contribute to ours and the world’s health. Rather than chasing after profitable and valuable companies like villagers with pitchforks after Frankenstein (H/T to The Absurd Report), lets explore the facts.

In 2007 the US spent $286 billion on prescription drugs. As Sally Pipes reports, that is more than the entire GDP of Ireland. Drug spending is a greater portion of healthcare than ever, currently responsible for 10-12% of healthcare costs. The simple fact, however, is that we are living longer than ever before, we are more obese than we ever were, and as a result chronic disease is more prevalent.

Given the latter two how is the former possible? The pharmaceutical industry is one of the reasons. When the average life expectancy in 1940 was 62, cancers, heart disease, stroke and diabetes were less

common concerns, and less well understood. In 1970 the average life expectancy was 71, it is now 78. As we live longer and add obesity as an increasing complication, the development of chronic diseases requiring a myriad of potential management approaches is unavoidable… unless we decide that an additional seven years of life has no value. The health needs of an increasingly aged and expanding population are different, more intense and if we intend to value life and the quality most Americans appreciate as a result of their added years, we will need the pharmaceutical industry.

The simple choice in many cases is would you rather pay for Lipitor or undergo an emergency coronary artery bypass graft (CABG) surgery?While drug costs are enormous, numerous studies document that spending on a variety of medications (to treat diabetes, hypertension, asthma, depression and elevated cholesterol) can provide a net reduction in healthcare costs. More upcoming about the role American drug research pioneers play not only in supporting the quality of American healthcare, but how they support medical quality the world over.

Do newer, more expensive drugs always add to this potential benefit of medical therapy. The answer is no. Have drug companies pursued development of look alike drugs given upcoming patent expirations in order to maintain profit in the market? Yes. The answer to such behavior, however, is not to demonize an industry which has added years to the lives of millions around the world.

So why are drugs so expensive? And only in America? How come those nationalized systems get cheaper drugs? Why don’t we purchase our medications from overseas? That’s the ticket, we’ll teach those evil pharmaceutical executives? This approach was proposed by both John McCain and Barrack Obama during the election. Punish these uniquely repulsive, heartless individuals.

Would that such a strategy would fix the problem. It won’t. First off, while ideologues may choose to believe it, it is unlikely that pharmaceutical executives are any greedier than Bill Gates, Warren Buffet, George Soros, T. Boone Pickens, Sergey Brin, Al Gore, Oprah Winfrey, Tiger Woods or Jay-Z. And there’s a big difference. The successful pharma corporations have produced products which have directly and regularly improved our own life or the life of someone we care deeply about. Traditionally America has begrudged no one the opportunity to succeed and profit. In fact, that some of the individuals noted above can be so successful is a tribute to this country and should give everyone hope that they are capable of greatness. So lets assume rational people can accept that while yes, there may be some in the drug industry who are more interested in profit than the well being of Americans, they are a minority.

Drugs are expensive because they cost a lot to develop. For every 5000 compounds tested, five will make it to clinical trials. Estimates vary but bringing a drug from concept through the animal and then human clinical trials required for FDA approval takes 5-15 years. At any given time there are 2000-3000 new drugs undergoing FDA review for thousands of medical conditions. From Sally Pipes, “Of course many of these drugs will never make it to patients, but these drugs offer hope to the countless individuals who suffer from cancer, Alzheimers, and other debilitating and life threatening diseases.” The cost of this process is estimated at between $500 million and $1.3 billion per drug. Money for drug research and development comes from investors. If pharmaceutical companies are not attractive investment opportunities, investors will invest elsewhere.

If the cost is high, so are the rewards. There clearly are monetary benefits that accrue to investors (that would be many of us) in successful pharmaceutical companies. The fact that average Americans share in the success of drug companies through a variety of investing vehicles is almost as rarely mentioned in these debates as is the effect of human lives saved.

As for overseas, brand name drugs are cheaper there. In Canada, prices may be up to 70% cheaper than in the US. Tapping into the Canadian markets would seem to be an obvious solution to our drug cost problem, or is it? The reason many drugs are cheaper overseas is that all government run health systems have placed price controls on prescription drugs. They have to do this. Otherwise they would be unable to sustain and fund their health care systems. Back to Sally Pipes, who hails from Canada:

In Canada, an agency called the Patented Medicine Prices Review Board ensures that drug prices are not excessive. This board strictly monitors the prices at which manufacturers may sell drugs to wholesalers and pharmacies, and the price at which pharmacies may sell to the public.

To save funds Canadian health officials routinely delay the approval of new and more expensive drugs. After the drug is approved and a price set, the provincial governments decide whether to put it on the formularies.

A report from the Fraser Institute, an independent non-partisan research and educational organization based in Canada, puts it succinctly:

Health Canada takes up to a year to approve new medicines as safe and effective. And while private insurance plans will immediately cover those medicines, the provinces can take up to another year to decide if they will pay for the same drugs," said Brett Skinner, Fraser Institute Director of Health, Pharmaceutical and Insurance Policy Research and author of Access Delayed, Access Denied: Waiting For New Medicines in Canada.

That additional one year delay keeps these new medicines out of reach for the one-third of Canadians who rely on provincial drug plans.

The study shows how two separate stages of Canada's drug approval process contribute to delays or result in new drugs being unavailable for some patients. First, Health Canada must certify a drug is safe and effective for public use, then provincial governments must decide if the drug will be covered by public health plans.

On average, Health Canada took 380 days to approve new drugs for sale, while the provinces added another 323 days to approve new drugs for coverage under provincial drug plans in 2006. This is an improvement from the waits recorded in 2004 when Health Canada took an average of 548 days and the provinces took 546 days to approve new prescription drugs, a total of 1,094 days or almost three years.

The study also found that while delays for access to new prescription drugs remain unnecessarily long, the provinces are also increasingly denying coverage for many new prescription drugs altogether.

According to 2006 data, only 39 per cent of new drugs approved by Health Canada were being fully reimbursed by provincial drug plans, a drop from the 44 per cent that were being fully reimbursed in 2004.

“Canadian patients are facing lengthy delays for government permission to get new medicines and then provincial drug plans aren't covering the costs of many new medicines," Skinner said.

"This is in direct contrast to most private insurance plans which cover 100 per cent of all new drugs certified by Health Canada. Ultimately, public drug plans cover less than half of the drugs covered under private sector insurance plans."

Why? Delays may cost lives, but they save the system money.

A number of brand name drugs that are price controlled are cheaper abroad; but there is no generic market and many new and effective drugs are not approved. Many inexpensive drugs here cost more overseas because there are no generic products in other nations. Generics account for 65% of the drug market in the US. The reason generics are cheaper here…a thriving free market which encourages competition…unlike the economic environment in Europe or Canada. With prices already controlled to less than profitable levels there is no profit for generics in these systems. The Wal-Mart $4 generic drug plan will not be available in Toronto, London, or Brussels any time soon.

So government run programs ration and offer a more limited menu of medications. Can’t we still import the brand name drugs that they sell at 50% discounts?

The larger question is why do drug companies even agree to ship drugs to these nations which mandate unprofitable price controls? There are two reasons. First, as long as America supports the majority of drug costs, companies can afford to sell their products at a discounted rate to smaller markets and maintain a profit margin. If we embarked on a large program of drug reimportation to the US, the drug companies would be forced to make a decision. Accept a significant reduction in revenue or forgo the Canadian market. In other words, just as we have militarily, the US supports the pharmaceutical needs of the rest of the world.

Why don’t drug companies demand higher reimbursement rates and refuse to ship to nations with draconian price controls? One phrase…patent theft. If a manufacturer were unwilling to sell its products at the government determined price, the country could, in some cases, allow a generic manufacturer to produce and sell a copy without the approval of the patent holder.

Myth #5: Disease Prevention, the Untapped Reservoir of Health Savings

The administration, in discussing methods to reduce healthcare costs, is fond of talking about the need to shift our focus from disease treatment to prevention.

From President Obama during the campaign:

We have to ask what we can do to provide more Americans with preventative care, which would mean fewer doctor's visits and less cost down the road.

Preventative care and population health have great potential to improve overall health and quality of life. Preventative care has repeatedly been shown, however, to increase healthcare expenditures. Living longer means more healthcare costs, albeit at a later point in life for many of us. The cold, hard truth is that healthcare is cheaper if a citizen dies. From the New England Journal of Medicine during the 2008 campaign:

Sweeping statements about the cost-saving potential of prevention, however, are overreaching. Studies have concluded that preventing illness can in some cases save money but in other cases can add to health care costs.

Our findings suggest that the broad generalizations made by many presidential candidates can be misleading. These statements convey the message that substantial resources can be saved through prevention. Although some preventive measures do save money, the vast majority reviewed in the health economics literature do not. Careful analysis of the costs and benefits of specific interventions, rather than broad generalizations, is critical. Such analysis could identify not only cost-saving preventive measures but also preventive measures that deliver substantial health benefits relative to their net costs; this analysis could also identify treatments that are cost-saving or highly efficient (i.e., cost-effective).

We should pursue disease prevention strategies but understand that preventative care is similar to health information technology. We should carefully consider who guides its development, and implementation but it is pure deceit to promise that investing in these strategies offers a treasure trove of healthcare cost savings.

It is difficult to find any mention of merit in our current healthcare system in the rhetoric of those supporting a single payer, government run health system. "Big Healthcare", like all the other “Bigs”, refers to the collective of pharmaceutical companies, private insurers, private healthcare purchasers and physician groups more interested in profit than serving citizens. What the single payer proponents conveniently ignore is the fact that a majority of our current system is government health care. It is Medicare, Medicaid, SCHIP, Tricare and the VA.

Based on 2008 WHO data, U.S. government programs accounted for over 45% of US health care expenditures. This makes the U.S. government the largest insurer in the nation. We are well down the road to a government system already. What we are being asked to accept is increasing doses the same. Reasonably observant individuals might notice that the increasing cost and inefficiencies of our health system track with increasing government involvement and regulation of our health care system. In the Wonderland of Barrack Obama things are never what we have traditionally been taught, but it seems pretty clear that our increasing health system difficulties are more attributable to “Big Government”, not “Big Healthcare”.

Are there ways to reduce cost in the US healthcare system and retain value? Yes.

Is the President’s plan the answer to healthcare costs? No.

Simply put by Robert Moffit at the Heritage Foundation, the President’s proposal offers “hopeful savings and costly change.”

Part III of "How to Destroy a Healthcare System" will review two other important criticisms of our current system...quality and access. This exercise will continue then with a dissection of the propoganda surrounding the Obama Health Care plan and a discussion of what it will mean to patients, families, providers and employers. Then we can consider real opportunities to improve what absolutely is, by any honest reckoning, the best healthcare system in the world.

Quaere Verum