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Monday, October 26, 2009

And Talking About The Drug Lobby...

An article today, from the AP Business wire, reaffirms what I said in my essay on Healthcare - An Update, within The Political Case for Healthcare Reform section, when talking about the FDA and its role in improving the nation's healthcare (click on the title link)...

GAO: FDA fails to follow up on unproven drugs
A report due out Monday from the Government Accountability Office also shows that the FDA has never pulled a drug off the market due to a lack of required follow-up about its actual benefits - even when such information is more than a decade overdue.

Sunday, October 11, 2009

Healthcare - An Update

As healthcare legislation is poised to be discussed and voted on in Congress, this topic was commented in Chapter 3 "A Pair of Primary Issues," in the essay "Our Health Care Market Dillemma" dated May 3rd, 2008 (pp. 23-27):
"Extreme regulation is inefficient though, and trying to regulate the health care industry as currently structured will just lead to greater societal costs, more free riding and greater value transfers to the healthcare gatekeepers. The economic incentives within this market take us to the logical conclusion that less people at a higher price will receive lesser quality care in the future. The industry’s structure, as it stands, leads to insurance companies going out of business if they do not recognize that they have to cater to the healthier and wealthier. This is the way our health care industry works. It is not that evil or shadowy individuals do not care about sick people. It is the structure of the market that leads to this inevitable outcome, and this needs to change."
Expanding on this part of the book, here are some additional thoughts on the healthcare issue as it stands today, in a three part essay examining the economic, moral and political issues framing the debate.

The Cost of Healthcare (Part 1) - The Economic Case for Healthcare Reform

By the time you have finished reading this, more than one person under age 65 and over 18 will have died in the U.S. due to lack of health insurance. Every 12 minutes someone else becomes a number in that statistic. It is entirely possible that the best care in the world may not have saved that someone, but that family member, neighbor, friend, acquaintance, or six-degree-separated addition to that statistic was unable to know if it could have been the case. Ensuring the best possible healthcare is provided to members of our society who need it is an issue that has dogged the nation for over 100 years. Tinkering and baby steps have created institutions and programs such as the CDC, The VA Hospitals, Medicare and Medicaid, smallpox eradication, polio, rickets measles and other common disease minimization, flu immunization, and the End-Stage Renal Disease (ESRD) program among others; programs that sometimes work, and sometimes are bogged down by rules that contradict the objective of the program. Yet, over 160 million Americans every year have claims denied, problems with their claim or are outright uninsured, facing deteriorating health, bankruptcy and death. The cost of not reforming health care is greater than otherwise, and this case can be made in economic, moral and political terms. This is the first of a three part essay addressing healthcare reform on these terms.

The Economic Case for Health Care Reform: The Doctor’s Bill

In a free and unregulated market, public goods are monopolized by private providers that are driven to serve the most profitable segment with the lowest risk. Government has generally understood this “market failure” principle, as in the case of public education, an example of private, public, as well as non-profits mixing together in an effort to make education accessible to everyone. If no possibility of a publicly funded basic education existed, natural oligopoly forces would drive the price of education ever higher, while the same schools would try to lower their cost by being increasingly selective in their admission policies. Having a public option, makes private schools more affordable for those who want it, and guarantees access for all to an education that improves the intellectual and skill pool of the labor market: a productivity bonus for everyone.

The notorious “death panels” are alive and well, and get paid bonuses when health care is denied to those in need. Repeated cases of insurance companies engaging in this practice in order to increase profits are well documented. There is no control mechanism or regulation to make these private companies behave differently in their natural drive for profits, and it is entirely within the rights of these companies to seek to maximize their profits. In a free, unregulated market, their actions are perfectly understandable. It is the mission of these companies within our free enterprise system to seek to decrease costs and increase profits. It is logical then that they will try to increase the rates as much as they can, and drop as many expense creating liabilities (people in need of health care) as they can. If Big Company A is not as effective diminishing liabilities and increasing profits as Big Company B, the shareholders of A will not be happy, sell Big Company A stock, and buy stock in B. The end result of this market structure is that it skews to the healthier and the wealthier, a diminishing pool that eventually has limited growth for A as well as B. As people are dropped either actively, by coverage denial, or passively by the unaffordability of the premiums, they may get bombarded by Little Company C, D, E and others, with seemingly affordable rates and coverage; except that when they actually need the service, exclusions, limitations and deductibles are even more pervasive than in A and B.

The 46 million or so Americans with no insurance includes a great number that can afford it but do not get it because they think they do not need it; and to a certain extent that may be true. They are young and healthy, and live a healthy lifestyle. Insurance companies would very much like to mandate these people to buy policies to increase their market pool of healthy customers, especially when not competing with a player that focuses on healthcare as a public good, not as a profit market. The market structure as it exists drives the insurance companies to cater to the healthier and the wealthier. It is in society’s best interest to alter this structure so as to change the incentives.

The costs of the healthcare plans being discussed in Congress are astounding, in the trillions of dollars. But, let us be clear, that money will be spent, regardless whether it is by the government or by private individuals, unless nobody goes to the doctor anymore. This is the doctor’s bill for the nation, as charged by the whole of health services provided. The essence of health care reform is cost driven, in order to get the inefficiencies out of the system and so that we can all spend less in this essential public service, whether through the private market or as part of a public option. To focus on the great amount of money allocated by the government on healthcare for all Americans is to focus on the wrong issue. This is money that is simply shifting from one pool to another, and its sheer size just amazes us when we see it in one big number. The cost of health care, those trillions of dollars, is already being borne by all Americans by:
  1. Paying private insurance, from the insured’s own pocket or as an employee benefit; moneys which come from the stagnant wages of the employee and the company’s customer’s purse.
  2. Subsidizing by local, state and federal taxes health services for the uninsured, typically emergency and critical care, shifting from wellness management, chronic and preventive treatment to acute treatment, the most expensive of all treatment, and
  3. Lost productivity in the economy, e.g., sick days and underperforming employees.
This is a short overview of the economic structure problems in the healthcare industry, a structure that requires an extra player to at least balance somewhat its shortcomings in servicing the public good. The market structure as described favors the private sector profit motive, but ignores the character of public good (in the economics definition of the term) that is implicit in healthcare. Undoubtedly even relatively mild illnesses such as the flu cost our economy billions in lost productivity and therefore output. More catastrophic illnesses or medical needs, and death have also a direct economic impact. The loss to our economy of five lives per hour is not just in output lost, but in the increase of costs due to greater use of emergency and high cost procedures instead of preventive medicine. When our society is healthy, productivity is higher and there is an economic benefit for all.

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The Cost of Healthcare (Part 2) - The Moral Case for Healthcare Reform

True healthcare reform will be less expensive for the nation as a whole than the system we have now, unless there are Americans that truly do not get covered at all and are refused any treatment whatsoever. That would be the only way to keep the system as is and lower the cost of healthcare overall, and it should be consensus that this is a morally unacceptable option: the “death panel”. To lower the cost in a morally acceptable way there are two issues to tackle: the inefficiencies of the system and the structure of the system. Regarding efficiency, the questions that must be answered include: has the quality of healthcare overall improved at a rate that justifies increasing its cost at a greater rate than the rate of inflation? Are we paying for a healthier nation than we were one, two, ten years ago? What does drive the cost of healthcare?

The Moral Case for Health Care Reform: A Better Life for All

In evaluating the financial statements of insurance companies, the economist Uwe E. Reinhardt reports that McKinsey has compared the administrative costs of similar insurance companies in OECD countries with different healthcare market structures. The excess cost is estimated to be $150B in 2008. These administrative costs come primarily from product design (new insurance products/types of policies), underwriting (vetting for pre-existing conditions, among other tasks), and marketing. A pair of additional studies cited by Dr. Reinhardt compares administrative costs in Germany and Canada with those in the U.S. In the first case Americans pay $380 more per capita ($1,520 for a family of four in 1990, the year of the study), and in the second $752 more per capita ($3,008 for that family in 1999). These are amounts paid for the administrative costs of the insurance companies as part of their overhead, not for providing health care services, products or development. According to Dr. Reinhardt, the overall estimated overpayment in administration costs to the insurance companies would have covered this year’s cost for true universal health care. Within the health care industry this is just a portion of the excessive costs that add up to make it a bloated and inefficient way to deliver medical care to Americans.

The excessive costs borne by the American healthcare consumer are reflected in the day to day lives. Health care costs are absorbing the production capacity of individuals and businesses alike. According to a recent survey from the Kaiser Family Foundation reports that in 2009 the average cost of job-based family health insurance climbed 5%, making it the 10th year in a row that it has grown faster than inflation and wages. The average cost of this type of insurance was $13,375, of which 73% was paid by the employers. When faced with unemployment, the COBRA payments would average more than $1,200 monthly and when self-insured, and without the leverage of large pools of group insurance, families face an ever increasing financial burden, just to keep insurance. The moment a claim is filed, premiums go up, exclusions are triggered and payments are denied, following the economic logic of the current market structure. When need in health care, individuals then face the decision tree of getting the service, hence risking a rise in premiums and future exclusions, or not seeking treatment, risking further complications and definitely lowering the quality of life. When providing healthcare to their employees, businesses forego money for wage increases, new hires and expansion. A recent report from The Business Rountable (an association of the largest U.S. company CEOs) estimates that, if nothing is done, by 2019, the average annual cost of providing insurance under our present system will be $28,530. The costs have increased and are increasing faster than inflation, but the quality of life and wellbeing of our nation as a whole has not increased by any measurable statistic.

The average family facing catastrophic needs, chronic or major illnesses is likely to get limited care, lose health care coverage, and face bankruptcy. In 2005, a Harvard study found that approximately 700,000 bankruptcies annually or 50% of the total, were directly caused by medical bills affecting nearly 2 million Americans, that more than 75% of those bankrupted by illness had insurance at the start of the illness, and that 38% had lost coverage at the time of filing for bankruptcy. In 2007, according to the American Journal of Medicine, the percentage of bankruptcies attributed to medical costs had increased to over 62%, still with 75% insured at the start of the illness. The rate of broken families and suicide associated with financial distress and home foreclosures adds to the impact of health care bankruptcies. Added to the stress of acute healthcare needs, these additional financial burdens directly strike to the heart of the American family and the American dream.

This is the system that we have now to provide for a public good, a formula that leads to the consequence of inadequate coverage and financial insecurity as a natural outcome. When combined with the waste of a bloated administrative overhead, this is morally wrong; as it is morally wrong to allow our fellow citizens to suffer a condition that can be demonstrably alleviated in a reform that is beneficial to all the members of society.

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The Cost of Healtcare (Part 3) - The Political Case for Healthcare Reform

It is important to understand when talking about the 1/6th of the economy (almost 16% - or $2.28 Trillion a year) dedicated to healthcare that this number is substantially greater in the U.S. than in other countries. The healthcare sector includes medical and healthcare goods and services, pharmaceutical, biotechnology and other products and technologies, as well as health management organizations, hospitals, and healthcare insurance. The U.S. spends more overall and more per capita on healthcare than any other nation, but this number does not say it all. In an analysis by the previously cited Dr. Reinhardt, a regression curve analysis (his graph is shown) is applied to different per capita spending in comparable countries, and the result is that per capita spending on healthcare is directly correlated to GDP per capita. In other words, if you have more money to spend, you will spend more money. The richer a country is the more each citizen of that country spends on the country’s healthcare sector. Yet, despite that the over $16,000 a year spent more than in the comparable economies and systems can be compared to a substantial “healthcare tax” on the average American family, no accountability or better results seems to come from that money spent.

Dr. Reinhardt argues that this regression curve also predicts what the per capita spending should be, given the GDP per capita of a country. The U.S.’ in 2006 should have been around $4,819, but was actually $6,714, approximately 40% more than what would be the norm for other economies and countries, according to the curve. It begs the question, is that almost 16% of the economy dedicated to the healthcare sector a sign of its strength or of its inefficiency?

The Political Case for Health Care Reform: We Can Do Better

When comparing five capitalist democracies approaches to healthcare, the size of the healthcare sector in the U.S. is 32% greater than it’s closest comparable, Switzerland. Switzerland is home to some of the largest pharmaceutical and insurance companies in the world, so this sector is sizable for its economy. In the U.S. there are other large components of the healthcare sector, each of which has a role in contributing to or reducing costs as a whole. Let us examine further.

Medical Technologies and Research

The largest number of medical innovations worldwide is commercially developed in the U.S., due to greater spending in research in America. In 2006 it was reported that out of the 22 most recent Nobel prizes in medicine, 15 had gone to Americans or researchers in American universities, while 7 had gone to researchers in other countries. The U.S. government spends over 7 times as much as European governments on medical research, and private companies spend over four times as much in America as they do in Europe. Out of the six major medical innovations of the last 25 years, one is from Switzerland (angioplasty), one that was developed in Germany (mammography) one in Japan (statins) and one in the UK (CT Scans/MRI) were improved in the U.S., and two are considered American (coronary bypass, and ACE inhibitors). While whether medicine is "socialized" as it is in Germany, Switzerland, Japan, the UK or Canada (where recently a non invasive technique for confirming breast cancer has been developed) does not in and of itself promote or hinder technological development in the field, investment does. Investment in medical technology research is proportionally greater in the U.S. than in the rest of the world, and that drives up that healthcare dollar per capita number. These innovations and developments create worldwide benefits, so in effect there is some “free riding” occurring, where the rest of the world benefits from the investments made within America. The total spent in research and innovation, however, amounts to less than 3% of the whole healthcare sector GDP, i.e. much less than 0.5% of U.S. GDP. The savings are not to be found by cutting spending here, quite the contrary. By encouraging more investment in this sector to make medical prevention and care more effective, by expanding immigration policies to encourage more intellectual capital to come and remain in the U.S., and by improving the educational baseline at elementary and high school levels—especially in math and science—more effective healthcare may develop.

Medical Drug Use and Development

Pharmaceutical research and development has given us a cornucopia of medications and drugs that have improved and prolonged the life of many throughout the world. This has been done riding on the back of a patent protection framework which allows funding and long development pipelines; but it is possible that there are excessive costs generated by this sub sector because profit margins, as reflected by the financial statements, are very much above the average corporate profit margin. It is not the role of the government to determine when a particular industry is “making too much money”, as there are many different factors that make any particular industry more profitable than another. In the case of the pharmaceutical industry, the risk of a particular investment is high, as product development pipelines can be very expensive and lead to negative outcomes after years of funding. This financial risk is partially protected by the government in the form of patents. A successful product will be allowed to be monopolized by a company so it can get greater than normal returns for its investment in this product to cover investments in other, failed product lines. Patent protection should allow major pharmaceutical companies to have profit margins in line with the profit margins of major corporations of other sectors, so why are the margins so much higher?

It is said that Americans are overmedicated. There is a pill and a supplement for everything that ails us, as in a type of “Jetson” cartoonish mentality. The public and the medical providers are constantly bombarded with marketing campaigns for over the counter or prescription drugs that will help us defeat the problems caused by our lifestyles—as well as for problems we did not know we had. As Americans we are willing to buy large amounts of products from the pharmaceutical companies and from the unregulated health supplement manufacturers to compensate for our unhealthy lifestyles. Ineffective or redundant overmedication is part of the “excess” spending in health care, an excess driven by the market and lifestyle choices of our society. Other drivers of these costs however should be looked at.

While the development of new drugs is to be encouraged, there is no mechanism that allows establishing true comparables between new drugs, drugs they replace (as the patents run out), and existing alternate remedies. That is, there does not seem to be a clear channel between the patent office, the FDA and independent testing researchers to determine if a new expensive drug has the same effect as an existing one, a health supplement or perhaps even a traditional home remedy—the analyses are narrow. The current regulatory structure is skewed towards the development and patent protection of new drugs, leading thus to the creation and marketing of new drugs—and a pill for everything that ails us. Likewise the unregulated nature of the health and natural supplement market makes Americans spend inordinate amounts of money in little more than compacted dirt and pulverized herbs with great claims but no proven effectiveness. The under funding of the FDA has not allowed it to address these two areas (broad analyses and supplements) where savings by the way of effective and cheaper medication and improved wellness for the American consumer may exist. The political deal to push healthcare included a hands-off arrangement to the current structure of the pharmaceutical industry. It is in this industry’s interest that the incentives as they exist are kept for the development of new drugs over existing ones and remedies, that food, diet and health supplements not be regulated or certified for medical and wellness use, and that the pool of people buying medicine increase. There is a discussion to be had on this point down the road; but pharmaceutical lobbyists have been very effective in postponing it.

Medical and Health Administration

As we go down the list of healthcare sub sectors, the administration systems for providing health care seem to be one where true savings can be found. Particularly the area of medical records is ripe for this streamlining and even the insurance companies would garner substantial savings if this relatively simple step, in conceptual terms, could be enacted. The idea is straightforward: every time you go to a new doctor you have to fill out you medical history, which then is placed in a folder, which goes into that holder in front of the examination room and later into a filing cabinet in the back room of the doctor’s office. The amount of time spent by you and countless other Americans just filling out and handling these forms, and the potential errors and omissions in doing so, represent billions of dollars of inefficiency; a clear opportunity for savings exists here. A networked information system, sharing information in a centralized database, and accessible by the patients through passwords, PINs or even biometrics could streamline medical histories and avoid many costly mistakes. The privacy concerns in constructing such information repository are as great as those of the existing centralized record keeping of Americans’ financial records used for determining credit scores i.e., surmountable. Secure access to this information by a patient authorized provider can be guaranteed, and record checking and updating by the patient can be done from his or her home.

There is a significant business opportunity here, a business that by eliminating all the man-hours wasted in duplicate and faulty recordkeeping can accrue great value. The technology and the data exist; they just need to be put together by the software and minor hardware technologies. This process can also flag fraudulent claims within Medicare, for example, with the consequent savings that have already been projected. The possibilities for streamlining costs, reducing fraud, and producing real substantial savings while providing better care make this area one in which special interests may interfere to appropriate these savings. It is critical that special care be taken to ensure that in fact this sector truly generates its potential for better care, efficiently delivered in a cost effective way to reduce that per capita healthcare dollar number.

The Medical Insurance Sector

The pressure is currently on insurers to become more efficient and reduce costs, so great portion of the debate has been on reforming this sector. However, the insurance sector as a whole does not have excessive profit margins when compared cross-industry to other corporations of similar size. It has already been demonstrated that it is the administrative and overhead costs that are excessive when compared with similar companies of the same industry in similar countries, and this may be attributed in part to the underwriting component of the administration. This is the part dedicated to examining particular cases and individuals to ensure that coverage is allowed, either before issuing the policy or when presenting the claim. It is sadly ironic that the resources dedicated to excluding and denying claims are what bring down the profit margin of the insurance industry to cross-industry comparable levels, when the cost to the consumer is up to 40% higher than in other comparable countries.

But another major component of this sector requires a close look. Cost savings can be achieved by examining the use of defensive medicine in order to shield practitioners and administrators. This practice raises costs both by increasing the amount of interventions and by forcing up malpractice insurance rates. Different interests are involved in this quandary that balances treatment, responsibility, liability, fairness and justice tugging at each other within a complex issue. In the pursuit of better care, the practice of defensive medicine can do harm, but doctors and medical administrators may feel forced to engage in it to protect themselves from future liability.

We Can Do Better

In reviewing the political issues related to health care we can see that action resulting in bringing down the costs should focus mostly on administrative practices of the medical field and of the insurance companies. There can be substantial savings in the pharmaceutical sector as well, and a clear drive to encourage healthy lifestyle choices should be part of public health policy. In medical administration, incentives to encourage the pooling and sharing of records and histories could make the delivery of medical services more effective at the same time as saving billions of dollars. It is also a way to decrease fraud within the existing Medicare and Medicaid programs.

The insurance companies have no economic incentive but to cater evermore and increasingly to the healthier and the wealthier, despite that the increased marginal cost of doing this has brought down their profit margins. This is why they want to increase the pool of the insured to include individuals that are healthy and do not believe they need to buy insurance, so they do not buy any. It would be a political mistake to mandate insurance to all without including a control mechanism that made sure that “cherry picking” by the companies still left out those in need of medical treatment and created more "free riding" on emergency and public services (as it occurred with the “health co-ops”). The insurance sector is in need of an additional player that can bring some sanity to the existing perverse incentives within it that give us an expensive system with inadequate coverage.

The public option is that player, a new part in that structure that will help adjust the shortcomings of the present system, not perpetuate them, and an effective correction to the bloated and inefficient healthcare sector that crowds out resources for wage growth and new investment, while delivering mediocre results for the money spent. Opponents to such an option argue that in the UK or Canada, for example, when the sector has such a direct intervention by the government the standard of care decreases, including preposterous arguments such as shortages of medical services and supplies—as if the market would not compensate for that. While this is a lie brought out to light by the fact that the wellness factor is greater in these countries as measured by such things as average lifespan, heart disease rates, obesity, chronic disease treatment, and the like, it begs the question to these opponents when they say no to reform: do you really think the U.S. cannot do better?

WHY SHOULD WE CARE ABOUT HUMAN RIGHTS?

We celebrated in a recent event held to commemorate the 75 th anniversary of the adoption by the United Nations of the Universal Declaratio...