Health Care Costs

Vouchers Are Not a Plan

Opponents of a single payer health care system in the United States like to say it would cost too much, even throwing in the inappropriate complaint that the CBO has not scored any plan.  Of course that won’t happen until congress puts bills such as H.R. 676 through the committee system. As an alternative a voucher plan is often offered up. The only thing that the voucher system offers is a cost-shifting lid on government spending. No control over total health care costs. No access to medical care for those who cannot afford the ever-increasing costs not covered by the vouchers. No system. An improved, expanded Medicare would require hard, thoughtful work and discipline, but it can succeed. We can pick and choose figures to argue over but  there is no ethical and rational alternative.

The financing of Medicare for All is a well explored issue. As far back as 1991 the GAO reported that, “If the universal coverage and single-payer features of the Canadian system were applied in the United States, the savings in administrative costs alone would be more than enough to finance insurance coverage for the millions of Americans who are currently uninsured. There would be enough left over to permit a reduction, or possibly even the elimination, of copayments and deductibles, if that were deemed appropriate.”   Later the same year the CBO reported, “If the nation adopted…[a] single-payer system that paid providers at Medicare’s rates, the population that is currently uninsured could be covered without dramatically increasing national spending on health. In fact, all US residents might be covered by health insurance for roughly the current level of spending or even somewhat less, because of savings in administrative costs and lower payment rates for services used by the privately insured. The prospects for controlling health care expenditure in future years would also be improved.” (“Universal Health Insurance Coverage Using Medicare’s Payment Rates”) .  Fourteen years later the lack of true (not just for the government) cost controls make improved Medicare for All an even more imperative goal.

For a good, up-to-date discussion (2013 figures) of H.R. 676 see the article by Gerald Friedman, professor of economics at the University of Massachusetts, Amherst. Friedman extrapolates on (1) the savings on provider administrative overhead and  pharmaceutical costs, (2) the regressive and obsolete funding sources to be replaced by progressive taxation (in billions of dollars), (3) the savings on administrative costs of insurers, Medicaid, and employers (in billions of dollars) and (4) the savings on federal tax expenditures.

As Professor Friedman states, “On top of the enormous administrative savings of single payer, the savings from effective cost-control would make it possible to provide universal coverage and comprehensive benefits to future generations at a sustainable cost.”


…and study Friedman’s charts

Funding with progressive taxationFunding with Tobin Tax

Reference Pricing: Another Fad


There have been a number of good discussions of reference pricing. This concept is mainly applicable only to large employer sponsored plans. As Ricardo Alonso-Zaldivar from the Associated Press observed, “However, the strategy appears to be suitable only for a subset of medical care: procedures and tests that are frequently performed, where the prices charged vary widely but the quality of results generally does not. In addition to knee and hip replacements, that could include such procedures as MRIs and other imaging tests, cataract surgery and colonoscopies.” The idea is essentially incompatible with the insurance exchanges and narrow networks. And, is there any reason to trust the insurance companies to use a fair, patient-centered set of standards in establishing any given price? Or is it possible that they will game any such system to their own advantage? For instance, they have already found a way to make sure any additional expenses incurred by the patient will not be allowed to apply to the out-of pocket caps required by the ACA.  Sarah Lazare in Common Dreams discusses some of the pitfalls in this latest experiment by CMS. In June, 2014, FamiliesUSA published an excellent brief by Lydia Mitts, “How To Make Reference Pricing Work For Consumers.” Ms. Mitts points out the potential financial risks of cost shifting to consumers if the insurance companies set their pricing too low making it difficult for patients to find providers who will accept the payments. She also mentions that those who do accept the prices might raise prices for other services. She concludes with an excellent list of key elements that would be necessary in order to make such a system work for patients. Unfortunately, the health insurance industry has shown little interest or ability to do such things as providing adequate networks or prioritizing (or even, measuring) quality. Don McCanne provided a good commentary back in 2013, which he summarized by saying, that CMS is saying “we should shift risk to the patients – exposing them to financial penalties should they not make perfect decisions in their health care purchasing, even as the private insurers create yet more barriers to perfectly priced health care!”

The goal to bring down prices of medical care is admirable but one more payment system just adds to the incomprehensible world of multiple payers, multiple (often conflicting) rules and regulations, confused eligibilities, unintended consequences, profit-making, rent-seeking and cost-shifting to the “consumer.”

Service Model, Not Business Model

Jim Flower has written an excellent article in Hospitals & Health Networks stating, ”It’s time to Rebuild Health Care’s Business Model”. He nicely portrays the unworkable elements of our present system and concludes that there is no way of tweaking the model to make it work. As he says, “The health care system, payers and providers playing the Default Model Game, are delivering an unreliable, unguaranteed, financially and medically dangerous product to their real customers — the large purchasers and the consumers of health care. This is not stable.”  Unfortunately he runs out of steam when it comes to the solution. Admittedly, he is speaking to hospitals and health networks and not to individual patients, policy makers, CMS, legislators, etc. His recommendations to get out of the fee-for-service business as much as possible, drive down internal costs and bid actual prices are, again, just different ways of playing the same old game. They don’t alter the present underlying attitudes of treating health care as a commercial, for-profit business rather than as a humane service. We have to grasp the knowledge that health insurance is a no-value-added business, that the patent protected pharmaceutical industry is avaricious, hospital systems are bounced between profit-making and forced service and physicians are losing their sense of their profession as a “calling”. Reforming business models is not going to change these fundamental dynamics.  If we want affordable, accessible and universal health care we need to improve Medicare and expand it to cover everybody from the day they are born and finance it through a single payer, multiple provider system dedicated to health care reform.  

Health Care Waste-Administrative Costs

The recent paper by Jiwani et al  concerning medical administrative costs has attracted a lot of attention. This paper in BMC Health Services Research calculates the costs of billing and insurance related activities (BIR) in the United States. Using 2012 figures, the authors conclude that BIR costs were approximately $471 billion. “Added BIR” was the amount which was judged to exceed costs in systems with simplified requirements using the Canadian single payer system and U.S. Medicare figures for comparison.

BIR Costs graph                                    Graph from Jiwani et al. BMC Health Services Research (2014) 14:556 

Excessive costs due to administrative complexity is just one of the five areas of health care spending examined by Berwick and Hackbarth using 2011 figures. These authors calculated the costs of our administrative complexity as a range with a mid-point of $248 billion compared to the updated and refined figure of $337 billion provide by Jiwani et al. The 20ll study also included estimates of wasteful spending in the areas of failures of care delivery, failures of coordination, overtreatment, and pricing failures. The total was $734 billion with an added $177 billion lost in fraud and abuse.

Waste 2011 graph

Recent commentators, including Jiwani et al , have noted that simplifying our system and recovering that $337 billion of excess administrative costs would pay for the upgrading of our present coverage including adding the presently un-insured. In dollars amount that makes sense but adoption of a single payer system would not immediately capture those savings. Elimination of the excessive overhead of the insurance industry would be done quickly and could recover half of that waste. The rest would have to wait for the development of new payment and delivery systems. The physician overhead portion would be especially difficult because it is built into the staffing of multiple scenarios, e.g., solo, small and large clinic, single and multiple specialties, self- and other-employed. The staffing includes multiple employees serving multiple roles with overlapping clinical and administrative functions. The savings can be harvested only by reducing the payments to the physicians. The current fee-for-service payment system would make it difficult to calculate a workable and equitable phase-out plan. However the physicians’ portion of the added BIR is only 13% so the needed gradual development of an improved physician compensations system would still be workable. The change in payments to hospitals and other health services would be easier to conceptualize.

When one looks at the other categories of waste it is obvious that there is a large opportunity for savings that can be realized only by a single payer system.

The Pharmaceutical Games

For decades the pharmaceutical companies have answered complaints and investigations about outrageous drug pricing by responding with the old axiom, “We have to have money for Research and Development.”   First of all, they make more money than other industries and secondly, their R & D expense is much lower than what they claim. Actually, those two statements add up to the same thing.

Recently there have been headlines proclaiming new high R & D costs of anywhere from $2.6 billion to $11 billion per new drug. One set of figures is generated by Joseph DiMasi at the Tufts Center of Drug Development.  This Center is financially supported by the drug industry. More recently Forbes published the $4 billion to $11 billion claims of Matthew Herper and Scott DeCarlo . What’s this all about? It’s about stacking the deck in order to plead high R & D costs as a justification for the astronomical prices the drug companies are charging for both new and old drugs. They also use this ruse to gain government protection from price competition by extending patent terms and data exclusivity.

Back in 2003, when Tufts guesstimated the average cost of each new pharmaceutical discovery, they doubled their initial figure of $401 million to $802 million. This was on the basis of “opportunity cost” or what the company could have earned if invested elsewhere. In defending this accounting ploy they later wrote “These are real, not ‘theoretical’, costs. They are especially relevant for investments in pharmaceutical R&D since the development cycles are so lengthy…”  Many comments have been written about this non-intuitive concept. But DiMasi et al aren’t through. Now they have come out with their latest figure, $2.6 billion, which includes $1.2 billion for opportunity costs. As we will see with the Forbes estimate, the authors take all of their R & D claimed costs and apply them to a small (and secret) list of self-originated new drugs. Numerous unverifiable assumptions and complex weightings are used in their calculations. One gets the impression that they worked very hard to come up with results which would satisfy the industry.

One problem is that commentators (and policy makers) have allowed Tufts to pervert the sense of the term “investment”. Once the perversion is accepted it’s clear sailing for this new example of Hollywood bookkeeping.  R & D is not an investment.  R &D is not an investment. Do we need to say it again? It’s the cost of doing business. The “investment” goal for the company is not to have R & D but to produce a marketable and profitable product. The “investment” goal of the stockholders is to make money. One doesn’t invest in R & D anymore than they invest in executive salaries or invest in advertising and promotion. These are all costs of doing business. Calling it investment doesn’t make it an investment anymore than going out and buying the most expensive coat you can find and calling it an investment makes it one .  One doesn’t invest in coats (or family groceries). One doesn’t invest in R & D.  It’s still just the cost of living. This is recognized by the IRS and affirmed by the companies when the R & D expenses are taxed as ordinary business expenses and not amortized over a 10-20 year period as would be a long term capital investment. Let’s see now. If I bought the coat for $300 then the real cost was $600 because I lost an additional $300 that I could have invested somewhere else.

Just when we thought we had seen the prime example of bookkeeping chicanery the writers at Forbes (Matthew Herper and Scott DeCarlo) came up with those figures of at least $4 billion and up to $11 billion for each new drug. Their genius was to take the industry claimed total R & D costs and, for each company, divide that number by the number of new drug approvals. It looks like they meant new chemical  entities. Let’s see now. If we take the number of oranges and divide by the number of drug bad apples we will get the cost per barrel. Of course that R & D figure includes the doubling effect (the phantom dollar) of opportunity loss. But it also contains all of the costs for the development of me-too drugs, new dosages, new forms of administration (intra-nasal, different propellants, slow release, etc.). The me-to-drugs are the big profit makers. They are the main reason drug companies spend at least twice as much on promotion and advertising as they do on R & D. Also, as Light and Warburton note, “R & D has been known to include all the costs of their contracting related to R&D, for example with biotech companies, contract research organizations and other organizations; the cost of land and buildings used substantially but not exclusively for research or development; and general administrative overhead and major equipment. Other costs mentioned in the R&D literature that some companies may include in their total R&D costs are large legal expenses for developing patents and other IP protections and legal defense against challenges; large fees paid to doctors to participate in clinical trials and become key opinion leaders, to promote new drugs; the costs of ghost managing and authoring research results, as well as support for medical journals publishing them; executive costs in finding and negotiating with other firms for new products; lectures and courses to inform physicians about current research; or company-wide technical upgrades, like software or computers.” For good reading, still applicable, is the Public Citizen report, Rx R&D Myths: The Case Against the Drug Industry’s R & D “Scare Card”

Without getting into the multiple assumptions and manipulation of data in the diMasi calculations there are some points worth consideration:

1) The Tufts Center is Pharma supported.  If they don’t come up with the results desired by Pharma they won’t get any more “contracts”, i.e., money.

2) The data used by Tufts is furnished to them by the drug companies and is not available for peer review or the public. If the industry wanted us to know the real costs of R & D they would release the data for public perusal. They never have. In fact they have spent a lot of money on legal and lobbying fees to fight efforts for transparency  (Appendix D) . At present the only effective way to force the industry to reveal its data is through the subpoena power of congressional committees.

3) There is no validation of what is included in Tuft’s company R & D figures.

4) Only 10 (unnamed) drug companies out of the top 50 firms provided figures. What is the selection bias?

5) Which drugs were used in the study? This has not been reported. What is the selection bias?

6) The whole rationale is just a smoke and mirrors show to divert attention from the fact that the top 10 Pharmas made $711.4 billion in the 10 years, 2003-2012 and that income is going up rapidly, partly with the help of U.S. taxpayers. Global drug sales are expected to top $1 trillion in 2014. If R & D costs are such a threat why are they making so much money?         

Pharm Profits_78427037_pharmaceutical_profits_624>                                                    


7) Because the drug companies use supposedly high R & D costs to justify their high prices it s important to know how much of their costs are reimbursed by  government and non-profit organizations.

8)  It doesn’t include the tax savings from tax credits and the reduction in taxes achieved by classifying R & D as business expenses, thereby reducing the taxable income.

9) It doesn’t account for amount of research paid for by others. An internal National Institutes of Health (NIH) study obtained by Public Citizen shows that taxpayer-funded scientists and foreign universities conducted 85 percent of the published research studies, tests and trials leading to the discovery and development of five blockbuster drugs. That was back in 1995 and the ratio hasn’t changed much since then. The drug companies usually report applied research without acknowleding that the basic research (pre-applied) is dominated by government support.

10) It doesn’t include profits shifted overseas and immune from U.S. taxes. ($7.2 billion in taxes avoided in 2012). It doesn’t explain why U.S. drug prices area so much higher than in the rest of the world. It doesn’t explain why old, generic prices are skyrocketing. It doesn’t explain how you figure R & D on a drug developed by one company and that company then bought out by a larger company. (See Gileal’s purchase of Pharmasset and subsequent marketing of Solvadi at $1,000/pill).. Yet Pharmasset’s R & D costs for Solvadi were only $62.4 million. And, after the sale, one of the later clinical trials was run by the NIAID.

The pharmaceutical industry hides the data for R & D costs while claiming astronomical figures. They turn to calculations supplied by DiMasi, et al at the Tufts Center for the Study of Drug Development which receives funding from, and is a cover for, big Pharma. They garner huge profits with the American taxpayer supporting a large percentage of their sales. We need regulations which create true transparency of R & D costs, and we need regulations to reign in these runaway prices. Competition and important research needs to be encouraged and prices need to be controlled to provide only reasonable return on investments.

The Value-Based Hospital May Not Be

The report by the Boston Consulting Group (BCG), “The Value-Base Hospital” is interesting but disappointing. “Value” is one of the three current catchwords that is used throughout the health care industry (“Quality” and “Patient-Centered” being the other two) . We know that the BCG is off to a bad start when they state, “By definition, health outcomes are specific to a given disease, medical condition, or procedure.” I don’t know where they get that definition but my 50 years of medical practice has always been informed by the understanding that health care and outcomes are specific to patients (and no 2 patients are the same). Medical conditions don’t walk into the hospital. Patients come to the hospital. They almost always have accumulated a list of diagnoses and conditions, some of which are accurate, some wrong, and a lot of “sorts of”s and “atypical”s and “suspected”s.  And they come with a variety of needs, goals, expectations, strengths and attitudes. If there is any value it has to be for each individual patient, not each condition. And only the patient knows what is of value.

The authors’ lack of awareness of the difference leads them to a narrowed appraisal of the STEMI trial. They summarize their perspective by saying, “The study found that routine thrombus aspiration before PCI did not significantly reduce mortality and, therefore, did not contribute to health care value.” What the study really found was no difference in mortality at 30 days, not 90 days, not 1 year (as in the TAPAS trial), but 30 days. And there was no other end point such as post hospital angina, shortness of breath or return to normal activity. The study wasn’t designed to detect any “health care value”. Whether or not thrombus aspiration has any value needs much more sophisticated investigation. As an aside it should be noted that Value is Quality divided by Cost. As, such, the term Value is often misused in place of Quality. Health outcomes are a measure of Quality, not Value. When stakeholders talk of value they usually mean decreased cost to them.

The International Consortium of Health Outcomes Measurement defines health outcome by saying “Outcomes are the results people care about most when seeking treatment, including functional improvement and the ability to live normal productive lives”.  For instance, for low back pain they consider the following parameters: major surgical complications, need for reoperation, need for pain medications, work status, health-related quality of life. The last three of these are important but very subjective and can be measured or scored only by creating arbitrarily weighted number scales. The BCG admits that the usual quality metrics are rejected by physicians as not relevant to patient care. However, the attempt to replace Quality” with “Outcome” is equally naïve and, by necessity, has to focus on events and procedures, not medical care. And it ignores the larger issues such as whether or not the procedures were indicated or avoidable in the first place.

Attempts to measure outcomes for medical conditions introduce a subjective quicksand of forms, questionnaires, and multiple inputs for every hospitalization or patient care episode. And, with all of that, they represent only one moment in time. As an example see the Movement Disorder Society’s 31 page Unified Parkinson’s Disease Rating Scale .

We have a long way to go before we can measure “Quality” of medical care and, as disappointing as it may be, we may never be able to measure it anymore than we can measure the quality of a poem, a symphony or a sunset or, for that matter, a kiss, the touch of a hand, or the healing power of caring. But that doesn’t mean we can’t strive for personal and compassionate excellence of medical care.

Don’t Fight the Health Insurance Companies

The recent poll by the AP concerning health insurance deductibles with private policies only confirms what we knew was going to happen.  People cannot afford health care even when they are insured. The trend for policies to have higher deductibles is just making the matter worse. Most of the policies being sold in the insurance exchanges are high deductible. Supposedly the consumer is at fault for picking premium price instead of level of coverage. The insurance companies are happy.

If the deductible prevents people from seeking medical care for illness and injuries or following treatment recommendations then those people are underinsured.  As Obamacare increases the number of insured by 10-15 million people it is increasing the number of underinsured by many millions more. This problem will get noticeably worse year-by-year as the people who are use to good health develop an increasing number of medical problems that require them to pay $3,000 to $6,000 even before their insurance kicks in. And, of course, if the problem lasts into the next year then the out of pocket deductible starts all over again. And, God forbid, what if two people in the family get sick. For comments by Dr. McCanne see

For my Blog: Insurance Exchanges: The Fast Food of Health Care

And  We Are All Underinsured

There is no use complaining and talking about which insurance policy to buy, etc. Don’t fight the health insurance companies. It’s only going to get worse. The solution is single payer medicine, Improved Medicare for All.

Hospital Administration Waste

U.S. hospitals spend 25.3% of income for administrative expenses-the highest of 8 industrialized nations studied in this report. If we had the same percentages as Scotland or Canada we would have saved $140 billion in 2011 and even more per year since then. We could do that by having a simpler single payer system.  Health Aff September 2014 vol. 33 no. 9 1586-1594                                    

Trans-Pacific Partnership: The Corporate Grab

The rent-seeking Trans-Pacific Partnership is the work of big corporations. It would raise the costs of pharmaceuticals (even higher) and lengthen the patents. It extends the range of patents and it turns jurisdiction over to an international tribunal, circumventing national laws. Please read Dr.Flower’s  “Backgrounder on the Trans-Pacific Partnership and health care“.