Category: Health Alerts

Are Medicare Advantage Plans Overpaid and Corrupt?

Medicare Advantage consists of private plans in which Medicare beneficiaries can choose to enroll. They were made more popular by the Medicare Modernization Act of 2003, which also introduced Medicare’s drug benefit (Part D). If not for Medicare Advantage, beneficiaries would be stuck in the traditional Medicare Part A (physician) and Part B (hospital) plans, where the federal government determines how much to pay providers according to bureaucratic formulae. It’s sort of like Gosplan, the old Soviet economic pricing and planning mechanism.

To escape this fate, one third of Medicare beneficiaries now choose Medicare Advantage plans. Obamacare (“the ACA”) was supposed to squeeze those seniors out of their plans in order to finance Obamacare. However, when the time came, the Administration balked. Meghan McCarthy of Morning Consult explains this “Potomac Two-Step“:

The approach, two years in a row, has been that CMS issues a proposed rate in February with very tough reductions, a proposition that rallies insurers and members on both sides of the aisle to vehemently oppose the cuts. After much hand-wringing and commenting, the administration arrives at a much friendlier number in the final release.

Medicare Advantage plans are popular for a number of reasons. Most importantly, they provide better care than traditional Medicare. Joseph Newhouse and Thomas McGuire review this in an academic journal. It is ably summarized by Austin Frakt in the New York Times UpShot blog:

Medicare Advantage plans — private plans that serve as alternatives to the traditional, public program for those that qualify for it — underperform traditional Medicare in one respect: They cost 6 percent more.

But they outperform traditional Medicare in another way: They offer higher quality.

Let’s Add Some Cash to the Copper (and Other) Plans

A version of this Health Alert appeared at Forbes.

Avalere Health has given a budget score to the so-called “copper plan,” a health insurance policy proposed by health insurers that would cover 50 percent of the actuarial value (AV) of the policy. Our colleague Linda Gorman has defined AV as the average amount a plan with a given set of benefits is likely to pay given a standard population. Current Obamacare plans (bronze, silver, gold, and platinum) cover higher actuarial values.

Actually estimating actuarial value in Obamacare is complicated. Nevertheless, to simplify, we can say that if the standard population would cost $8,000 per beneficiary, a copper plan would expect to pay $4,000 of the costs.

One problem with Obamacare’s regulation of these plans is that the AV is forward looking. Different actuaries come to different conclusions. For example, an Obamacare silver plan has an actuarial value of 70 percent. With an out-of-pocket maximum of $6,350, what co-insurance and deductible will result in the standard beneficiary paying 30 percent of the costs? When this question was posed to three highly respected consulting actuaries, they came up with three different answers. Each proposed a 20 percent co-insurance. However, their deductibles differed substantially: $4,200, $2,050 and $1,850.

Another problem, discussed frequently at our blog, is that Obamacare incentivizes insurers to design plans that will attract the healthy and dissuade the sick from enrolling. Because a small portion of any population accounts for most of the health costs, an insurer can design a plan that will have extremely high cost-sharing for sick people. The easiest way is an expensive tier of specialty drugs. Because most of the people will not spend anywhere near their share of the AV, the plan overall will hit its target.

Unfortunately for insurers, their plans are not achieving their goals: Sicker people have piled into Obamacare. So, it is not surprising that insurers want to offer a copper plan with even lower AV, in order to attract more healthy people with lower premiums.

Patient Power Puts Pressure on Prices

A study recently published in Health Affairs describes how price transparency drove down the cost of MRIs by almost twenty percent from 2010 to 2012. Compared to patients who did not have the advantage of transparent pricing, cost per procedure dropped $220. Further, there was a significant shift from hospitals to outpatient facilities.

This result is just the beginning. It was not a result of true consumer-driven health policy, but an intervention by an insurer. When a physician referred a patient for an MRI, the insurer required prior authorization before paying for it. When the patient called for prior authorization, the customer-service rep was able to give the patient the choice of a lower-cost provider in the same area. Importantly, the insurer’s rep was able to tell the patient how much he or she would save by using the lower-cost provider.

This is something that providers resist mightily — for obvious reasons. As a consequence, more expensive providers, especially hospitals, dropped their fees significantly. This resulted in a 30 percent compression of prices.

It is a step in the right direction. The article notes that government dictating price transparency has no effect — something we have discussed previously at our blog. Nevertheless, there is a lot further to go. For example, one third of the patients had zero co-pay or deductible, so were completely insensitive to price. Also, it still requires too much bureaucratic intervention. Why should a patient have to call the insurer to figure out the best price for the service?

For reducing costs, imaging is probably low-hanging fruit. Nevertheless, this experience teaches valuable lessons. Prior authorization alone (when an insurer simply makes a yes or no decision on whether it will pay for a procedure) is a cause of irresolvable conflict between payers and providers. Because the patient remains insensitive to price, if the physician decides to do the paperwork for prior authorization, it does not reduce costs. This was confirmed for Medicare in a Congressional Budget Office estimate in 2013.

Are Patents Leading to Drugs that Cure the Wrong Patients?

A version of this Health Alert appeared at Forbes.

That’s not a headline you’ve read before, I’ll bet. New evidence suggests that drug companies invest too much in therapies targeting diseases at late stages and not enough on prevention or early-state therapies.

It is emotionally satisfying and socially acceptable to say that buying an extra few months of life is priceless, but if resources invested in such drugs could have been invested in drugs that would have dramatically increased the quality or length of lives of other patients, it is not evil to suggest that the resources were misallocated.

Eric Budish of the University of Chicago, and colleagues, have observed that drug companies invest significantly more in researching and developing therapies for late-stage than early-stage cancers. They have identified the patent system as the culprit. As summarized in the Economist’s Free Exchange blog:

The economists find that pharmaceutical companies conduct 30 times more clinical trials for recurrent cancer drugs than for preventive drugs (the effect persists even after adjusting for market size). The authors also show that firms divert their R&D expenditures away from more curable, localised cancers and focus on incurable metastatic and recurrent cancers instead. The patent system encourages pharmaceuticals to pump out drugs aimed at those who have almost no chance of surviving the cancer anyway. This patent distortion costs the U.S. economy around $89 billion a year in lost lives.

To put it (a little too) simply, patents have a term of twenty years. If a drug-maker has to do a clinical trial that lasts ten years until it reaches its endpoints, it will have only ten years of patent life. If a trial for a late-stage cancer only takes one year to reach its endpoints, it will have up to nineteen years of patent life. Here is an example from the study:

What is To Be Done with Health Insurance Exchanges, Post-Obamacare?

Any time a Republican politician suggests that there is anything positive in Obamacare, the media are eager to declare this means the Republican establishment is backing away from repealing the Affordable Care Act and wants to “fix” it instead.

This, of course, is what most businesses and their lobbyists would prefer take place. It is consistent with the Kaiser Family Foundation’s drumbeat of monthly polls reporting that “over half the public has an unfavorable view of the Affordable Care Act (ACA) in July, up eight percentage points since last month,” but that a “majority continues to prefer Congress improve ACA rather than repeal and replace.”

The latest exhibit is a report in the Wall Street Journal that U.S. Senator Bob Corker (R-TN) thinks that “we could build on the exchange concept.” What? Build on a legacy of bloated and broken IT contracts, which swallowed up billions of dollars (including $655 million on three state-based exchanges that shut down after a few months of operation) and failed in so many different ways to enroll people properly?

“Building” on that would be a strange way to “fix” Obamacare. Fortunately, a member of Senator Corker’s staff has told me privately that he meant nothing of the sort. Instead, what he meant was expressed in a rhetorical question reported below the lede in the Wall Street Journal:

“Don’t we really want individuals in our country to have their own health insurance?” Mr. Corker said, backing the ability of individuals to take their health insurance with them as they change jobs and “move away from being dependent on employers where people feel locked in.”

Have Faster FDA Approvals Caused More Drug Safety Problems? No!

A version of this Health Alert appeared at Forbes.

The media gave some attention to a new study, which suggests that the Food and Drug Administration (FDA) recklessly allows unsafe new prescription drugs onto the market. The research supports a longstanding suspicion that the Prescription Drug User Fee Act (PDUFA), first passed in 1992 and renewed every five years, has caused the FDA to view the research-based pharmaceutical industry as a “partner” and source of revenue, rather than a regulated industry.

Before PDUFA, the FDA was funded by general appropriations. PDUFA has allowed the FDA to increase its revenue by user fees, which drug-makers agree to pay for new drug approvals or facilities inspections. PDUFA was last renewed in 2012. At the time, I endorsed the renewal because there was no likelihood of Congress reducing the FDA’s power: PDUFA was the best way to ensure drug approvals kept moving at the FDA.

These researchers think that’s a bad thing. According to the lead author, Cassie Frank, a physician at Harvard Medical School: “The FDA is under constant pressure to rush new drugs through the pipeline to approval. In its hurry, the FDA is apparently failing to distinguish useful drugs from toxic ones, and more dangerous drugs are slipping through. By the time many drugs receive serious safety warnings, millions of Americans have already been exposed to their side effects, which can sometimes be fatal.”

This conclusion is sensationalist, to put it mildly.

The authors examined drugs approved from 1975 through 2009 and found that drugs approved after PDUFA’s passage were more likely to receive a new black-box warning or be withdrawn than drugs approved before its passage (26.7 per 100 drugs versus 21.2 per 100 drugs at up to sixteen years of follow-up).

Reforming Health Insurance to Promote Diagnostic and Pharmaceutical Innovation

Sovaldi is a wonder drug that effectively cures a strain of the Hepatitis C virus. The headline price of Sovaldi is $1,000 per pill, or $84,000 for a course of treatment. Too expensive? That’s what the head of the health insurers’ trade association says, and many agree with her.

This charge is inaccurate. The problem with Sovaldi is that all the costs are upfront. Spending $84,000 in a few months will potentially save hundreds of thousands of dollars down the road. As Margot Sanger-Katz wrote in the New York Times:

Research on the cost-effectiveness of Sovaldi is still in the early stages, but it appears that use of the drug has the potential to actually save money over the long run. Data from the C.D.C. suggest that more than 60 percent of people with hepatitis C will end up with chronic liver disease — and as many as 20 percent will end up with cirrhosis. Treating those diseases is costly. A liver transplant, the most expensive option for the small group of patients with end-stage disease, costs nearly $600,000.

This development can take twenty or thirty years, and not every Hepatitis C patient will end up needing a transplant. Nevertheless, according to the PriceWaterhouseCoopers Health Research Institute, Sovaldi will reduce long-term medical claims for employer-based plans.

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Repealing the Medical-Device Excise Tax: Taking the Next Steps

Why does the medical-device excise tax still exist? This tax is a universally reviled Obamacare revenue-raiser. It levies a 2.3 percent excise tax on the sales of medical devices of all shapes and sizes — from the smallest artificial-heart valve to room-sized imaging machines. Outside liquor and tobacco sales, most Americans don’t see excise taxes, which are levied on gross sales, irrespective of a company’s profitability.

Repealing the excise tax has wide bipartisan support in both chambers of Congress. Obamacare champions — including Representative Nancy Pelosi and Senator Al Franken, both of whom voted to impose the tax when they voted for Obamacare — have manned the ramparts for repeal.

The tax was first levied in January 2013. Hoping to see it repealed before the first dollar was collected, scholars produced impressive research in 2011 and 2012, anticipating significant job losses due to the tax’s effects on device-makers’ ability to compete.

In 2011, Diana Furchtgott-Roth and Harold Furchtgott-Roth published a study concluding that the tax would cost 43,000 American jobs. Similarly, Michael Ramlet and Robert Book of the American Action Forum wrote an analysis in 2012, which predicted job losses of at least 14,500 and up to 47,100. In a report for the trade association AdvaMed, Ernst & Young concluded that the excise tax would add 29 percent of companies’ U.S. corporate income taxes. (At the time, I was Vice-President of research at AdvaMed.)

Devon Herrick of the National Center for Policy Analysis published research explaining that most medical-device firms in the U.S. are relatively small. 95 percent of U.S. headquartered firms have sales less than $100 million and focus on domestic rather than international sales. It is more difficult for these small companies to avoid that tax by focusing on exports. Herrick also concluded that the excise tax doubled the effective corporate tax burden.

Medicaid Should Be Included in Paul Ryan’s Anti-Poverty Proposal

Congressman Paul Ryan has introduced a proposal, Expanding Opportunity in America, to bring together different federal anti-poverty programs into one. Ryan focuses on the Earned Income Tax Credit, housing and home-energy assistance, education assistance, food stamps (SNAP), and criminal sentencing reform.

Ryan’s proposal hinges on the Opportunity Grant (OG). States would apply for OGs that would roll some or all of this federal money into one lump sum. However, it would not just be turned over to states as a block grant. States, civil-society organizations, and recipients themselves would all be responsible for measuring and achieving outcomes. The OG would have one overriding goal: To facilitate recipients moving out of dependency and into self-reliance.

Ryan is looking back to the success of the 1996 welfare reform, signed by a reluctant President Clinton after a successful campaign by House Speaker Newt Gingrich. Ten years after the reform, it was widely recognized as a significant success. (In 2012, President Obama gutted much of the reform through executive action.)

At a recent briefing at the American Enterprise Institute, Ron Haskins of the Brookings Institution pointed out that this proposal should have bipartisan appeal, and if it got to President Obama’s desk he would likely sign it. This explains the appeal of Ryan’s proposals. He doesn’t just throw out wide-eyed ideas designed to attract media attention. He develops them and modifies them until they get enough support from his colleagues that a pathway to success can be identified.

This is what happened to his Medicare reform proposal. The initial version, contained in his Roadmap, proved bait for demagoguery. President Obama accused him of wanting to give seniors “some kind of voucher,” insinuating that it would be about as valuable as a supermarket coupon. Most Republican colleagues were terrified of having to vote for this. Nevertheless, after some watering down, Ryan put it in his budget and convinced his colleagues to vote for it.

Should Politicians Fix the Price of Sovaldi?

A version of this Health Alert appeared at Forbes.

Gilead (NASDAQ: GILD) has become the whipping boy du jour for the forthcoming Obamacare-driven cost explosion in government and private health spending. Apparently, everything was going swimmingly until Gilead — right out the blue! — dropped a cure for Hepatitis C on the market and threw everyone’s spending projections into a tizzy.

Politicians and the health insurance industry have embarked on a high-profile campaign to shame Gilead for the price of its new wonder-drug, Sovaldi, which can add up to $84,000 for a course of treatment. If successful, this campaign will have terrible long-term consequences for medical innovation.

Thursday’s earnings report by Gilead confirms that Sovaldi is blowing the doors off. About 70,000 patients have already received treatment in the U.S., and a further 10,000 in Europe. Worldwide, sales for the first half have amounted to $5.75 billion, almost half the company’s revenue. That revenue comes from health insurers and governments, so it is not surprising that they are scrutinizing the issue.

Senators Wyden and Grassley have requested documents from Gilead respecting its acquisition of Pharmasset, the company which originally developed the medicine that was to become Sovaldi. This is a fishing expedition that purports to have the objective of determining exactly how much Pharmasset and Gilead spent on researching and developing Sovaldi. However, this question cannot be answered. Further, it is irrelevant to the value Sovaldi delivers.