About MeI am a physician and behavioral scientist. My research and writing explore the quirks in human nature that influence our lives -- the mixture of rational and irrational forces that affect our health, our happiness, and the way our society functions. (more...)
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According to figures from the Kaiser Family Foundation, one of the best sources of reliable health policy information, the majority of Americans will have to exhaust all their “liquid assets” to cover medical expenses, if they reach the maximum out-of-pocket costs allowed by their health insurance.
The moral of this story is simple: stay healthy!
Most conservatives agree that Medicaid costs are too high. Most liberals agree that Medicaid patients should receive necessary medical care for free. And both conservatives and liberals agree that we should embrace ways to encourage Medicaid patients to obtain important preventive care services, in hopes that such services will lower healthcare costs by promoting public health.
But does anyone agree with the idea of paying Medicaid patients to receive such services?
The state of South Carolina has created an incentive program to encourage Medicaid recipients to receive preventive medical care . Show up for an annual exam, and Medicaid patients not only receive the visits for free, but even get $25 a pop for making it to the appointments. Receive mammograms, and they get another $20 per test. Get a flu shot, and they can say hello to an Alexander Hamilton, whose visage adorns the $10 bill.
Here is a table from Kaiser Health News showing what South Carolina plans to offer Medicaid enrollees, depending on which services they receive. There aren’t any huge rewards here, but when you think about the large number of people who are eligible for Medicaid in South Carolina, the cost of these rewards could be substantial:
When I first learned of this reward program, I was reminded of a conversation I had with my teenage son. He had underperformed in school, obtaining grades incommensurate with his ability. I was expressing my disappointment with his lack of effort, but he had a rejoinder: “Dad, you should be rewarding me, for not doing drugs, or drinking and driving like all my friends.”
Here are some projections on what illnesses Medicare enrollees are experiencing now, and what they will be experiencing 20 years from now, courtesy of the Brookings Institute:
Despite passionate warnings that the Affordable Care Act would demolish the American economy, things haven’t exactly turned out that way. Here is evidence Dan Diamond circulated a while back. Dan is someone I suggest you follow on Twitter if you want more pictures like these:
ICYMI: When people watch action movies, they consume more calories.
Cancer drugs have become increasingly expensive in recent years. No one blinks anymore when a new lung cancer or colon cancer treatment comes to market priced at more than $100,000 per patient. In part, we don’t blink because we have simply gotten used to such prices – the shock has worn off. Moreover, many of these new treatments are targeted therapies that only work for patients whose cancers express specific mutations, targeting the specific genetics underlying their neoplasms. Because these treatments are targeted, we know that only a subset of patients will receive them, thereby limiting the overall cost of the therapies. We are willing to give pharmaceutical companies some leeway in pricing these drugs, because we recognize that such targeted therapies limit the pool of patients pharmaceutical companies can count on to recoup their investments. In fact, due to such precision targeting, we even hope that the new treatments will be so much more effective against cancers they will justify their high prices.
Unfortunately, a study by David H. Howard and colleagues shows that new cancer treatments, on average, are less cost-effective than older ones. The price of cancer drugs is rising faster than the effectiveness.
In the simplest terms, cost-effectiveness quantifies the ratio between how much an intervention raises healthcare costs and how much it improves health outcomes. For advanced cancers, one important outcome is whether the treatment increases patient survival. A $100,000 treatment that increases life expectancy by an average of, say, six months would have a cost-effectiveness of around $200,000 per life year. (The actual cost effectiveness could differ, depending on how the drug influences other healthcare costs.) That $200,000 per life year cost-effectiveness ratio is on the border of what health policy experts think is worth spending for a year of life. And if that extra year of life is of low quality, the intervention would be deemed even less cost-effective.
If she had been eligible for Medicare, the hospital would have charged the government $10,000 for the services it provided to her, with Medicare picking up most of the tab. But lacking insurance, she was billed directly from the hospital, and not for a mere $10,000. The total charge: $120,000!
That 1200% markup is extreme. But out of the 50 U.S. hospitals with the largest price markups, 49 are for-profit institutions, marking up charges 9 to 12 times above what Medicare would pay. That is the conclusion drawn in a recent study published in Health Affairs. The U.S. hospital industry has a price problem. And as it turns out, that problem is especially problematic at some of our largest for-profit hospital chains.
Before I dig in to the details of these markups, let me provide a quick refresher on hospital pricing. If you call up the nearest hospital and ask what they charge for, say, a hip replacement, you will quickly learn that most hospitals don’t charge a single price for this procedure. (To keep things simple, let’s ignore the physician fee part of this equation, and just stick with the hospital charge.) The hospital will have a Medicaid price, and a Medicare price. They will have a price they charge BlueCross, and another they charge Cigna, and yet other prices for yet other insurance companies, each price the result of company to company negotiation. And finally, they will have the charge master price – the amount they bill for people without insurance, or for people receiving the procedure outside of their insurance network, or for people paying for the procedure with workers’ compensation insurance. These charge master prices were the main focus of Steven Brills’ influential Bitter Pill essay in TIME Magazine. And as I’ve written about before, charge master prices are often arrived at capriciously. Some experts might even contend that such prices don’t matter much because so few patients, or payers, pay this full price.
But as it turns out, these prices are not completely capricious, and for-profit hospitals raise their prices for very savvy financial reasons. You see, the charge master can be a starting point, what behavioral economists call an “anchor,” for negotiations with payers. In addition, high charge master prices pad the bottom line for hospitals, whenever they serve patients who pay the full price. And there remain a large number of people in the United States who, despite the Affordable Care Act, do not have health insurance and therefore will be charged this full price.
Greedy pharma execs have been in the news of late. Here is a story on the topic, from Wired. The reporter misquotes me. I never said Apple could make profits selling iPhones for $10. I said that even if they could profit at that price, they’d be crazy to do so if people would pay lots more.
Martin Shkreli is the Internet’s villain of the week. After buying and then immediately jacking up the price of a drug that treats a potentially deadly parasite, he’s become a sneering meme in social media, a think-piece punching bag, and a policy springboard for presidential candidates. He gives a bad name to former hedge fund pharmaceutical CEOs everywhere.
How can that be? Drug companies and greed are supposed to go together like bankers and um, greed. Shkreli recently capitulated to the public outrage and said he’d drop his drug’s price. But he hasn’t backed down from his rationale for the original price hike: This is what it takes to do research, to be profitable, to be successful in his highly regulated industry.
And in a way, he’s right. Long before you ever have a chance to balk at drug prices, the companies that make the medicine rack up billion-dollar tabs from research, development, and clinical trials. Insurance companies negotiate for distribution, and whittle more money away from a company’s bottom line. Not to mention that without profits, investors won’t invest in pharma, and drugs won’t get made. So is Shkreli really an excessive rogue actor, or is he merely playing by the same rules as the rest of the pharmaceutical industry?
Drugs start in laboratories. Some scientist—at a university, government lab, or pharmaceutical company—finds a chemical compound that seems to have some effect on some malady. She or he isolates the compound and tests its effects on individual cells in petri dishes, then animals, building a case for human use. This preclinical work, called drug discovery, can take three to four years, and only about one in 1,000 compounds survive to get tested on human beings.
Human tests—called clinical trials—are the gauntlet of drug development, and have three phases. The first tests the drug for safety, the second for dosing, and the third makes sure the drug is effective enough against whatever it targets that it’s worth putting on the market. Lasting anywhere from five to ten years, only about one in ten drugs survives clinical trials to market.
Time (plus scientists, plus lab space, plus equipment, plus patient recruitment, plus test after test after test) is money. A 2014 report from Tufts University Center for the Study of Drug Development found that the average cost of going from chemical compound to clinical trials to FDA-approved drug is $2.7 billion. Even drugs that fail early can cost companies millions. “There’s a saying, that it costs a billion to produce the first pill, and 10 cents to produce the second,” says Rachel Sachs, a fellow at the Petri-Flom Center for Health Law Policy, Biotechnology, and Bioethics at Harvard Law School.
Pharmaceutical companies make a lot of hay about these costs, but they aren’t the end-all be-all for a drug’s final price. “If I’m the pricing person for something, I’m not looking at how much we spent making it,” says Peter Ubel, a physician and professor of business and public policy at Duke University. “I’m looking at what I think the market will bear.”
“What the market will bear” is an phrase you’ll hear frequently when you start asking people about drug costs. What it means is nobody outside the company really cares how much a pharmaceutical company spent developing a drug. Markets care about a drug’s perceived value.
Think about when Apple debuted the iPhone, says Ubel. “There were crazy research, development, and production costs, and they probably could have sold the thing for $10 and still made a profit,” he says. But Apple figured that people would pay $500, and so that’s what they charged.
The bill she received in the mail revealed a staggering figure — $9,225 for one infusion of Avastin, a chemotherapy drug. And she would need many more such infusions. Fortunately, the dollar amount is what medical experts call a “charge,” which in normal marketplaces refers to the amount a provider expects for the good or service in question, but in healthcare means: the amount the provider reports billing to the payer, which has almost nothing to do with what we expect the payer to pay.
Phew! She scanned the bill more closely. The $9,000+ figure was followed by several other figures – the amount the insurance allows the doctors to charge, for example, plus (most importantly) the amount she was expected to pay out-of-pocket. As it turns out, for most Americans with private insurance, that out-of-pocket value will be quite reasonable. For Avastin, privately insured patients pay an average of $228 per treatment. That still is a lot of money for most people, but it is mere fraction of the overall cost. Insurance companies, in fact, pay an average of $4,461 for each Avastin treatment, based on data from 2012.
But there’s a very important third party payer that is not so generous, a payer that more than 55 million Americans count on for help with medical bills. That payer, of course, is Medicare. (To read the rest of this article, please visit Forbes.)