I was visiting with my primary care physician yesterday, and as we sat in his office waiting for a long article to print, I decided to pick his brain a little bit about the issues we've been discussing here -- where do health care costs come from, and how might we control them?
If you think it's a little odd that I was "visiting with" my PCP, or that he had time to usher me into his office, log into an online database, and pull up and print a 16-page article on a medication we were discussing, well, that's part of the story. My physician is a practitioner of what's sometimes called "concierge medicine." In a nutshell, this means that his patients pay him a flat yearly fee. What this fee purchases, in my case anyway. is first of all an annual physical that has some teeth. I come in a week or two beforehand, get a full battery of eye, ear, breath and blood tests from his assistants, as well as an EKG. I'm then given a fairly fat packet of questionnaires to fill out, regarding things as diverse as eating habits, indicators of depression, etc. I fill these, drop them in the mail to his office, and then in another week or so I come in. I get an actual exam, then we repair to his office and discuss the lab work, the questionnaires, and anything else. It's not been out of the ordinary for us to spend 60-90 minutes in such discussions.
In addition to the annual physical, the fee in effect "buys" me readier access. I can generally see him on as little as two days' notice. I can call him or email him directly. In the office, there's never a sense of being rushed. This all comes about because his patients number in the low hundreds, rather than in the thousands.
(Insurance does not cover the annual fee. And the fee does not cover any costs other than the physical. I carry an insurance plan, and have a copay for all services, including office visits).
Now, this sort of medical practice has its detractors, especially those who claim that it creates an unfair, two-tier medical system. My point here is not to get into that debate, but rather to provide context that illuminates the views he shared with me.
His first contention was that many PCPs today are so heavily burdened they can do little besides act as "traffic cops." They see people quickly, and often simply wave them on to one or another specialist. The specialists then prescribe expensive tests, because a) that's what they do, b) that's what many patients want (and c), my own addition, I imagine some specialists stand to profit therefrom). In my doctor's view, if PCPs were able to spend more time with patients, develop deeper medical histories, and consider a range of issues including mental health, many fewer expensive tests would be performed.
I explained his practice at length because I think it's clear how his practice choice and his view of cost sources are related.
He also spoke openly about the "extraordinary, constant psychological pressure" brought on by the fear of lawsuits. In his view, defensive medicine is a large contributor to costs. In his view, those who espouse some sort of reform aimed at moderating this problem are "not wrong."
By then the article was done printing, and precisely because he's generous with his time I try not to abuse it, so I didn't pursue the question.
But just to recap, one veteran practitioner of primary care opines that allowing primary care physicians to somehow spend more time with their patients would have a significant positive impact on costs, as would reforms that would limit the practice of purely defensive medicine.
Friday, September 11, 2009
Tuesday, September 8, 2009
EU advertising regulations
In looking at drug costs, we learned (at least I did), that other countries in the McKinsey comparison are much stricter than the US in how they regulate the marketing and sale of pharmaceuticals, both directly to consumers and to health care professionals as well.
My purpose in this blog is simply to bring information to light, though if you've read for a bit you know I can't help interjecting the occasional opinion. In any case, I thought I should learn more about the laws that regulate pharma marketing and sales in the comparison countries, since it's been argued we could lower drug costs by following their lead.
So far today, I've discovered that pharma marketing and sales is one of the areas in which the European Union has taken it upon itself to offer directives. From there, many member nations (such as the UK, France and Germany) appear to have substantially adopted those regulations. In some cases such rules may have predated the EU directives, in others the adoption may not be 100% -- I haven't exhaustively dug into the matter. But it seems to me the EU directives can be taken as a reasonable proxy for the rules that prevail in much of the European Union.
A simple, though technically outdated, version of the directive on advertising can be found here. This is an EU directive of 1992. It was implemented in Britain, for example, in 1993/4. This directive is superseded by and incorporated into an omnibus directive of 2001, which you should consult if you want the latest commas and periods, but the 2001 directive is much longer, whereas the 1992 directive concentrates on sales and advertising.
If you like, you can also look over the EU's page on medicine directives generally, with links to numerous specific rules.
Finally, if you'd like some discussion of the history and context of the EU rules, look over this summary offered by the Picker Group (Europe). Apprently there has been pressure in the last seven years or so to relax some of the advertising provisions slightly for certain classes of medicine.
In any case, this is a starting point for looking at what the members of the EU think is appropriate regulation in this area for their 500 million citizens.
My purpose in this blog is simply to bring information to light, though if you've read for a bit you know I can't help interjecting the occasional opinion. In any case, I thought I should learn more about the laws that regulate pharma marketing and sales in the comparison countries, since it's been argued we could lower drug costs by following their lead.
So far today, I've discovered that pharma marketing and sales is one of the areas in which the European Union has taken it upon itself to offer directives. From there, many member nations (such as the UK, France and Germany) appear to have substantially adopted those regulations. In some cases such rules may have predated the EU directives, in others the adoption may not be 100% -- I haven't exhaustively dug into the matter. But it seems to me the EU directives can be taken as a reasonable proxy for the rules that prevail in much of the European Union.
A simple, though technically outdated, version of the directive on advertising can be found here. This is an EU directive of 1992. It was implemented in Britain, for example, in 1993/4. This directive is superseded by and incorporated into an omnibus directive of 2001, which you should consult if you want the latest commas and periods, but the 2001 directive is much longer, whereas the 1992 directive concentrates on sales and advertising.
If you like, you can also look over the EU's page on medicine directives generally, with links to numerous specific rules.
Finally, if you'd like some discussion of the history and context of the EU rules, look over this summary offered by the Picker Group (Europe). Apprently there has been pressure in the last seven years or so to relax some of the advertising provisions slightly for certain classes of medicine.
In any case, this is a starting point for looking at what the members of the EU think is appropriate regulation in this area for their 500 million citizens.
Placebos: Truly Confounding Data
So what does one do with a finding, such as the Wired story I linked to yesterday, that placebo response is getting stronger and more effective. Because one of the reasons suggested for this, which I find inherently plausible, is that the effectiveness of direct-to-consumer advertising (DTCA) in the pharma space is causing consumers to believe more and more strongly in the efficacy of certain medications, indeed in engineered medications generally.
The problem with DTCA, it's argued, is that:
1. It's expensive, thus driving up pharma marketing budgets in a way that ultimately gets passed on
2. It may lead to consumers asking for meds they don't need, either because their condition doesn't warrant it, or in cases where they request an expensive patented drug when drugs with similar mechanisms of action are available as generics
(These are among the reasons many countries ban DTCA in pharma, as indeed the US did until 1997.)
So what's public policy to do with the idea that pharma DTCA may be responsible for a significant strengthening of placebo response? Ban it anyway, and come up with relatively inexpensive, publicly funded notices that somehow accomplish the same thing? Recommend that pharma firms mix some sugar pills in with their Loparex and bring the cost down? (Kidding). It's as though the universe is laughing at policy wonks by creating wormholes and contradictions that policy alone can't resolve.
Kidding aside, it would appear that the placebo response, rather than being just an annoying problem that drug makers need to "overcome", is something that could potentially be harnessed to do considerable good at non-considerable expense.
(Random unrelated plug: if you're doing policy research, you could do worse than stop by Sourcewatch.org, which I've linked to a few times on the blog, including this post. Sourcewatch is a wiki-like site that tries to uncover the funding sources, political bents etc. of groups and persons, especially those participating in political and policy debates. Sourcewatch is funded by the "Center for Media and Democracy", which appears, from what Sourcewatch itself writes, to be funded by fairly left-leaning, anti-conservative types).
The problem with DTCA, it's argued, is that:
1. It's expensive, thus driving up pharma marketing budgets in a way that ultimately gets passed on
2. It may lead to consumers asking for meds they don't need, either because their condition doesn't warrant it, or in cases where they request an expensive patented drug when drugs with similar mechanisms of action are available as generics
(These are among the reasons many countries ban DTCA in pharma, as indeed the US did until 1997.)
So what's public policy to do with the idea that pharma DTCA may be responsible for a significant strengthening of placebo response? Ban it anyway, and come up with relatively inexpensive, publicly funded notices that somehow accomplish the same thing? Recommend that pharma firms mix some sugar pills in with their Loparex and bring the cost down? (Kidding). It's as though the universe is laughing at policy wonks by creating wormholes and contradictions that policy alone can't resolve.
Kidding aside, it would appear that the placebo response, rather than being just an annoying problem that drug makers need to "overcome", is something that could potentially be harnessed to do considerable good at non-considerable expense.
(Random unrelated plug: if you're doing policy research, you could do worse than stop by Sourcewatch.org, which I've linked to a few times on the blog, including this post. Sourcewatch is a wiki-like site that tries to uncover the funding sources, political bents etc. of groups and persons, especially those participating in political and policy debates. Sourcewatch is funded by the "Center for Media and Democracy", which appears, from what Sourcewatch itself writes, to be funded by fairly left-leaning, anti-conservative types).
Monday, September 7, 2009
Placebos might be just the thing
I couldn't pass up posting a link to this recently-Slashdotted article from Wired, making the claim that placebo response is growing more and more powerful in drug trials. What this might mean for health care costs I couldn't say, but it's fascinating reading.
McKinsey on insurance and administration costs
So far we've covered the first two large categories in the McKinsey analysis of our "excess" spending on health care. (You can find the report linked in the Health Care Links list at the right). First was outpatient care, at $436B excess, and next was drugs and nondurables, at $98B excess.
The third category is insurance and administration costs, at $91B, about the same as drugs. If you're an ardent advocate of single-payer, or just generally distrustful of large companies like the insurance firms, you may say "Aha! Our complex yet monopolistic system of multiple private payers is at fault. A single payer, especially if that payer is a non-profit such as a government plan, is just what we need!"
Well, maybe. But that's not quite what McKinsey found. It's true that insurance and administration is essentially tied for second place in terms of its contribution to our $638B in "excess" spending. But it's not necessary because of the complexity or expense of the private sector. Let's look at the details.
The US spent, in 2006, nearly twice as much per capita in this category as the next country in the list (France), and over four times the average in the selected peer group of countries. Private payment accounts for a much higher percentage of this cost than in any other compared country, about two-thirds of the total overage.
Given how much of the cost is related to private payers, it turns out we actually spend a bit less on private-sector administration than you'd expect from peer comparisons. So private insurance is much more prevalent in the US, but is in fact slightly more efficient than the private-payer systems elsewhere.
Still, there's no question that private insurance is more expensive. McKinsey found about $34B in excess administrative expenses in the private sector compared to our peers. But the interesting fact is, public insurance shows the same pattern. Another $28B in excess administrative expenses in the US is attributable to the public sector. So not only do we spend more per insured life on private insurance than do our peers, we pay more per insured life in public insurance administrative costs as well: SIX TIMES the average of the comparison group.
Overall, in 2006, spending on administration was growing about in line with overall expenditures (6.3%). But deeper in, there's a significant disparity: spending on administration in the private sector grew at a slower rate, 2.9%, from 2003-2006, while spending on public-sector administration grew at an eye-opening 13.1%! This in turn was essentially driven by Medicare spending, which increased at 32.7% annually in this period.
Several things go into increased Medicare administration costs:
1. The addition of benefits under Medicare part D
2. Significant increases in Medicare enrollment (about 25% growth in this period)
Overall, again, Medicare administration costs per enrollee increased at about 30% per year from 2003 to 2006.
I'm not yet sure what to make of this. Growth in Medicare spending is naturally going to be driven by enrollment increases, which in turn are driven by demographics. But why do we spend so much more per enrollee than other countries? Is it simply that our Medicare benefits are comparatively rich? (I'm not a Medicare recipient, so I have no idea based on my own experience). If that's the case, and the cost per enrollee can't be driven down much, then clearly the demographics-driven Medicare costs have the potential to be the immovable (yet growing) object in the midst of this debate.
No doubt this is why the Medicare Board of Trustees warns that the program faces insolvency in eight years.
The third category is insurance and administration costs, at $91B, about the same as drugs. If you're an ardent advocate of single-payer, or just generally distrustful of large companies like the insurance firms, you may say "Aha! Our complex yet monopolistic system of multiple private payers is at fault. A single payer, especially if that payer is a non-profit such as a government plan, is just what we need!"
Well, maybe. But that's not quite what McKinsey found. It's true that insurance and administration is essentially tied for second place in terms of its contribution to our $638B in "excess" spending. But it's not necessary because of the complexity or expense of the private sector. Let's look at the details.
The US spent, in 2006, nearly twice as much per capita in this category as the next country in the list (France), and over four times the average in the selected peer group of countries. Private payment accounts for a much higher percentage of this cost than in any other compared country, about two-thirds of the total overage.
Given how much of the cost is related to private payers, it turns out we actually spend a bit less on private-sector administration than you'd expect from peer comparisons. So private insurance is much more prevalent in the US, but is in fact slightly more efficient than the private-payer systems elsewhere.
Still, there's no question that private insurance is more expensive. McKinsey found about $34B in excess administrative expenses in the private sector compared to our peers. But the interesting fact is, public insurance shows the same pattern. Another $28B in excess administrative expenses in the US is attributable to the public sector. So not only do we spend more per insured life on private insurance than do our peers, we pay more per insured life in public insurance administrative costs as well: SIX TIMES the average of the comparison group.
Overall, in 2006, spending on administration was growing about in line with overall expenditures (6.3%). But deeper in, there's a significant disparity: spending on administration in the private sector grew at a slower rate, 2.9%, from 2003-2006, while spending on public-sector administration grew at an eye-opening 13.1%! This in turn was essentially driven by Medicare spending, which increased at 32.7% annually in this period.
Several things go into increased Medicare administration costs:
1. The addition of benefits under Medicare part D
2. Significant increases in Medicare enrollment (about 25% growth in this period)
Overall, again, Medicare administration costs per enrollee increased at about 30% per year from 2003 to 2006.
I'm not yet sure what to make of this. Growth in Medicare spending is naturally going to be driven by enrollment increases, which in turn are driven by demographics. But why do we spend so much more per enrollee than other countries? Is it simply that our Medicare benefits are comparatively rich? (I'm not a Medicare recipient, so I have no idea based on my own experience). If that's the case, and the cost per enrollee can't be driven down much, then clearly the demographics-driven Medicare costs have the potential to be the immovable (yet growing) object in the midst of this debate.
No doubt this is why the Medicare Board of Trustees warns that the program faces insolvency in eight years.
Saturday, September 5, 2009
McKinsey on drug costs
Moving on in our tour of the McKinsey Report. Last time we looked at the overall breakdown of the categories in which US health care spending exceeds those of its peers (on a per-capita, wealth-adjusted basis). We saw that outpatient care was the largest single contributor to the overage, at $436B, accounting for about 2/3 of the "excess."
The next major contributor, though a much smaller one, is drug prices. I've already ranted a bit about drug prices in early posts, or rather about what I see as the dead end of Medicare price controls. In those posts I argued that we needed to focus on cost, not on price. So what does McKinsey have to tell us about why drug spending is almost $100B a year more than you might expect from looking at our peers?
There are a few reasons for this, according to MGI:
1. Generally higher prices for identical drugs. On average we pay 50% more for a given drug than in other countries.
2. Our drug mix is more expensive. In other words, our drug choices tend toward the high end of the market.
3. Interestingly, these facts are offset by the fact that our per capita drug usage is LOWER than that of peer countries.
So, we actually use fewer drugs overall. But when we do use them, we use ones toward the higher end of the market. And when we buy those higher-end pills, we pay on average 50% more than other markets (77% in the case of branded drugs).
So the difference is due to drug prices. OK, why are drug prices higher here? Again, a mix of causes:
1. We have more money. The market will bear a higher price. Our greater wealth accounts for a bit over a third of the difference.
2. It can be argued the US is subsidizing pharma R&D for the rest of the world. This would account for a bit less than a third of the gap. (This assumes that price controls in peer countries cause many drug to be sold at low or zero margin).
3. Finally, unlike peer countries in which pharma spending on marketing is limited, as is the size of sales forces, as well as marketing directly to physicians, pharma firms spend a lot on these items in the US. This too accounts for a bit less than 1/3 of the total.
It seems to me these conclusions lead to some pretty clear ways we could hold drug costs lower. First, to push back on the more expensive drug mix, don't prescribe so many of the higher-end drugs, particularly drugs that have the "same mechanism of action" as less expensive drugs on the market. Well, that's easier said than done. Either doctors and patients will somehow work together to achieve that end, or it would be imposed by insurance pools that limit their formularies -- in other words, a form of rationing, which is apparently a concept that's anathema. Except of course that insurance companies public and private are performing rationing all the time already, certainly rationing of this sort -- see, for example, the VA's exclusion of Lipitor from its formulary.
Then, for the higher drug prices, two things. Firstly, apply significant pressure to other countries to relax their price controls to some extent, allowing pharma firms to charge higher prices there and more fairly distribute the R&D burden. Secondly, look closely at those countries that MGI claims limit pharma marketing spending, salesforce size, and direct-to-physician marketing, and draft a bill to do the same for us.
The next major contributor, though a much smaller one, is drug prices. I've already ranted a bit about drug prices in early posts, or rather about what I see as the dead end of Medicare price controls. In those posts I argued that we needed to focus on cost, not on price. So what does McKinsey have to tell us about why drug spending is almost $100B a year more than you might expect from looking at our peers?
There are a few reasons for this, according to MGI:
1. Generally higher prices for identical drugs. On average we pay 50% more for a given drug than in other countries.
2. Our drug mix is more expensive. In other words, our drug choices tend toward the high end of the market.
3. Interestingly, these facts are offset by the fact that our per capita drug usage is LOWER than that of peer countries.
So, we actually use fewer drugs overall. But when we do use them, we use ones toward the higher end of the market. And when we buy those higher-end pills, we pay on average 50% more than other markets (77% in the case of branded drugs).
So the difference is due to drug prices. OK, why are drug prices higher here? Again, a mix of causes:
1. We have more money. The market will bear a higher price. Our greater wealth accounts for a bit over a third of the difference.
2. It can be argued the US is subsidizing pharma R&D for the rest of the world. This would account for a bit less than a third of the gap. (This assumes that price controls in peer countries cause many drug to be sold at low or zero margin).
3. Finally, unlike peer countries in which pharma spending on marketing is limited, as is the size of sales forces, as well as marketing directly to physicians, pharma firms spend a lot on these items in the US. This too accounts for a bit less than 1/3 of the total.
It seems to me these conclusions lead to some pretty clear ways we could hold drug costs lower. First, to push back on the more expensive drug mix, don't prescribe so many of the higher-end drugs, particularly drugs that have the "same mechanism of action" as less expensive drugs on the market. Well, that's easier said than done. Either doctors and patients will somehow work together to achieve that end, or it would be imposed by insurance pools that limit their formularies -- in other words, a form of rationing, which is apparently a concept that's anathema. Except of course that insurance companies public and private are performing rationing all the time already, certainly rationing of this sort -- see, for example, the VA's exclusion of Lipitor from its formulary.
Then, for the higher drug prices, two things. Firstly, apply significant pressure to other countries to relax their price controls to some extent, allowing pharma firms to charge higher prices there and more fairly distribute the R&D burden. Secondly, look closely at those countries that MGI claims limit pharma marketing spending, salesforce size, and direct-to-physician marketing, and draft a bill to do the same for us.
Well, THERE'S Yer Problem!
I was going to dive back into my walkthrough of the McKinsey. But as I was looking through the report, the following struck my eye. It was contained in the section on outpatient costs, which we discussed the last time. It turns out that hospitals, in this study, earn their highest profit margins on elective outpatient procedures. This is illustrated by the following graph, drawn from the report:
What I find appalling is what's in the blue box. This is typical financial analyst-speak. There'd be no surprise in seeing this language applied to, say, Proctor and Gamble's Latin American product mix, or the margins on luxury vs. commodity audio equipment. Markets and margins are being assessed for their profitability, presumably so business leaders can make sensible decisions about how to sell things so as to increase their profit. We understand that the concern here is almost entirely with profit -- not with whether folks in Costa Rica actually need strawberry-scented detergent. Strawberry-scented detergent seems like a typical excess of capitalism: perhaps a sad waste of resources, but in theory the marketplace can vote, and no obvious immediate harm comes from a bunch of marketers plotting to flood Belize with handi-wipes. OK, harm probably does come from it eventually, but we accept the profit-first thinking as an essential hallmark of market economies in consumer goods.
But how is it possible that a culture exists in which it is remotely acceptable, REMOTELY, to assess components of our health-care system by these profit-first measures? How is it possible that anyone, anywhere, for whatever reason, should assess a hospital's care mix not for the beneficial effects it produces, or how it fits into our overall health care cost picture, but simply on which classes of care make the most money? In this world, emergency room patients aren't just emergency room patients, they're Repeat Business Opportunities (RBOs, as we call them over in the conference rooms of market-driven America). And a report like the one above is guaranteed to provoke thinking in the hospital boardroom as to how we can increase the number and profitability of outpatient procedures we do. Effort will be put towards this end. Marketing dollars will be spent.
If we have Bank of America financial analysts getting involved in the discussion over what kind of care hospitals should provide, we have a big problem.
What I find appalling is what's in the blue box. This is typical financial analyst-speak. There'd be no surprise in seeing this language applied to, say, Proctor and Gamble's Latin American product mix, or the margins on luxury vs. commodity audio equipment. Markets and margins are being assessed for their profitability, presumably so business leaders can make sensible decisions about how to sell things so as to increase their profit. We understand that the concern here is almost entirely with profit -- not with whether folks in Costa Rica actually need strawberry-scented detergent. Strawberry-scented detergent seems like a typical excess of capitalism: perhaps a sad waste of resources, but in theory the marketplace can vote, and no obvious immediate harm comes from a bunch of marketers plotting to flood Belize with handi-wipes. OK, harm probably does come from it eventually, but we accept the profit-first thinking as an essential hallmark of market economies in consumer goods.
But how is it possible that a culture exists in which it is remotely acceptable, REMOTELY, to assess components of our health-care system by these profit-first measures? How is it possible that anyone, anywhere, for whatever reason, should assess a hospital's care mix not for the beneficial effects it produces, or how it fits into our overall health care cost picture, but simply on which classes of care make the most money? In this world, emergency room patients aren't just emergency room patients, they're Repeat Business Opportunities (RBOs, as we call them over in the conference rooms of market-driven America). And a report like the one above is guaranteed to provoke thinking in the hospital boardroom as to how we can increase the number and profitability of outpatient procedures we do. Effort will be put towards this end. Marketing dollars will be spent.
If we have Bank of America financial analysts getting involved in the discussion over what kind of care hospitals should provide, we have a big problem.
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