August 2012 Archives

In a recent op-ed in the Washington Post, Matt Miller of the Center for American Progress denounces members of our "medical-industrial complex" - physicians and specialists, ostensibly - for their dependency on "far higher payments than their counterparts abroad get," despite allegedly worse outcomes and inefficiency.

What both Republicans and Democrats are missing (or ignoring), Miller writes, is that even with $700 billion in cuts to Medicare, our spending trend compared to other countries will remain roughly where it is.

Miller is certainly correct that the Medicare cuts will do little to 'bend the curve' of health care spending. Spending will shift, those with Medicare will have fewer doctors accepting their coverage, but the trend of spending will continue uninhibited.

Yet, Miller's claim that our supernormal healthcare spending is driven by the medical-industrial-complex's greed needs to be fine-tuned somewhat. The problems that Miller identifies are largely the result of our third party payer system that - a hybrid model that gives us the worst of capitalism and the worst of socialism by insulating consumers and the medical-industrial complex from price signals. Before discussing the implications of not having price signals, however, we can start to address Miller's basic claim by looking at the salary of physicians in the US compared to other developed countries. This should give us some idea of the actual cost that the 'medical-industrial-complex' imposes on Americans.


Source: Commonwealth Fund, Explaining High Health Care Spending in the United States: An International Comparison of Supply, Utilization, Prices, and Quality

For both general practitioners and specialists, the US leads the pack in salaries. American general practitioners out-earn their French counterparts by nearly $100,000. American specialists lead by nearly $300,000. It would appear that this lends some credence to Miller's argument that the medical-industrial complex is in fact purposely bankrupting Americans.

However, an important factor driving these salaries is the high cost (both the explicit financial and the time-opportunity cost) of becoming a physician in the United States relative to other countries.

In France, for instance, a student interested in becoming a physician starts immediately after high school - this consists of: a two-year "first cycle" focused on scientific training; a four-year "second cycle" focused on general medical training; and a "third cycle" that offers two options: a two-year residency focused on practical and theoretical training (the general practitioner track) or a specialized four to five year program that allows specialization in one of many fields (the specialist) track. A general practitioner can finish his studies in a mere eight years; a specialist in 10 or 11.

By contrast, in the US a medical student will take at least 11 years to become a general practitioner - much longer to become a specialist.

The financial burden is very different as well. In France, medical education (indeed, most higher education) is heavily government subsidized and graduates leave with little to no debt. This, however, means much greater government control - explicit limits on the amount of medical students, as well as strict government control over schools' curricula. Additionally, the cost of physicians' schooling is passed onto the general population through higher income taxes.

In the US, the average medical school graduate will have around $150,000 in loans. Malpractice insurance and board certifications add even more. Only by his mid-30s will the graduate start seeing the 'big bucks'. This creates a more implicit and nuanced cap on the amount of doctors in the US. However, the added bonus is still the lack of overt government control, giving US-based schools more leverage in developing innovative programs.

So, perhaps the salaries of American physicians are justified - after all, the time and financial investment they make is significant.

However, this is far from the whole story. Physician's salaries generally make up a relatively small portion - only 8.3 percent of US national health expenditures in 2006. Spending on physicians' services and hospital services in 2006, on the other hand accounted for 20% of spending, and there is wide variation on quality and price. The problem if it lies anywhere, lies here: in the inability of the health care system to drive efficiency and productivity gains that contain costs or at least keep them growing at a more sustainable rate. Here, the lack of price signals is at the root of the inefficiencies buried within our health spending.

To understand what it really means not to have price signals, we can look at the share of total health expenditures that out-of-pocket spending (OOP) makes up. In a single-payer system we expect this to be very low; in a capitalist system we expect it to be rather high.


As it turns out, OOP's share of total spending has fallen tremendously in the US - roughly 10 percent since 1990. Current OOP spending levels puts us in line with Germany and Canada - more socialized systems with defined budgets for healthcare, rather than Switzerland - a market-based system where spending is determined by price signals. Today, out of pocket spending accounts for about only 12-13 cents on the dollar on health care spent in the U.S. We have no price signals, and no budget constraints (save for Medicare's Sustainable Growth Rate; Medicare does have plenty of price controls, which is part of the same problem) - we're left with a system where people have diminished incentives to stay healthy or seek less expensive treatments (how much does an MRI cost? Is a "watch and wait" approach better than getting more expensive tests, etc.), and healthcare providers have diminished incentives to become more efficient (Medicare largely pays according to the pre-determined fee schedule, regardless of outcomes or relative quality).

As noted earlier, Matt Miller is ultimately correct in his implication that we do not get the most efficient outcomes for all of our spending. The high cost of drug trials (that increase the price of prescription drugs), the lack of a transparent price mechanism for healthcare (that make consumers less likely to shop for the 'best value'), and government distortions of the existing market (Medicare, after all, is a prime culprit here through its RBRVS, which creates lower reimbursement rates for primary care physicians compared to pricey specialists, raising the cost to private and out of pocket payers). Along with other state regulations that limit competition (think certificate of need and scope of practice regulations) and tax policy all contribute to the inefficiencies and high costs that Miller lumps together.

Unfortunately, his solution isn't very helpful - "weaning" the medical-industrial complex off of high payments is more nuanced than he lets on. The real villains are not the private actors (pharmaceutical companies, doctors, hospitals etc.) that charge high prices - it's the high-cost and inefficient regulatory environment that they're operating within and the license we give them to charge so much by insulating consumers from prices.

Increasing competition and transparency in the system - and encouraging more consumers to shop for health care value - would go a long way towards improving price competition and allocating resources (like physician pay) more effectively.  



Two articles over the weekend highlight the continuing effect of Obamacare on the health care industry - particularly how it is accelerating industry consolidation.

In both the insurance and hospital industry, players are consolidating to lower costs, gain market share, and defend their bottom lines.

The big question, however, is whether these trends will ultimately benefit consumers and the health care system as a whole, through improved quality and lower costs.


First, on the provider side, hospitals are snapping up independent physicians' offices and integrating them into their networks. Along the way, costs are going up because hospitals have more power to bargain for higher prices from insurers.

The Wall Street Journal explains:

As physicians are subsumed into hospital systems, they can get paid for services at the systems' rates, which are typically more generous than what insurers pay independent doctors. What's more, some services that physicians previously performed at independent facilities, such as imaging scans, may start to be billed as hospital outpatient procedures, sometimes more than doubling the cost.

The result is that the same service, even sometimes provided in the same location, can cost more once a practice signs on with a hospital.

Major health insurers say a growing number of rate increases are tied to physician-practice acquisitions. The elevated prices also affect employers, many of which pay for their workers' coverage. A federal watchdog agency said doctor tie-ups are likely resulting in higher Medicare spending as well, because the program pays more for some services performed in a hospital facility.

It's hard to fault the physicians for moving into hospital practices: they can get more predictable hours, and have to devote less of their time and attention to dealing with administrative hassles like chasing down reimbursements from insurers. And hospitals would argue that consolidation will improve overall quality through better quality controls and integration across multiple service providers.

That's the optimistic reading.

A less optimistic reading is that hospitals will use their enhanced market power to raise prices, and shift patients into more lucrative settings or services (evidence-based, of course). Previous efforts to control health care through price controls have generated similar unintended consequences - leading providers to simply shift their mix of services to maximize revenue. Integration could also lead to a stagnation of innovation in health care services, as hospitals focus on maximizing revenue from payers rather than delivering care in ways would threaten their own dominance of the market.

True innovation, after all, rarely comes from large incumbent players in any industry.

The other consolidation trend is at the insurer level, where insurers are struggling to meet Obamcare's higher compliance costs, caps on profits, and requirements that they spend more on health related services and less on benefits administration.

Two recent insurance mergers, between Aetna and Coventry Health Care and, earlier, Wellpoint and Amerigroup, are just the tip of the trend, with more mergers expected according to the Washington Post:

...the health care industry is increasingly turning to consolidation as a way to cope with smaller profit margins and higher compliance costs that many anticipate when the federal government's health care reforms under the Affordable Care Act take effect. ...

The regulatory limitations on their margins mean that to drive profitability, they need to get leverage on [sales, general and administration], said David Windley, an analyst with Jefferies & Co. "In order to do that, they need to be bigger."

The government prefers to deal with a few bigger players rather than lots of small ones, so you're not likely to hear any complaints from the Beltway as industry consolidates. But it's unlikely to improve competition or innovation in health care markets.

Bigger, after all, isn't always better. Often, it just means more of the same. And that's the last thing America's health care system needs today.

A recent study published in Health Affairs has been used by some commentators on the left to argue that the Affordable Care Act (ACA) is not the deficit-raising monster it's made out to be. The point of contention is a graph from the study that purportedly shows average growth rate of National Health Expenditures (NHE):


At first glance, it would seem that this graph vindicates the ACA - come 2021, the difference in growth rates between NHE pre-and-post ACA have fallen to less than a percentage point.

What they gloss over, however, is the massive spike in growth rates starting in 2014, when the ACA's coverage provisions go into effect. This adds to the absolute cost of the ACA over time, even though the growth rate slows down eventually, based on projections.

For a deeper look at what this will look like, the study breaks it down by sector:


The effects of the ACA don't appear to be quite so subtle anymore.

Overall, NHE will continue to grow uninhibited:


More importantly, what those trumpeting the trend line compared to pre-ACA projections fail to note is that the ACA's "cost savings" (which moderate growth rates in the out years) are based on numerous assumptions, some of which are less realistic than others:

  • The Sustainable Growth Rate (SGR) formula, as well as the Budget Control Act of 2011 (the "fiscal cliff") is set to cut physician's reimbursement from Medicare, slowing Medicare's growth rate to 1.3 percent in 2013, from 5.9 percent in 2012. The study points out that under an alternative projection where physician fee schedule rates grow at one percent from 2013 on, Medicare's growth rate is set to slow down only slightly to 5 percent. Whether this cut will be maintained is up for debate. Congress has, in fact, put off SGR cuts every year since 2002. If it is implemented, Medicare growth will slow, but surveys also suggest many physicians will stop accepting Medicare; among those will be even be the Mayo Clinic. If the cut isn't implemented, and experience suggests it won't be, Medicare will grow at a much faster rate.

  • The slower growth rates in Medicare after 2014 (2015-2021) are also contingent on the SGR cuts and the budget sequester. Again, the reality of these cuts going through is questionable.

  • Further moderating the growth of costs across the board is belief that the excise tax on comprehensive coverage plans - commonly known as the "Cadillac tax", starting in 2018 - will force people into lower cost plans with tighter utilization requirements.  However, the tax was fought off by union supporters in an earlier incarnation of the ACA, and the will likely try to delay or kill implementation yet again.   The study also assumes that most of the productivity adjustments for providers in the ACA will be implemented as written, itself a dubious assumption and one that has been questioned by CMS.

Other factors will play an as of yet undetermined role in the ACA's costs - the final definition of essential health benefits for plans sold on the exchanges, whether or how many employers "dump" employees into the exchanges (and pay the fine for doing so), and the impact of the individual mandate on insurance take-up by the young and healthy (if many young and healthy uninsured opt out of the mandate, the exchanges will be forced to cover a pool of sicker and more  expensive patients - costs that will be passed along to taxpayers).  There's also the variable of how many states will opt out of the ACA's Medicaid expansion and send more of the uninsured to the state exchanges. 

In short the ACA is, at a minimum, an enormously expensive coverage expansion - and because many elements of its cost savings provisions are weak or uncertain at best (like the SGR cut) the fiscal downside of the legislation will even more pronounced if everything doesn't pan out exactly as its advocates hope. 

In a previous post we've addressed the areas where the United States appears to lag behind other developed countries, debunking some of the misconceptions surrounding those metrics - while also acknowledging places where the U.S. could improve its performance.

Now we turn our attention to those measures where the US takes a clear lead.

Breast Cancer Survival Rates

Breast cancer is the most common form of cancer among OECD countries, accounting for a full 30% of cancer incidence among women and 15% of all cancer mortality. Moreover, it is an important indicator of the quality of a country's health system. Of course, other factors like genetics play an important role in breast cancer survival rates - some people are naturally more resistant to cancer. However, it is hard to discount the importance of the quality and availability of detection and treatment regimens in saving breast cancer patients' lives.

There is reason to applaud, then, when we discover that the United States has the OECD's highest 5-year survival rate for breast cancer at 89.3 percent, with the average at 83.7 percent.


What factors, then, contribute to such a high survival rate in the United States compared to other countries? A recent study by the OECD concluded that total health expenditures, access to innovative drugs, and investment in technology are all strong predictors of cancer survival rates - the US either leads, or is close to leading in each of these indicators.

According to another study published this past April in Health Affairs, from 1983 to 1999, the US increased average cancer spending from $47,000 per case, to $70,000 per case. The authors peg the net value for all US cancer patients to have totaled nearly $600 billion. The authors find that "differences in US costs reflect more rapid uptake of new technologies that may lead to differences in survival." Simply put, we spend more and we get more. This further echoes the point that University of Chicago researchers made in 2006

Good bang for your buck? Absolutely.

Waiting Times

The quality of care in any health system is irrelevant if people can't see the doctor or are unable to get the surgery they need.  Americans, on average, have much shorter waiting times for medical care than citizens of Canada and other OECD countries with more egalitarian healthcare arrangements. The numbers speak for themselves - in 2010, 25 percent of Canadians seeking elective surgery had to wait four months or more to receive it - compared with a mere 7 percent  of Americans. In fact, the Fraser Institute found that 2011 marked the longest waiting times recorded in Canada:

"[D]espite high levels of health expenditure and provincial wait time strategies, it is clear that patients in Canada are waiting too long to receive treatment."

Thumbnail image for waiting_times_elective.png

Not only do Americans wait less for elective surgery, they also wait less to see specialists - 20 percent in 2010 had a four week or longer waiting time, compared to 59 percent in Canada; 28 percent in the UK.

Thumbnail image for waiting_times_specialist.png

The numbers do show, however, that a number of countries - Switzerland, Germany, and the Netherlands have shorter waiting times than the US by 2010 estimates. The difference in waiting times, however, is much less pronounced than the difference between the US and countries like the UK and France.

Ultimately, it is hard to see the utility of a universal healthcare system in which patients have so much trouble seeing their doctors and getting the services they need.

Fatal Injury Adjusted Life Expectancy

The last piece of the US "outcome" puzzle is a little puzzling itself. Life expectancy is a very simple, easy to understand, and to an extent, useful measure of a country's broader health status - inextricably linked to the quality of the health system. When using raw figures, the US tends to lag behind other OECD countries in this measure. The raw figure, however, ignores the behavioral aspects that tend to get captured in the measure of life expectancy - homicide rates and fatal injury rates, for instance, will exaggerate the difference between the United States and France - the US has around four times the homicide rate of France. Because homicides and other injuries are unrelated to the quality of a country's health system, it makes sense to strip those differences out and build a new metric - the "Fatal Injury Adjusted Life Expectancy". Fortunately, two researchers from Texas A&M and the University of Iowa developed exactly such a measure using mean life expectancies from 1980-99 for OECD countries. 


Source: How Does the U.S. HealthCare System Compare to Systems in Other Countries?

Using the fatal-injury adjusted mean, the United States leads the OECD in life expectancy. Yet another way that Americans get a good value for their money.

Do Americans spend a lot on healthcare? Without a doubt. Do we get a good return on our investment? When it comes to higher cancer survival rates, shorter waiting times, and longer life expectancy it's hard to argue that Americans don't see some significant returns on their investments.

None of this, however, deals with efficiency.

In our next post we will address some of the inefficiencies in the US system, their causes, and offer some suggestions for improvement.

Cereal Killers

With apologies to my attorney friends, the saying "95 percent of lawyers make the rest of them look bad" remains one of my favorites.

And a story in yesterday's New York Times did little to change this. The lawyers who were involved with negotiating the Tobacco Master Settlement Agreement (MSA) of 1999 (and made obscene amounts of money in the process) are now going after food manufacturers using a similar strategy. This is almost funny.

According to the Times, Don Barrett, a lawyer in Mississippi earned a mere $200 million from the MSA, but he apparently can't live on that, so he and his well-meaning colleagues are suing ConAgra, a giant Nebraska-based food company, for mislabeling a number of their products, including the always-dangerous Swiss Miss cocoa.

Mr. Barrett says, possibly even with a straight face, that "It's crime--and that makes it a crime to sell it." He and the rest of his merry men want the products in question taken off the shelves. I feel safer already!

And clearly in the interest of humanity everywhere, his group might seek damages equaling four years of sales for all mislabeled products. The fact that these guys stand to make billions of dollars does, I concede, tarnish their philanthropic credentials somewhat, but I'm still sure that they mean well.

The food industry is not without blame either. Their marketing practices haven't been exactly pristine. Taken at face value one might conclude that, given the number food items labeled as "healthy" and "natural" (in the obligatory green package), anyone that eats a granola bar should theoretically be immortal. And another thing--am I supposed to be surprised that my milk is "Raised By Farmers?" As opposed to lingerie salesman or bassoonists?

This is going to create all sorts of problems for marketing departments at food companies, since pretty soon they will run out of chemicals that they can boast that are excluded from their foods. Most of the deadly poisons like sugar, salt, artificial colorings, artificial sweeteners, preservatives, gluten, lactose and corn syrup are already proudly trumpeted as being absent from so many products. What will the next gimmick be? Plutonium-free eye drops? Delicious Pop Tarts-- no tapeworms!

While this may sound stupid, if you didn't read the Times article, you haven't even been exposed to the true meaning of the word yet.

In 2009 two mothers sued PepsiCo, claiming that Cap'n Crunch's Crunch Berries did not actually contain berries. In a ruling that ranks right up there with the Dred Scott decision, a federal judge threw the case out stating that "a reasonable consumer would not be deceived into believing that the product [contained a fruit that does not exist]."

I should hope so, because anyone with the IQ of plankton pretty much knows that one is just as likely to find a Steinway grand piano in the damn box as a berry. I suppose the decision could be reversed on the grounds that Quaker is misstating the Cap'n's military record, and the cereal should really be named Lt. Crunch.

Should history repeat itself, it is worth taking a look at how the MSA played out. The money paid by Big Tobacco ($252 billion over 25 years) protected the industry from lawsuits from individual states, and was intended to be used to fund anti-smoking programs.

How did that work out? Not all that well really, since only about 3 percent of the revenue was actually used for anti-smoking programs, however, plenty of it was used to plug state budget deficits, build bridges and highways and other ways that states spend our money.

In the end, Big Tobacco, looking to cut their losses, "agreed" to a shakedown by lawyers representing individual states, which, instead of funding anti-smoking programs simply grabbed the money and used it as a bank account. The addicted smokers got next to nothing, but this was hardly true for the lawyers--they got between 10 and 25 percent of the take depending on the state they represented--tens of billions of dollars.

Government at its finest.

So, by all means, let's repeat this process. Another big payday for the tobacco lawyers, decreased revenues for the food companies, which will no doubt be passed on to you, and something approaching zero public benefit. All in the name of Crunchberries.

Is this a beautiful country or what?

This decision came down from the federal court of appeals last week, and appears to have largely tracked expectations in terms of Myriad's patent being upheld.


For a very nice, short, non-technical summary of the narrow grounds of the case, see Derek Lowe's always interesting and informative blog, In the Pipeline. (Is he moonlighting as a patent lawyer on the side?)

As for the long term implications of the decision for the personalized medicine industry, see this helpful analysis from the Genomics Law Report:

Looking ahead, it appears increasingly unlikely that Myriad's denouement, when it finally arrives in 2013 or 2014, will produce a significant effect one way or the other on either Myriad or the personalized medicine industry. We think this is likely to be true regardless of the litigation's substantive outcome.

For Myriad, win or lose in court, its challenged patents will expire by the end of 2015. But the company's additional patents (the litigation involves only a small minority of Myriad's overall BRCA portfolio), its decades of experience as the sole provider of clinical BRCA diagnostic testing and its proprietary database of BRCA mutation information should allow Myriad to comfortably maintain its advantage in the marketplace against would-be direct competitors of clinical BRCA diagnostic testing.

More broadly, competition for single-gene diagnostic providers like Myriad is expected to increase thanks to a growing cohort of companies deploying next-generation sequencing platforms to develop multiplex or whole-genome diagnostic and interpretive products. The price for these broad-based products is expected to rival what Myriad and other similar companies currently charge to analyze only one or two individual genes. And the technology employed by these companies - which include Genomic Health, Foundation Medicine, GenomeQuest, Ingenuity, Personalis, Silicon Valley Biosystems and many, many others - may very well invent around any Myriad-style gene patents on isolated DNA sequences that manage to survive both legal challenge and patent expiration, although that proposition has yet to be tested in court.

So Myriad's patent will be upheld, but it's due to expire in a couple of years, and new technologies that look at multiple gene and/or gene-protein interactions will likely prove to be very powerful (and potentially superior) competitors to the incumbent's BRCA test.

Still, we haven't heard the final word from the Surpreme Court on the topic yet.

If a pharmaceutical company's drug harms or kills a patient, that's front-page news. But that's not the only way that patients can be harmed. A patient who isn't given a helpful medicine is also harmed, but unlike with the first example, this story doesn't make it onto the front page or any other page of the newspaper for that matter, because the victim and the harm caused are invisible. Who was the victim? We usually don't know. What drug would have helped them and how much? We usually don't know.

The 19th century French economist Frederic Bastiat taught economists to study both what is seen and what is unseen. (Read What Is Seen and What Is Not Seen.) For instance, if a broken window is replaced, the natural tendency is to focus on the benefit to the economy--and the glazier--of the payment for the window (the seen) while overlooking the negative result of the building's or car's owner not spending that same amount of money on something else (the unseen).

The "seen" in the pharmaceutical example is a specific drug harming a specific person. The "unseen" is a drug not helping a person. This unseen situation often results from a drug not being developed, perhaps because a company didn't see the economic payback, or because the drug was explicitly rejected by the FDA.

Sometimes, however, the unseen can be observed by careful observation. Consider two young boys with the same deadly disease-- Duchenne muscular dystrophy. Max Leclaire, 10, is currently in a clinical trial for a new drug that has miraculously reversed some of his debilitating symptoms. His brother Austin, 13, tried to enter the clinical trial but didn't meet the criteria.

Is FDA's senior leadership paralyzed by internal fights over the science and process of new product approvals? You wouldn't have thought so in 2011 after the agency approved 35 new medicines, the highest since 2009. In 2012, the agency also managed to adroitly shepherd a new user fee agreement through Congress, fending off provisions from industry and advocacy groups that it didn't like.


But there are other worrying signs that all is not well at White Oak - at least in the medical devices division. Recent revelations that the FDA had been monitoring the emails of self-described "whistleblowers" who leaked confidential company documents to the New York Times call into question the ability of senior staff to enforce agency approval decisions - at least without a media firestorm.

This concern is explicitly raised today by Jon Entine in a Forbes article dissecting the whistleblower suits:

The [New York Times] and many activist groups are now portraying the self-proclaimed whistleblowers as beleaguered heroes and victims of an agency "enemies list" designed to muzzle public minded employees. They hint at a corrosive and corrupt culture inside the FDA that is captured by big business and limits the agency from encouraging dissent.

But now, as the backstory is coming into sharper focus, it appears that culture is far more nuanced. The FDA appears not so much closed as split between various factions, with a minority of junior scientists determined to push an ultra-aggressive regulation strategy even after higher level science reviews consider but reject their input. This grueling internal battle appears to have left the CDRH, the FDA office empowered to oversee innovative medical technology devices, including genetic tests, in disarray. ...

The latest FDA black eye highlights an internal battle inside an agency struggling to balance a commitment to science with an intensely politicized decision-making process. As Steve Usdin reports in a superb deconstruction of the scandal in BioCentury, the origin of the dispute seems to reflect internal conflicts that often occur in agencies with many employees holding differing scientific and ideological agendas. ...

"If junior staff can always go around senior management when there is disagreement, and successfully use politicians and the media to have decisions overturned, then junior staff are running the organization by default," [Usdin] writes.

To be fair, the problem is that the FDA is tasked by Congress with inherently conflicting roles, both setting the standards that define how new products are evaluated as safe and effective, and then reviewing and approving the data submitted by companies that purports to meet FDA criteria.

Both roles require nuanced judgments and trade-offs in a rapidly evolving scientific environment that don't lend themselves to an all-or-nothing regulatory approval process - especially in today's hyper-partisan, 24-hour media environment, when the losing party at the agency can go to Congress or the media to plead their case.

Scott Gottlieb, a former FDA Deputy Commissioner, looks at the same phenomenon from the perspective of drugs rather than devices in a recent National Affairs article.

Conflicts are inevitable, Gottlieb believes, when "the same individuals simultaneously [play] the roles of detective, judge, and jury when it comes to considering new drugs for approval." Given the conflicting demands placed on FDA staff, the natural tendency is to delay product approval in favor of more data not just on the product's safety, but also its efficacy and utility, i.e., how it can best be used in clinical practice.

More data will protect the FDA against charges of favoritism from its critics on the left and the right, or at least the agency hopes that it will. Gottlieb thinks this ill serves the interest of patients, who have to wait longer for new products to come to market. It also doesn't seem to insulate the agency from criticism - or quell its own rancorous internal disagreements.

Gottlieb suggests that one way to cut this Gordian knot would be to separate the collection of and review of data on product safety and efficacy and let an internal committee of FDA's senior staff or scientists make the final call on product approval - thus embracing the reality that balancing the risks and benefits (and uncertainties) associated with new technologies is a policy decision, not a black-and-white exercise in number crunching where differing opinions can be dismissed as the product of industry influence or outright corruption. Gottlieb believes that this change would allow the agency's reviewers to become more flexible and innovative, since the final decision for product approval or denials wouldn't rest with them.

I think this makes eminent sense, but it's also worth noting that the agency's schizophrenia about medical products is reflected broadly in popular culture and politics. Drug and device companies are simultaneously lauded as the saviors (seeking the next cure for cancer) and villains (driving up health care costs and hawking unproven products). In short, Congress and the FDA take their cues from a public that wants ever more and better health but is unwilling to tolerate any risks from medical innovation.

That's a recipe for dysfunction.

Contrast this with the rapid innovation in consumer products (particularly software and IT) where Americans have broadly made a choice for surrendering more privacy - to Google, Facebook, et al - in return for a better suite of products and services from industry. Concerns about industry's potential abuse of privacy have (largely) failed to materialize since companies recognize that abusing that trust would be tantamount to financial suicide.

There may also be other lessons to be learned from the IT sector. The wired world offers a potential paradigm for how health care companies can offer improved services and tailored products to consumers, and a new venue for testing and evaluating competing product claims in close to real time through carefully designed electronic medical records. In this world, patients and physicians don't need and shouldn't expect certainty - but they should expect better information and more informed choice.

That role - as America's "chief information officer" for health care - is one that the FDA could embrace, and Alex Tabarrok offered one vision of this approach in an earlier post on MPT.

But first we'd have to recognize that the uncertainty we abhor lies not with our officials or our institutions, but in the very nature of the endeavor to tailor treatments to vastly diverse patients under many different circumstances. This may be one of the few ways to end the schizophrenia that we've imposed on the FDA - and on ourselves.

The U.S. health care system is the frequent target of policy critics, with accusations of massive inefficiency and skyrocketing costs. However, distilling the truth from the rhetoric is increasingly difficult - and important. In this post, we focus on the health outcomes of Americans that do, in fact, disappoint in international comparisons.

The importance of measuring health outcomes cannot be overstated. If by spending more money we can significantly improve cancer survival rates or life expectancy, it is hard to argue that it's not "worth it". While by some crucial measures Americans do get good value for their money - we will get to these in a later post - for now, we will address three measures where we may not:

  1. Obesity: Americans are (no-pun intended) on the whole 'bigger' than our developed friends. In 2010, nearly 36 percent of Americans were reportedly obese. For comparison, the OECD average hovers around 22 percent. Few would dispute the fact that obesity is directly implicated in many chronic diseases, including heart disease, diabetes, and even some cancers. High rates of obesity may also be significant drivers of health care costs. A 2011 study by Cornell researchers John Cawley and Chad Meyerhoefer, published in the Journal of Health Economics, looked at healthcare spending in 2005 and suggests that the cost of obesity is greater than previously thought:

    "[H]ealth expenditures in 2005...were [$1,017.76 billion in 2008 dollars]...This paper's estimate of the national medical care costs of obesity-related illness in adults is $209.7 billion[in 2008 dollars], which is more than twice the [previous] estimate of $85.7 billion...[the results] suggest that 20.6% of U.S. national health expenditures are spent treating obesity-related illness..."

    Certainly, high obesity rates are problematic; given not only the financial costs, but the social and human costs. This begs the question, however - are high obesity rates an indication of a poor, inefficient healthcare system? The answer is a resounding no. Basic lifestyle decisions - eating a burger instead of a salad, getting a soda instead of juice or water, taking the elevator instead of the stairs - are the main causes at play. Looking at the distribution of obesity among the different states according to the CDC's Behavioral Risk Factor Surveillance System, we find that the highest rates are concentrated in the south and correlate quite nicely with comparatively lower rates of exercise, yet have much less correlation with insurance coverage.

    So while we may be spending a lot of money on obesity-related costs, 'fixing' our healthcare system by way of universal or near-universal coverage won't reduce obesity rates or minimize these costs.

  2. Infant Mortality: Another metric in which the US, at least apparently, leads the OECD is infant mortality rates. Numbers from 2010 place the US infant mortality rate at 6.1 deaths per 1,000 live births compared to the OECD average of 4.3. This rather gloomy statistic, however, has some confounding factors buried within it. 

    For instance, the US also leads the OECD in pre-term births, which doubtlessly boosts the infant mortality rate. While it may be tempting to use the high pre-term birth rate as an indicator of the quality of US prenatal care, this would be an error. Many factors besides prenatal care can contribute to pre-term births including behavioral factors such as drinking or smoking, as well as the age of the mother - in fact, some studies have shown that adolescent pregnancies are more likely to result in a pre-term birth. (The U.S. has a higher teen pregnancy rate than many of its competitors, although this rate has been falling in recent years.) Certainly, none of these factors are indicators of the quality of care.

    Moreover, if we dig deeper, we discover that differences in reporting standards also confound the data. There are major differences in live-birth reporting requirements among countries, adding more difficulty to any comparison.

    Reporting differences aside, reducing infant mortality is absolutely a noble goal. However, many of the determinants of infant mortality are outside of the healthcare "sphere" per se - no amount of Medicaid expansion will stop teenage pregnancies or convince a mother-to-be to stop drinking.
  3. Mortality Amenable to Healthcare: Yet another indicator where the US tends to lag other countries is a bit of a mouthful - mortality amenable to healthcare refers to an age-standardized measure of deaths judged to be amenable, or 'treatable', and thus avoidable. A 2011 working paper published by the OECD compared countries using this indicator across two lists of diseases/conditions (such as tuberculosis, various types of cancers, and asthma) compiled by two different groups of researchers. In both lists, the United States takes a significant "lead" (meaning it performs poorly) ahead of countries like France or the UK, and above the OECD average.

    Of all the outcomes we've discussed so far, this is the most salient to judging the quality of a healthcare system. By this indicator, the United States is surely lagging. However, the authors of the report caution against over-estimating the value of this measurement.

    "The general conclusion is that the concept of amenable mortality...provides new information that is not directly reflected in general mortality indicators traditionally used to measure the outcomes of health systems...The concept of amenable mortality focuses on premature deaths that are preventable by effective health care [emphasis in original] interventions and thus should not be used to assess the performances of the entire health system."

    Factors that improve quality of life are not included in this measure, nor are mental illnesses, or mortality from lung cancer.

    Mortality amenable to healthcare is a valuable metric, and helps point to where we may work to improve our healthcare system. Perhaps increased health insurance coverage could in fact improve the United States' standing in this measure; yet many other cultural, behavioral, and other factors (such as prevalence of particular diseases) generally exogenous to the health system are lumped into this measure. To echo the researcher's sentiments, this means that this metric is very limited in what it tells us about a country's health system, and is not the only, or even the best yardstick.
Simply put, while the statistics are somewhat muddy, it does appear that the U.S. does lag behind other countries in one area related to health care, amenable mortality. Here, Americans may not be getting the most bang for their buck. In other areas, like infant mortality and obesity, the policy challenges are much more nuanced and require different solutions.
The takeaway, however, is that none of these solutions require the sort of restructuring that the ACA has forced upon Americans. Moreover, none of these indicators are exclusively related to health insurance coverage. Having now addressed areas where we may falter, in our next post we will move on to the critical areas where Americans take a decisive lead.

One of the central talking points used to sell Obamacare to Congress and the public was that it would lower health insurance premiums. The President continues to push this talking point on the campaign trail.

The only problem is, it's not true.

The Washington Post "Fact Checker" recently evaluated Obama's claim that his landmark legislation will lower health insurance premiums. The President's claim received "three pinochios", which indicates "significant factual error and/or obvious contradictions."

The Fact checker previously called the President's claim "foolish, dubious" that premiums would be $2,500 "lower than they would have been without the law". But what about the claim that premiums in the small group and individual markets will decline, thanks to the law?

Here, the president is trying to have his cake and eat it too. Does the law expand coverage? Certainly, although it is an awfully expensive way to do so, and is chock full of new taxes and regulations. It also will place 17 million Americans into Medicaid, a broken health care program for low income Americans that is bankrupting the states and which offers worse outcomes than private insurance or Medicare.

But I digress.

The Fact Checker notes that Obamacare contains a number of provisions that will "put upward pressure on premiums". You may like those provisions (let's leave their policy justifications aside for the moment) but there is little serious debate that they will not tend to increase premium costs.

For instance, the law's age banding requirements will raise prices for younger, and healthier applicants (while lowering them slightly for older applicants). The inability of insurers to vary premiums based on health status (called community rating) will also increase costs for healthier individuals. The requirement that insurers accept all comers, regardless of whether they have pre-existing conditions will also tend to increase costs.

And the essential health benefits package mandated by Obamcare will require benefits that "are more extensive than what most individuals and small businesses already purchase", which "will also boost premiums, especially if you currently have a less extenstive plan."

There are also a variety of taxes and fees that will be passed along by insurers directly to consumers, increasing premiums yet again. (This is a topic that I discussed in depth at National Review Online recently.)

Here's the bottom line from the Fact Checker:

...the bad news is that, on average, premiums almost certainly will go up -- with some people really getting hit with increases. "Based on the analysis of the individual market, there is a concern for rate shock to a material portion of the population," a report for Rhode Island said. "The individuals who currently are qualified for preferred rates will be seeing large increases in their healthcare premiums if they do not qualify for premium subsidies.

...The law's provisions, especially the requirement for essential benefits, will almost certainly increase premiums, though tax subsidies will help mitigate the impact for a little over half of the people in the exchanges. But a lot of other people -- such as a young male who currently has a plan that does not include all of the required benefits -- are likely going to have sticker shock when they see what happens to their premiums starting in 2014.

I think this is a pretty fair characterization of what will happen. The President's preferred policy choice - now law - is for a very rich, very heavily regulated insurance market. That market will offer a more limited menu of more costly choices, choices that (for some) will be heavily subsidized by taxpayers.

You can defend higher costs and higher taxes as a responsible health care policy choice. But make no mistake: Obamacare has made insurance coverage more expensive for the individual and small group markets. And shifting more health insurance costs to taxpayers is a far cry from actually lowering them.

In other words, there is still no such thing as a free lunch.

For all the talk of the "lack of innovation" in the pharmaceutical industry, it is instructional to examine the past two decades, when innovation was at its best. In particular, AIDS and hepatitis C, the two most important viral infections in the world have been knocked down (or out) by the brilliant efforts of pharmaceutical scientists, leading to numerous new drugs that have exceeded all possible expectations.

In my recent Forbes op-ed, the contrast between these successes of the past twenty years and an altogether different scenario today is examined.

The lack of innovation isn't the problem-- it is the mass exodus of the pharmaceutical industry from infectious disease research.

And this will leave us woefully unprepared for the next "AIDS" epidemic that comes along.

America generally suffers in health care comparisons with our developed competitors - especially when it comes to spending, where the U.S. is portrayed as an inefficient outlier. The mismatch between costs and outcomes is then used to justify increased government intervention in U.S. health care markets. 

In this first of a series of posts on U.S. health care metrics, we'll take a look at how current comparisons are often misleading, where the U.S. health care system may be inefficient, and finally what policy solutions are available for improving U.S. health system performance, without wrecking what the U.S. does well - developing innovative new drugs and diagnostics.

"We spend too much." That's the constant refrain from many health care experts.

Whether on a per-capita basis or in absolute terms, we are constantly reminded that the US leads the developed world in health expenditures - evidence of our broken and inefficient healthcare arrangements. Take this figure, from a 2011 OECD report, which finds that the U.S. spends more than twice the OECD average on health care.

Thumbnail image for health_spending.png

Source: HEALTH AT A GLANCE 2011: OECD INDICATORS © OECD 2011, p. 149

The trouble is that this figure only tells part of the story. In his recent book, American Health Economy Illustrated, Duke University scholar Christopher Conover explains how comparisons using traditional measures of Purchasing Power Parity adjusted-GDP (GDP PPP) tend to exaggerate the differences in health spending between other countries and the US. Conover writes that:

"Health PPP in US dollars is lower than GDP PPP for all OECD members; thus the widely reported cross-national health spending dollars (calculated using GDP PPP) greatly exaggerate the true differences in health resource use between the United States and other nations." p.8

Essentially, PPP allows us to standardize the purchasing power of different currencies using one metric. The widely used GDP PPP (or USD PPP) figure takes into account prices across the entire economy, which in the US, are generally lower. However, US health care prices are on average 25% higher than other OECD countries - this means that any difference in health expenditures measured using GDP PPP overstates the difference. Conover offers a more realistic comparison:

Source: American Health Economy Illustrated p. 9

Using 2007 numbers, Conover's analysis brings the difference between the US and Norway down to 18%, from an incorrectly calculated 50%. 

Critics would argue that these higher prices are evidence in and of themselves of the failures of our system and the virtues of the single-payer model - we will address these unfounded criticisms in later posts.

By using health-spending adjusted PPP, the differences between the US and other OECD countries is much less pronounced than those sounding the seventh trumpet would like us to believe.

Even by this measure, however, we retain our leadership. In coming posts we will address the deeper issues - Do we get better or worse health outcomes for our spending? What drives the increase in spending? And, finally, is more government control the only way we address our health care challenges?

In a recent New Yorker article entitled "Big Med", Dr. Atul Gawande raises a number of good points and thoughtfully describes a few anecdotes that offer valuable insights into how we manage healthcare, and how healthcare could do better. He is absolutely right to look to other industries for lessons to apply to healthcare delivery. To date, the healthcare industry has relied on a series of experiments that only adopted fringe elements of process change, rather than making fundamental, market-based improvements. But even with PPACA upheld, we won't necessarily see these types of changes through increased size and scale (e.g. Accountable Care Organizations (ACOs)), as Dr. Gawande implies. The government has even less incentive and accountability for efficiency than the current delivery system has. What we need are market-based solutions.

Dr. Gawande analyzes the potential for healthcare delivery to be run like a Cheesecake Factory. To summarize, he asserts that through a more efficient model that includes transparency and accountability for correctly producing a food order (in a standardized way), Cheesecake Factory creates a high-quality dining experience at a low cost. Toyota also famously improved its processes; it, too, had a market incentive to do so. All of these models have been out there for the taking, but they haven't been adopted and integrated in healthcare except selectively, as in the case of free-standing independent specialty facilities. These are all market-based solutions, not government solutions.

But as Gawande notes in his article, healthcare consolidation has typically led to higher costs, not lower ones, and, as they say, the definition of insanity is repeating the same activity and expecting different results. The threat of oligopoly, and healthcare delivery organizations becoming "Too Big to Fail" cannot be overlooked, and I have less faith in the government's ability to prevent it than Dr. Gawande does. As I wrote in a previous blog post:

"In theory, larger groups could mean greater efficiencies. But large healthcare delivery organizations have generally not been more efficient, integrated or consumer-centered. By encouraging consolidation, the current environment reinforces the negative aspects of the current model -- lack of transparency, accountability, and cost effectiveness. ACOs and other consolidation efforts offer no new business model, and simply reduce provider options for the consumer and create behemoth organizations with added layers of complexity... not better outcomes at lower cost. The net result is likely to exacerbate current problems."

Furthermore, The Cheesecake Factory, for all its successes, is hardly perfect. Even in this successful chain, the wait times are legendary -- particularly in bigger cities like Chicago -- hardly a model we'd like to have at the doctor. Add in additional government controls, and the doctor's waiting room starts to look more and more like the DMV. In addition, the chain has been widely criticized for its unhealthy menu, earning the accolade "worst family restaurant in America" in 2010. Dr. Gawande cites their 49 "SkinnyLicious" items, but these represent less than one-fifth of their total offerings, and even these items are dubious; for example, the SkinnyLicious Shrimp Summer Rolls contain nearly a full day's worth of sodium per serving. So maybe The Cheesecake Factory has figured out how to deliver food more efficiently, but this efficiency has come at the expense of our health.

Until we create a truly market-based approach to the healthcare industry, we won't be able to crack rising costs in any meaningful way. Transparency, increased accountability, and a consumer-centered model for healthcare will be table stakes to achieve the goal of better health outcomes at lower cost. These large scale "chains" will just repeat the mistakes of the past. Government solutions, such as ACOs, merely add layers of bureaucracy without changing the fundamental problems. Sure, the healthcare industry has undertaken some efforts to alter processes... but they haven't reinvented a new model. They have essentially just repackaged the same old inefficiencies in a bright, shiny new box. It's time America stops having to pay for second-hand healthcare!


Markets span the gamut from monopoly (one supplier, many buyers), to competitive markets (many buyers and sellers), to monopsony (one buyer, many suppliers). Competitive markets are the most efficient: price signals in competitive markets promote competition and innovation, and provide products at a variety of prices and levels of quality to consumers.

Some markets may naturally tend to monopsony (the Pentagon for national defense) or monopoly (typically markets with very high capital costs and barriers to entry, like electric utilities).

But monopoly and monopsony are considered sub-optimal outcomes. Monopolists have the power to depress competition and charge higher prices than there would be in a competitive market. Monopsonists, on the other hand, have the power to depress prices sub-optimal levels. Both have a tendency to underprovide resources, leaving unmet demand - the "deadweight loss" of consumer and producer surplus from goods that aren't produced or consumed.

What relevance does this have for health care? Lots, actually. The increasing socialization of health care costs through government programs (Medicare, Medicaid, Obamacare) give government monopsony power, allowing it to depress prices.

From the government's perspective, this is a good thing since scarce tax dollars can be used to buy large quantities of health care at below market prices. From a political perspective, it's also easier to ask for concessions from (for instance) drugmakers than to increase patient copays, reduce coverage, or ask voters to pay more in taxes.

But monopsony power is a double edged sword. If you drive prices too low, you sharply reduce incentives to invest in R&D. You get cheaper drugs today, at the price of many fewer new (and better) medicines tomorrow. Grandpa gets cheaper drugs today, but his grandchildren get fewer new medicines, and more old ones.

European nations have used their monopsony power to control drug pricing through a variety of mechanisms (from outright price controls to reference pricing), but at the cost of driving drug R&D out of Europe and (generally) delaying European patients access to new drugs.

The U.S. hasn't used this approach - yet - but one state, Massachusetts, is at least seriously considering it. Under Section 273 of new health care legislation signed into law this week, the Bay State created a pharmaceutical cost containment commission "to study methods to reduce the cost of prescription drugs for both public and private payers." In particular,

The commission shall examine and report on the following: (i) the ability of the commonwealth to enter into bulk purchasing agreements, including agreements that would require the secretary of elder affairs, the executive director of the group insurance commission, the director of the state office of pharmacy services, the commissioners of the departments of public health, mental health and mental retardation, and any other state agencies involved in the purchase or distribution of prescription pharmaceuticals, to renegotiate current contracts; (ii) aggregate purchasing methodologies designed to lower prescription pharmaceutical costs for state and non-state providers; (iii) the ability of the commonwealth to operate as a single payer prescription pharmaceutical provider; and (iv) the feasibility of creating a program to provide all citizens access to prescription pharmaceuticals at prices negotiated by the commonwealth.

Why stop here? If it's such a good idea for the government to buy drugs in bulk, why not buy MRIs, ultrasounds, hospital beds, and bedpans?

For that matter, why bother shopping at Wal-Mart when the state can use it's purchasing power to buy your food, your clothing, and your housing at ultra-cheap prices?

The reason that we don't let the government buy these things (except for the very poor) is that it produces an economic disaster. Price controls destroy incentives to bring new products to market. The irony is that we keep trying to figure out new ways to make price controls work.

There's a much, much better way to lower costs while also improving quality.

For instance, the MA bill puts a lot of emphasis on building Accountable Care Organizations to coordinate care pay based on capitated payment rates. Whether or not ACOs are a silver bullet for fixing health care, ACOs or other health systems (and insurers) are still much better situated to negotiate with drug companies on the best bundle of old and new medicines needed to optimize health outcomes.

A central purchasing agent (in this case, the state) can't possibly account for all of the myriad ways that drugs fit into the totality of the health care system. Indeed, some ACOs/health systems might opt to increase their overall pharmaceutical spending or spending on select new drugs because it offsets other health care costs - like expensive doctors and hospital beds.

Ideally, consumers would pick from competitive bundles of care with their own cash (or vouchers, for low-income Americans). This would give providers even more powerful incentives to create innovative bundles of health care products and services.

Medicare Part D operates like this: allowing seniors to pick from a wide range of competing private insurance options at a range of prices. Plans that manage to offer the most effective drug formularies at the most attractive prices gain market share. And competition also produces robust negotiations between drug companies and insurers, helping to keep prices low for consumers. To date, Medicare Part D has come in over 40% below initial cost estimates, thanks to robust competition between insurers and drug companies.

One of the bright spots in the Massachusetts legislation appears to be an effort to collect better data on health care prices and outcomes - and this information could empower consumers to seek out the best, and most efficient providers.

We need more competition and consumer choice in health care, not less, and certainly not a single payer (for drugs or anything else). We'll have to wait and see what the Bay State commission recommends, but we'll go out on a limb right now and venture that it'll be a bad idea.

Here's hoping we're wrong.

When my sister Paula was treated for Acute Myeloid Leukemia a few years ago, her doctors did not have any of the latest miracle cures available (such as Gleevec, a drug that has literally revolutionized the treatment of Chronic Myelogenous Leukemia since its 2001 approval). Instead, they had to rely on the broad-spectrum chemotherapy drugs daunorubicin and cytarabine -- old stalwarts on our war on cancer that date to the 1960s.

Chemotherapy agents work by poisoning all the quickly dividing cells in the patients body, whether they're cancerous or healthy. When they're effective, they kill all or nearly all the cancerous cells before they kill the patient. But they inevitably come with a raft of very serious and often (temporarily) disabling side effects. Like many patients undergoing chemotherapy, Paula felt for months on end as though the treatment may have been worse than succumbing to the disease.

That's why the move by medical science into more targeted cancer therapies -- ones that either deliver a therapeutic dose to a specific or localized site in the body or consist of molecules specially designed to bind only with certain cell types -- has been hailed so broadly. Benefits include fewer or smaller doses given to the patient, greater confidence that the drug will find and destroy cancerous cells, and, perhaps most importantly to the patients, fewer and less severe side effects. And as the fields of genomics, proteomics, and metabolomics advance at a lightening pace, we are quickly learning much more about what makes cancers unique and how to target them effectively.

Unfortunately, the very high hopes we have for targeted drug therapies in these early days in their development are all too frequently accompanied by disappointment (see here and here) as one targeted therapy after another has proven to be ineffective or far less potent than we once imagined they would be. Experience is mixed, to be sure, and a handful of targeted therapies, such as Gleevec, have proven to be real breakthroughs. As the New York Times detailed two years ago in a three-part series of articles, the now-approved drug Zelboraf (then being tested in clinical trials under the moniker PLX4032) "produced seemingly miraculous results in some patients with [metastatic] melanoma" and a very specific genetic mutation.

However, in spite of the mixed clinical trial results related to efficacy, a new study published in August edition of the journal Annals of Oncology has found that targeted drugs appear to be living up to the hype with regard to safety. On average, patients in phase I clinical trials of targeted cancer therapies experience a markedly lower rate of the most severe (grade 3 and 4) adverse events associated with drug toxicity and fewer and less severe physical side effects than do patients undergoing traditional chemotherapy.

The study analysed data from 687 patients in 36 Phase I trials on a variety of different cancer types. And the findings offer some genuine hope to patients. "The theory behind targeted drugs is that they should affect only cancer cells that have a specific fault and spare healthy cells, which we hoped would lead to higher rates of efficacy and lower rates of side-effects," the study's lead author, Rhoda Molife of the Royal Marsden NHS Foundation Trust near London, told World Pharma News. "It's very pleasing that our study seems to back this up, at least in the context of Phase I trials."

Of course, the news isn't all good. World Pharma News also reports that, "for targeted drugs, the most common toxicities were gastrointestinal -- such as loss of appetite, diarrhoea and vomiting -- and fatigue, while side-effects for cytotoxic drugs are generally haematological or cardiovascular in nature." So, although targeted cancer therapies have fewer side effects, being treated with them is still no walk in the park. But the study's findings are one more bright spot in our slow but steady march to conquer the Emperor of all Maladies.

The FDA's unambiguous answer is yes, at least when it comes to autologous stem cell transplants conducted in physician-owned and operated clinics. In today's Wall Street Journal, former FDA Deputy Commissioner Scott Gottlieb and Coleen Klasmeier discuss the importance of a recent D.C. Circuit Court case that ruled in favor of the FDA and against a Colorado company offering autologous stem cell transplants for orthopedic use:

A recent decision by a federal trial court gave the Food and Drug Administration the latitude that the agency has long sought to regulate our cells as drugs. It could put the brakes on one of the most promising areas of medical research.

At issue are cells taken from our own bodies and then re-implanted with the purpose of treating medical problems. The most inspiring work involves adult stem cells, although the court's ruling in principle extends FDA oversight into things as common as in-vitro fertilization--basically turning reproductive cells into "drugs" under the law. ...

The FDA has repeatedly sought to blur the line between manufacturing medical products and practicing medicine whenever new techniques emerge. But the standard for regulation isn't whether the agency feels a technique is novel but whether it meets the definition of being a medical product.

Federal regulators have stretched that definition to the point where a reasonable limit no longer exists. The law provided a clear impediment to unrestrained exercise of FDA authority. Something needed to be an "article"--not a medical procedure--in order to become a drug. The constraint that a drug needed to be a "thing" has been read out of the law by FDA, and the district court appears to have accepted that position.

If the FDA's victory is upheld on appeal, then conceivably nothing done as part of clinical practice is beyond the agency's reach.

Project FDA Chairman and former FDA Commissioner Dr. Andrew von Eschenbach also touched on this case in an April 2012 Journal op-ed: August 2010, the FDA filed suit against a company called Regenerative Sciences. Three years earlier, the company had begun marketing a process it called Regenexx to repair damaged joints by injecting them with a patient's own stem cells. The FDA alleged that the cells the firm used had been manipulated to the point that they should be regulated as drugs. A resulting court injunction halting use of the technique has cast a pall over the future of regenerative medicine.

From the agency's perspective, it had only called a "time out" until it could apply its regulatory process designed to analyze the therapy's effectiveness and potential risks. For the industry, however, government had intervened in a way that seemed to bar the established clinical practice of using an individual's own cells to advance the healing process.

Lawyers--many lawyers--are now trying to resolve this dispute. But at a time when science and technology are creating marvelous medical breakthroughs, the FDA should be leading and guiding the development of state-of-the-art therapies like regenerative medicine. Instead, the agency's process for regulating complex new technologies often starts too late, after companies and researchers have sunk millions of dollars and thousands of hours into painstaking research.

The "time-out" continues, and Regenerative Sciences has promised to appeal the FDA's decision.

For more of a back and forth on the underlying issues involved, check out the Cell Therapy Blog, the FDA Law Blog (purely on the legal issues), and how some of the broader isses in the field are developing via the Knoepfler Lab Stem Cell Blog.

I'll write more on this in a future post.

Many recent efforts to reform healthcare appear to merely add layers of bureaucracy without fixing the underlying problems. The industry needs a fundamentally new business model - one which incentivizes provider and consumer behaviors to achieve measurably better health outcomes at lower cost. While all stakeholders must be engaged in order to make any realistic changes, this new model specifically requires providing consumers with meaningful outcome information, in order to make good cost/benefit choices and ensure they are receiving real economic and clinical value. Even though we have an uphill battle in transforming healthcare, there are at least some innovative private sector efforts devoted to managing costs and improving outcomes that should be seen as beacons for further change.

Imagine a future where consumers ask questions about the price and outcomes that healthcare systems deliver - not questions about the cost of one MRI versus another, but about all the costs to treat a pregnancy or an orthopedic procedure. As I discuss in my upcoming book, Healthcare at a Turning Point, these areas are relatively easy to calculate, as they have a defined beginning, middle and end. It is now generally understood that the amount and types of care required for some conditions can be anticipated; and therefore, a total cost for treatment can be established.

These predictive care paths - and the outcomes they achieve - are the true "product" of hospitals and physicians, not each procedural detail. Considering the goals of healthcare reform, this implies that - like manufacturers - investments in "R & D" (e.g. new approaches to care delivery) will need to become part of the new business model. Differential pricing is then based on the quality of outcomes produced. As such, these "products" can be audited for quality, just as products of pharmaceutical and medical device manufacturers get audited. This ultimately provides the necessary transparent data on health outcomes and patient experience for a truly patient-centered focus of healthcare delivery.

One specific example where the private sector implemented such innovative methods comes in the area of cancer care. Cancer Treatment Centers of America (CTCA) has taken the lead in providing a comprehensive, integrated diagnostic evaluation and treatment plan for the four major types of cancer (i.e. breast, colorectal, prostate and lung) for a fixed fee and in five days or less. They are poised to provide treatment for selected cancers on a fully transparent, bundled price basis.

Reducing practice variability - and understanding the causes of it - is essential to any attempt at bundled payment. At the heart of its model, CTCA established consistent evaluation protocols. With a transparent, fixed total "price" for an evidence-based course of evaluation associated with outcomes, there is no incentive to provide additional, unnecessary care. Significant administrative efficiency can also be achieved, moving away from the cost-accounting minutia of the current system - which consumes provider time and encourages upcoding abuse. Most importantly, patients understand what will happen in their care because the process and price are transparent and they are actively engaged in healthcare decision-making.

Organizations like CTCA will continue to be successful to the extent they understand the key drivers of cost and variability associated with outcomes. Through unique care approaches, they can also define essential economic and clinical components of value - to both patients and payers. Care models need to be used to guide the development of the evidence required to demonstrate better outcomes and define commensurate value for the price. More importantly, these models will be the basis for setting a higher bar in the industry, redefining the quality metrics that could be used as a comparator between institutions.

Healthcare delivery organizations must anticipate and be prepared to meet the inevitable demand for better care at lower cost. There is a gathering storm of reduced reimbursement and shrinking margin, but there is also an opportunity to grow share and preserve margin for innovative market leaders.

Merely defining a care path and corresponding price won't result in growth or improved outcomes. Differentiated care and a commitment to delivering more value as defined by the healthcare consumer will be key to success. The market share winners in this environment will be those providers who can define and deliver on better health outcomes.

KV Pharmaceutical Co. developed a version of hydroxyprogesterone caproate with the brand name of Makena. After investing in the drug's development and successfully receiving the desired FDA approval and seven years of marketing exclusivity as an orphan drug, KV priced Makena at a level that would have been reasonable for a such a product if it were completely new. Unfortunately, compounding pharmacies had been charging a price that was one one-hundredth of Makena's price for unapproved hydroxyprogesterone caproate and so KV drew scrutiny from Congress.

The FDA had laid out a deal that KV accepted. Those companies that gave the FDA what it wanted by putting their "outsider" products through the FDA's expensive, risky, and lengthy approval process would be rewarded with seven years of marketing exclusivity. KV was successful at this task and thought it had received its prize. However, under political pressure, the FDA effectively made a mockery of the deal by refusing to take enforcement actions against the remaining compounding pharmacies.

I guess marketing exclusivity isn't what it used to be as the FDA showed that its rules are pliable and subject to the political winds. KV played by the rules but Congress and the FDA didn't oblige. The laws of economics, though, aren't so whimsical and KV has realized that it paid a premium price to develop what is effectively a generic product. Struck by a stark financial future, KV has now filed for Chapter 11 bankruptcy protection. I assume that other companies won't be as credulous.

Massachusetts is poised to sign into law sweeping legislation that will create an extensive bureaucracy to set and maintain a global budget for both the public and private health care spending in the state.

States are America's laboratories of democracy, and Gov. Deval Patrick and the legislature are certainly putting their belief in central planning to the test. Good for them.

Will it work? Color me skeptical. (For more detailed objections, see the Pioneer Institute's Josh Archambault's video dissection of the bill, embedded below.)

The new Bay State legislation sounds like a lot of wishful thinking disguised as technocratic optimism. At the heart of the bill is an 11 member Health Policy Commission with sweeping powers to (ostensibly) restrain state health care spending and ensure that it doesn't exceed gross state product (GSP) growth through 2017 and .5% lower than that thereafter (until 2022).

This is a very ambitious benchmark. To date, health care inflation in the state has averaged several points higher than GSP - and every developed country in the world is struggling to control health care spending (let along keep it below GDP growth, at least for any length of time) even using the kinds of global budgets and price controls that the Bay State is contemplating now.


Archambault notes that the Commission will also be given "tremendous control over how our health care system will be set up, and the method by which medical professionals will be paid...[along with] what facilities get built where, why and when. It will have power over the future of medicine, with controls over medical innovation." Ironically, for all its power, providers who contribute to "excessive" health care costs can only be fined $500,000 for disregarding the Commissions diktats.

But the central problem with this approach - or others like it, i.e., Obamacare's Independent Payment Advisory Board (IPAB) - is that it is so one-sided. Bay State legislators are betting that you can reform 20% of the economy from the supply side, with very little involvement from the demand side (the patients). (For more detail, see this post.)

It also assumes that commissions and technocrats recruited from industry, hospitals, and academia won't play favorites, or be pressured by interest groups into supporting pet projects and institutions. Good luck with that.

There's tremendous need for more transparency in American health care and better quality metrics. And there's broad agreement on the left and the right that we have to move away from fee-for-service health care.

But the kind of fluid health care delivery and insurance innovations we need in health care can't be managed from the top down - the systems are just too complex and fast moving. And entrenched providers have very little incentive to encourage true competition that might result in "creative destruction" of their very business model.

In the few parts of the health care system where consumers can spend their own money - Lasik, medical tourism - we have seen tremendous cost and quality improvements as providers compete for business. Safeway and Whole Foods have proven that employees can be empowered to improve their own health and save money at the same time. One of the few bright spots among health care entitlement programs is in Medicare Part D, where seniors chose among competing private drug plans and costs have been held over 40% below initial projections.

America's health care system is moving away from fee-for-service medicine, as employers and providers embrace new payment and delivery mechanisms. But we should be accelerating and supporting these initiatives by empowering patients and their families to choose among competing providers and insurers with their own money, while also creating new electronic information systems that allow consumers to easily compare providers based on price and quality.

Adopting an approach that consumers can continue to consume health care as they always have while asking providers and insurers to bear the financial risk of changing the system around them (as well as changing patients' own health behaviors) is to risk a huge backlash and inevitable failure.

In fact, for all of their effectiveness in holding down costs, the failure to get buy-in from consumers is what doomed managed care in the 1990s.

I understand why policymakers like this Wizard of Oz approach to health care - where everything important happens behind a curtain and a disembodied voice just tells you which ACO you're going to belong to. It gives the illusion of stability in the midst of potentially wrenching changes.

But if you don't have buy-in from patients and consumers - and can't force providers to really compete against one another - we won't be able to fundamentally transform our health care system.

And fundamental transformation is what we really need.

Over the weekend, Paul Howard wrote about a National Journal article lamenting that pharmaceutical companies keep promoting their products for off-label uses -- that is, "uses the Food and Drug Administration hasn't blessed." Paul did a solid job debunking the article's primary claim: that regulatory officials and the Department of Justice are woefully out-gunned and have too few tools at their disposal to prevent companies from repeatedly engaging in fraudulent behavior.

The fact of the matter is that prosecutors have a sledgehammer at their disposal -- an enforcement tool that has made many a hardened corporate executive cry uncle when they should be fighting the charges in court. After all, much of what these companies are doing is either not illegal or is protected by the First Amendment or both. But the government's charges almost never have to be proven in a court of law because a mere indictment on fraud allegations would be sufficient to destroy most drug companies. It's time we started reining in these misleading, and potentially fraudulent, allegations of fraud.

Under federal anti-fraud laws, merely being indicted for fraudulent behavior permits government programs to exclude, suspend, or "debar" corporations from doing business with the federal government. As I've written before, because Medicare, Medicaid, and the VA health programs pay for a sizeable chunk of all US health spending -- including vast amounts of the pharmaceuticals administered in a hospital setting -- debarment from federal health programs would be tantamount to a corporate death sentence. "It is thus not surprising," notes Ropes & Gray attorney Joan McPhee, "that virtually all rational corporations ... conclude, as a business matter, that they cannot incur the risks associated with taking an indictment and going to trial, even when, in the corporation's assessment and that of its seasoned counsel, the threatened case is without factual or legal merit."

Far from having a limited ability to prosecute this allegedly illegal activity, the Department of Justice can exact billion dollar penalties from the pharmaceutical industry without ever having to prove the allegations in court. No guilty verdict is necessary to trigger debarment, which means that prosecutors can leverage this power and the vagueness of federal regulations to force defendants to settle out of court.

What is especially galling, though, is that the news media have so willingly bought in to the government's allegations of fraud. Indeed, the National Journal article is just one of many recent news reports cheerleading for the government's new "tough on fraud" campaign (see here and here, for example).

Now, to be sure, there is plenty of genuine fraud in the Medicare and Medicaid programs. And when multinational corporate giants agree to settle out of court and pay billion dollar plus fines, it's easy to suspect that something shady must have been going on. But the infractions most of these firms are being charged with do not include fraud or consumer misrepresentation or any other claim that the firms misrepresented the truth about their products.

The so-called crime that the drug companies are committing is, as the National Journal puts it, promoting their products "for uses the Food and Drug Administration hasn't blessed." But, as federal judge Royce Lamberth explained in his decision in a seminal off-label promotion case, "In asserting that any and all scientific claims about the safety, effectiveness, contraindications, side effects, and the like regarding prescription drugs are presumptively untruthful or misleading until the FDA has had the opportunity to evaluate them, FDA exaggerates its overall place in the universe" (Washington Legal Foundation v. Friedman, 13 F.Supp.2d 51, 68 (D.D.C. 2000)). Promotion of off-label uses could include untruthful or misleading statements, just as promotion of on-label uses could. But promoting a drug or medical device for an off-label use is not inherently untruthful or misleading.

Technically speaking, companies prosecuted for off-label promotion are charged with introducing a "misbranded" article into interstate commerce. And that might sound like fraud or some other form of misrepresentation -- and the government certainly wants you to believe that it is. But the misbranding in question doesn't have to be untruthful or misleading in any way. It's not even related to what is actually printed on the product's label. It occurs, according to the FDA, solely for the reason that the manufacturer's spoken or written recommendation that the drug be prescribed for an off-label use suggests an "intended" purpose for which "adequate directions for use" are not printed on the label. But, of course, the manufacturer is legally barred from printing "adequate directions" for an off-label use on the product's label because that too would constitute the introduction of a "misbranded" article into interstate commerce.

The logic here is circular. Under the FDA's interpretation of the Food, Drug and Cosmetic Act, drug manufacturers are forbidden from mentioning the fact that certain off-label uses have been shown to be safe and effective because they are also forbidden from supplying physicians and patients information about the appropriate way to use drugs for off-label indications in a safe and effective way.

Got it? If not, you could certainly be forgiven for being a little confused. Even many legal experts have difficulty figuring out what is and is not lawful.

During oral arguments last year in a drug sales representative's appeal of his off-label promotion conviction, a panel of Second Circuit Court of Appeals judges seemed inclined to agree that the FDA rules are unclear, ambiguous, and overbroad. At one point, a DOJ attorney tried to explain that off-label promotion "is not a crime" per se, but is merely evidence of the manufacturer's intent to "introduce a misbranded drug into commerce," which is illegal. But the only way the drug was "misbranded" was the sales rep's claim that it was safe and effective for two off-label uses. The judges had difficulty following DOJ's argument and questioned why such speech should be considered criminal.

The U.S. Supreme Court has held on several occasions, most recently in June of 2011, that truthful speech used in pharmaceutical marketing is entitled to the same level of First Amendment protection as other commercial speech. The U.S. District Court for the District of Columbia held some of the FDA's off-label promotion rules unconstitutional in a case that was reversed on appeal when the FDA acknowledged that some off-label speech is protected by the First Amendment. And a recent decision on a related issue by the Seventh Circuit Court of Appeals suggested in non-binding dicta that the FDA's off-label speech restrictions are likely to be "unconstitutional in at least some applications."

Unfortunately, so few constitutional challenges to the FDA's off-label speech ban ever make it to court because an indictment, what attorney Joan McPhee calls the "admission ticket" to the courtroom, would be a catastrophe for any drug firm. That Second Circuit case, Caronia v. United States, is now being watched so closely because it is so rare for these prosecutions to end up in court. Alfred Caronia, the sale representative in question, decided to fight, even though his employer, Orphan Medical, folded at the thought of an indictment.

This "debarment trap" is patently unfair, as companies are forced to choose between the Scylla and Charybdis of a multi-billion dollar fine or the loss of many billions of dollars in sales without having defrauded or otherwise harmed anyone. Worse still, prosecutors and the Department of Health and Human Services are free to mete out either punishment without ever being subject to the oversight of an independent court, essentially stripping manufacturers of basic due process rights. It is no stretch to think that prosecutors who use the threat of debarment to force a settlement are engaging in unethical behavior. And it is long past time that we did something about it.

The simplest solution would be for the FDA to bring its rules on off-label speech into compliance with the First Amendment in a clear and concise way, so that the rules reflect the fact that much of this type of speech is constitutionally protected and so it becomes possible for manufacturers to know what is and is not illegal. That would only solve the problem as it relates to off-label speech, however, leaving drug manufacturers and many others in the heath care industry subject to the whims of aggressive and unfettered prosecutors for other reasonable conduct. Thus, real reform must rein in the ability of prosecutors to use the threat of debarment for the purpose of avoiding judicial oversight. I've been looking into ways in which this might be done, and I hope to explore some proposed solutions in future posts.

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Rhetoric and Reality—The Obamacare Evaluation Project: Cost
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