September 2012 Archives

Will the Romney-Ryan Medicare plan lead to the doom-and-gloom scenario outlined by Center for American Progress (CAP) scholars in a recent op-ed?

Let's address their points one by one.

The Romney-Ryan Plan Voucherizes Medicare

CAP reiterates Democrats' refrain that the Romney-Ryan reform plan for Medicare will lead to greater financial burdens for seniors, and will leave them without adequate access to quality care.

Fortunately, this isn't the case. The Romney-Ryan plan is based on the idea of "managed competition" - better known as premium support. As my colleague, Colleen Chambers, wrote in a previous post, premium support is not the same as vouchers. While the idea of providing a subsidy (that scales with income) to purchase insurance on the private market is based on the idea of vouchers, there are important distinctions. Premium support includes basic protections like: being charged the same price for the same coverage, a guaranteed right to enroll in a plan of your choice, and no discrimination against the sick.  The Federal Employees Health Benefit Plan and Medicare Part D - both successful, popular programs - are examples of premium support.

The point is that individuals can make surprisingly reliable decisions when given the opportunity to do so. Premium support relies on the indisputable fact that the market can make better decisions than the government. So instead of being subjected to the whims of budgetary maneuvering in Congress or the whims of unelected bureaucrats (Obamacare's Independent Payment Advisory Board), seniors can buy quality insurance from companies that have to compete against one another. This benefits seniors through higher quality services at lower cost; granny isn't being thrown off a cliff.

Medicare Expenditures Grow Slower than Private Insurance

The op-ed cites a recent study by the New England Journal of Medicine (NEJM), which finds that over the past decade, Medicare costs per enrollee have grown slower than private insurance, and will continue to grow slower into the next decade.

Literally speaking, the NEJM findings are on-point. Annual growth of Medicare expenditures, according to the Centers for Medicare and Medicaid Services (CMS), has slowed down relative to private insurance premiums.

However, there are many confounding factors buried in these findings. For one, Medicare per-enrollee costs - even for common benefits - are nearly three times those for private insurance (see previous link from CMS). Another consideration is that physicians are compensated by Medicare at about 80 percent the rate of private insurance, and by Medicaid at about 60 percent of private insurance. This means that prices for private insurance are artificially inflated by Medicare's and Medicaid's reimbursement schemes. These costs are then passed on to the consumers - those that hold these insurance policies. So in effect, there is an implicit subsidy embedded in Medicare beyond the tax that we all pay; this subsidy helps keep the numbers relatively low and looking good for the public.

More importantly, the projected slowdown in Medicare's cost growth comes from the ACA's $716 billion cuts to Medicare. Much of these cuts are based on reducing Medicare's Sustainable Growth Rate (SGR) payments to physicians by nearly 30 percent. Such cuts have almost always been preempted by Congress in the past, and as such, it's hard to believe that they will be allowed to go through.

Even if these cuts do go through, the money will have already been spent, as it is being used to fund subsidies for the ACA's insurance exchanges. Unfortunately, the real world can't spend money twice like Washington can.

Medicare Has Lower Administrative Costs than Private Insurance

The fact that this bit of 'conventional wisdom' still permeates public discourse is a testament to the success of the administration's PR campaign.

If it were true that government could achieve lower overhead costs than the private sector, then axiomatically it would be true that the government should run the economy, dictate business production decisions, and silence market forces wherever they may creep.

Fortunately, hundreds of years of economic scholarship have taught us otherwise. The famous economist and political theorist, Frederic Bastiat wrote:

[A] law produces not only one effect, but a series of effects...the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

So when we encounter the argument that Medicare's overhead costs are only two percent versus 10-15 percent in the industry, we have reason to question such a claim's validity.

First, Medicare administrative costs don't take into the account the rampant fraud within the program, which the Government Accountability Office (GAO) pegged at 10 percent of Medicare's outlays - $48 billion dollars in 2010. If these losses were counted as part of administrative expenses, Medicare would be within the industry range. If fraud-combatting efforts, marketing, and sales efforts were as strong as the private sector, there is reason to believe that administrative expenses would be greater.

Second, a 2009 study by Robert Book, found that looking at administrative costs per-person actually shows that Medicare's costs are higher than private insurance. Looking at costs as a percent of total expenditures is misleading because the expenditures will necessarily be higher for Medicare beneficiaries who are older, sicker, and thus more expensive to treat.

While Medicare's administrative "savings" are often touted as an example of Medicare's efficiency, a better measure is per-enrollee costs for common benefits. As mentioned earlier in this post, Medicare is decidedly more expensive.

IPAB Will Design Innovative Policies

The ACA, in an attempt to control costs, established the Independent Payment Advisory Board (IPAB), which consists of 15 appointed (not elected) experts who are supposed to make the hard choices that Congress can't. IPAB is supposed to make evidence-based decisions to determine what procedures, drugs, and diagnostics are cost-effective for the purposes of determining the set of covered services under Medicare. The CAP authors argue that IPAB can make 'innovative' decisions that reward cost-effective policies from delivery systems. This much is true. They can do so. There is no reason to think that they will.

On the flipside, IPAB can do the exact opposite and become what its critics have accused it of being -  a de facto rationing panel.

Defenders of IPAB use clever rhetoric to obfuscate the fact that IPAB is unaccountable (its decisions can only be overruled by a supermajority, or its proposal automatically becomes law) and if it fails to make a proposal by 2014, the buck is passed to the Secretary of Health and Human Services.

While IPAB is currently prohibited from recommending healthcare rationing, President Obama has expressed the desire to further strengthen IPAB. Moreover, IPAB can't be dissolved before 2017 and even then, there are strict time-tables for when it can be done.

My colleague, Paul Howard and Doug Holtz-Eakin, president of the American Action Forum, addressed other perversities enshrined in IPAB earlier this year:

IPAB...exempts hospitals and hospices from cuts until 2019...cuts will fall most heavily on physicians, Medicare Advantage plans, medical device makers, and pharmaceutical companies.

[T]he uneven burden of IPAB's cost discipline will penalize some of the most innovative and potentially cost-saving technologies - like new (and expensive) drugs for Alzheimer's, which might save money in the long run by keeping patients out of nursing homes. IPAB's focus on year-to-year cuts also discourages Medicare from implementing quality and cost-containment programs that might save money over the long term.

Moreover, as Holtz-Eakin explained in testimony before Congress, the uncertainty of future reimbursement rates means that care providers will have greater incentive to reduce their exposure to Medicare (by accepting fewer, or no Medicare patients) or to cost-shift to other patients.

IPAB is a legislative monster; the CAP authors' optimistic claim is little more than speculation.

Here's a simple question - if premium support is good enough for the exchanges, why isn't it good enough for Medicare?

Fixing Medicare means harnessing market forces, not stymieing them.  

The pharmaceutical industry, as I have noted before, is an industry in transition, reflecting significant change in the regulatory environment, technology, market expectations, and competitive set. Any one of these dynamics forces, even leading companies, to rethink fundamental assumptions about their business models, their go-to-market strategies and the products and services they bring to market. But for pharmaceutical manufacturers, the fact that all of these forces are happening simultaneously accelerates the pressure and reinforces the need to challenge business model assumptions. As a result, orphan drugs appear to be an interesting opportunity to consider for insuring continued success.

Blockbuster drugs have created massive profits for Big Pharma for quite some time. But as patents have expired over the past few years (and continue to do so), this model appears unsustainable. With the enormous success of these blockbuster drugs, and significant regulatory hurdles for new drugs, most manufacturers have spent R&D money investing in follow-on or me-too products, rather than developing innovative drugs. The result is a shockingly low number of truly new molecules and an equally disappointing ability to identify which drugs will work for which patients under a given set of circumstances. Nowhere is this more evident than in the treatment of cancer. Without change to the business model, there is grave potential for the bubble bursting in an industry that U.S. companies have dominated for years.

Further complicating the issue for the industry is that regulators, payers, and patients now question the benefit of some of these follow-on products compared to their predecessors. Many of the new drugs have not demonstrated significant improvement to justify additional cost, and blockbuster drugs have historically generated significant side effects across various populations. Globally the bar is being raised for what constitutes economic and clinical evidence.

The current model relies almost exclusively on randomized placebo-controlled trials (RCTs) required for bringing them to market. These clinical trials utilize inclusion and exclusion criteria that wind up not properly accounting for the people who actually take the drugs in the real world post approval. And this is how we wind up with uncertain efficacy and a whole variety of negative effects that were not anticipated. This is where orphan drugs have an opportunity to play a potential role in Big Pharma's resurgence.

Orphan drugs target a small subset of the population (fewer than 200,000 people). To the extent one can find narrow indications and unmet medical need, there is an opportunity to capitalize on the advantages conferred by the orphan drug law that enable pharmaceutical and biotechnology companies to zero in narrowly, thus, avoiding some (if not all) of the issues with efficacy and safety mentioned above. Economic and clinical value is easier to demonstrate with a small population, and the pendulum is swinging in favor of narrower focus (niche markets).

Another benefit to orphan drugs is that these markets do have the potential to become "rolling blockbusters" (I provide a great example of one such success in an earlier post entitled "Today's Orphan Drug Could Be Tomorrow's Blockbuster"). Companies can first focus on patients with a certain combination of comorbidities for which an indication might be appropriate, and then roll out additional research, without investing the enormous amount of time and money in trying to make a "one-size-fits-all" product, which, at the end of the day, doesn't usually 'fit'. Rather than limiting themselves to one specific therapeutic area, companies could look at a variety of areas where they can make a difference, and focus a certain percentage of their efforts on demonstrating greater economic and clinical value for specific target populations.

Not only will this create public good, but it will also help get back to the roots of the pharmaceutical industry -- innovation and novel products that have kept the U.S. at the forefront of the global pharmaceutical industry. While this specialized focus might not eclipse blockbuster success, it will certainly improve the chance of the industry maintaining its status, as the blockbuster model has seen better days.

Orphan drugs come with some additional advantages to the traditional blockbuster approach. For one thing, the cost of development is significantly lower, particularly given that clinical trials can be smaller (i.e., Phase III trials can be conducted with less than 1000 enrollees). This is a more hospitable environment than the current normal drug path. There are also other attractive benefits like fast track approval, tax credits, and PDUFA fees waived for orphan drugs. And while evidence clearly must still exist -- FDA won't cut corners -- when truly life-threatening conditions are at stake, it may mean that there will be more "wiggle room" in getting a product to market, especially when there are no alternative treatments.

There are, of course, some potential challenges that pharmaceutical companies will need to overcome. Most notably, increased competition draws increased scrutiny from the FDA and Congress, who question whether drugs are really orphan drugs with so much money being invested. There is potential for legislative restraints in the future, though these are likely to just be a part of doing business and an inevitable market force that will play itself out.

Additionally, payers have pushed back on orphan drugs. They still look at FDA approval, safety and efficacy, and the population for which the drugs are intended. No payer will say it won't cover the approved drug (particularly if it's the only drug out there), as this would result in tremendous public backlash. However, because of the price tag, there is great (and reasonable) concern over whether the drugs work. More scrutiny on efficacy is likely to come with orphan drugs, but, ironically, the flipside can be seen with "ultra-orphan" drugs (which target an extremely small population). For these drugs, the total spend may not be the same as a typical branded pharmaceutical, so they are unlikely to get the same attention.

Ultimately, payers are still concerned about cost. Through focus on real world evidence, there will be a lot of opportunity to prove viability of particular drugs. As a result, pharmaceutical companies that are able to monitor and track patients to make sure they see positive effects will see great success with endeavors in orphan drugs. The opportunity to engage in post-marketing studies will prove to be beneficial for both patients and for R&D. But some companies are better prepared for this than others. It will be crucial to establish these capabilities to make this work.

There is a significant opportunity for pharmaceutical companies to revitalize their bottom lines and benefit society at the same time. But attention must be placed on changing the way they do business. Patient engagement must change to make them a more integral part of the process. Real world evidence is at the heart of the success of orphan drugs, particularly as companies have the potential to utilize a "rolling blockbuster" model through more focused research. Today's orphan drug could be tomorrow's blockbuster!

The wheel of healthcare policy is turning, slowly, from a Cut Strategy to a Cure Strategy. That is, from the old idea that the main goal should be to cut healthcare spending, to the new idea that the main goal should be to improve health--and to remind voters that healthier people cost far less.

So far the signs of this shift from Cutting to Curing are small. Nonetheless, they are unmistakable: On September 25, the White House Council of Advisors on Science and Technology (PCAST) issued a report calling for a doubling of "innovative new medicines" over the next 10 to 15 years. Doubling new medicines? Where does such a vision come from? Not, to be sure, from the current conventional wisdom that less healthcare is the goal, that we need to "bend the cost curve"--downward. And as a predictable result, the pipeline for new drugs has been drying up for years, depriving people of cures they would be happy to pay for.

The PCAST report is, indeed, quite a turnabout, given that the entire healthcare discussion over the last three years--as well as over the last two decades--has been how to make cuts in spending. The policy elites of both parties have started with the a priori assumption that our goal should be to spend less on healthcare, not more. That is, we--the general public, though perhaps not the elite--should be more like those thrifty Europeans; we should learn the wisdom of the right to die, even the "duty to die." And yet the average American has never agreed with this approach; polls show that by more than a 4:1 ratio, people want more healthcare, not less. But the average American, of course, does not write for a wonk publication; he or she is heard from only at election-time.

Yet now, in contravention of the prevailing "scarcitarian" ethos, the White House, for a change, has produced a policy document making an argument that the public would actually like. Consider this quote from PCAST co-chair Eric Lander:

With improved collaboration among all the participants in the drug development ecosystem and optimization of drug-evaluation pathways, American researchers and companies should be able to accelerate the development of safe and effective drugs while also strengthening the U.S. economy.

In other words, PCAST is saying that a positive pro-science medical strategy would be a win-win: a win for our health, and a win for the US economy, including, of course, the export economy; after all, the rest of the world needs new medicines, too.

And to the extent that such research creates new spinoffs across the economy, that's a third "win." And if real improvements in medicine--most obviously, an effective treatment for Alzheimer's Disease--could be linked to a raising of the retirement age for entitlement programs, well, that's a fourth "win." Such a quartet of wins would be a major improvement over either party's healthcare-policy track record in the last few years.

In the meantime, we might note President Obama himself is not quoted in the PCAST release, nor has he chosen to highlight this medical-abundance idea on the campaign trail. So the PCAST report cannot yet be considered a true presidential initiative, as opposed to the optimistic effort of some forward-thinking policy entrepreneurs dwelling several rungs down the White House staff ladder. After all, the Executive Office of the President is a big place, after all, and PCAST is tucked away in the Eisenhower Executive Office Building; it's possible that when the West Wing and/or the Office of Management of Bean-Counting--oops, make that Budget--gets wind of this change in healthcare orthodoxy, the PCAST report will be put away on a high shelf.

Yet it's also possible that the opposite will happen: Maybe the Obama White House will embrace the idea. Maybe the President will cite the PCAST idea in his first debate, focused on domestic policy, with Mitt Romney on October 3--as in, perhaps, "This is what I will do in a second term. I will move ahead with new cures. And as for you, Governor Romney, not only do you want to cut Medicare, but you and your running mate also want to cut the National Institutes of Health and other medical research programs."

Would such a pro-research declaration help Obama, or would it hurt him? Would a policy of science-based medical hope turn out to be good politics, or bad politics?  If Obama pushes new medical solutions, it would show he is indeed running a smart campaign.

But who knows, maybe Romney and the Republicans are ready with a strong response, noting that the output of new medicines has continued its long downward trend in the past three years. Maybe Romney is ready to respond with his own ideas for doubling the production of innovative new medicines. Maybe the Romney Plan will include say, enterprise zones, X-Prizes, deregulation, and trial-lawyer shielding. Maybe the Romney Plan is so good that Romney will spring it on Obama in that debate. Or maybe not--we'll have to wait and see.

This much we do know: Nothing would be better for medical progress today--and tomorrow--than a bipartisan competition between the two parties to generate the best possible Cure Strategy.

After all, both parties have tried the Cut Strategy, without success. In 2009-10, the Democrats scared the American people with talk about healthcare rationing and cutting Medicare, and we all know what happened in the 2010 midterm elections. And since then, in 2011-12, the Republicans have been scaring--or, as some might insist, letting the Democrats and the media get away with scaring--the folks about cutting Medicare.

So if each party gets zapped on Medicare--Democrats in '10, and Republicans, seemingly, in '12--then what conclusions should we reach about the next election? Who wants to go first on cutting Medicare in time for the '14 midterms? One popular inside-the-Beltway answer, of course, is for both parties simultaneously to agree to cut Medicare and squeeze healthcare, as part of some "grand bargain." And that might work, at least in the short run--until the real Medicare cuts kick in. At that point, the public backlash will begin, and the bargain, grand as it might be, will likely unravel.

After all, as we learned with The Medicare Catastrophic Coverage Act --enacted in 1988, reviled by seniors immediately, repealed in 1989--legislation that seems like a good idea in DC can quickly fall apart if the larger public is not on board.

So we might note that the way to make, say, Bowles-Simpson 2.0 into a genuine success would be to add a Cure Strategy component to the Cut Strategy. That is, make progress on elder-diseases such as Alzheimer's, and then couple that progress with a raising of the retirement age for entitlements. That would be a win for health, and a win for the government's budget burden--again, that fourth "win." And these Medicare cuts could stick, because the elderly and their political champions--most of them, at least--would have to admit that some greater positive health-deliverable was actually being delivered.

But first the political class has to accept the eternal paradox of medicine: The road to austerity--as in, lower costs--runs through abundance. That is, just as with computer processing power--or any kind of economies-of-scale technology--"more" means not only cheaper, but also better. After all, not every problem is fiscal; some problems are scientific, and that truism applies to the toughest, and most tragic, of health problems.

Eventually, one or both of the two parties will embrace the Cure Strategy. That is, leaders will give people what they want and the economy what it needs. And when that happens, we might note that Lou Weisbach, a Chicago businessman/political activist/health visionary, will deserve a lot of the credit; for more than a decade, Weisbach has been pushing what he calls an American Center for Cures, and his efforts have encouraged leaders in both parties to take a closer look at the Cure Strategy.

In July, Rep. Bob Dold (R-IL) endorsed the American Center for Cures on the floor of the House. And in September, Rep. Rob Andrews (D-NJ) took to the pages of The Wall Street Journal to argue for an "Apollo program" against dreaded diseases such as Alzheimer's. Out of Dold's and Andrews' shared vision, one can espy a future agency--say, a Department of Cures, modeled after DARPA--tasked with a serious mandate to improve medicine and cure specific diseases. Or it could be something completely different: It could be a series of enterprise zones, offering long-term shelters from regulation, litigation, and taxation.

In other words, while the details of a bipartisan Cure Strategy are waiting to be filled in, the broad outlines of a comprehensive Cure Strategy are already apparent. After all, "more," as in "more health" is a better political pitch than "less," as in "less health." And yet, once again, over time, more health will equal less expense--just as more computer power makes computing cheaper.

It's a life-changing, politics-changing vision, that's for sure. And the Obama administration--whether it fully realizes it or not--has just made a big move in that direction.

B(o)M(b)S away

And I thought my investment strategy was bad.

Back in January, Bristol-Meyers Squibb got themselves into the right race, but picked the wrong horse, and it was a very expensive bet.

The company plunked down $2.5 billion to buy Inhibitex, a small antiviral company that had exactly one important asset: a phase II inhibitor of hepatitis C polymerase--the long-awaited, and perhaps final piece of the hepatitis C puzzle. I suspect they must now have quite a case of buyers remorse. After reports of serious cardiotoxicity (including one death) in a phase II trial, last month BMS stopped all development of BMS-986094, formerly INX-189.

Two decades of research have brought the brass ring--an AIDS-like cocktail for hepatitis C--within a tantalizingly short reach. Such a cocktail, a combination of a protease inhibitor (two were approved in 2011) with another drug that acts by an unrelated mechanism, would be expected to be very potent, less prone to generating resistance, and capable of replacing the first-line therapy, interferon--an immune booster that is only modestly effective, and plagued with an array of such awful side effects that it is not uncommon for patients to discontinue treatment, despite the absence of any alternatives.

It was obvious from the onset that the second drug would probably be an inhibitor of RNA replication, a crucial step in viral proliferation that is promoted by an enzyme called hepatitis C polymerase (short for RNA-dependent RNA polymerase).

A number of companies are getting very close, especially Abbott, Vertex and Gilead, but no one has managed to cross the finish line, a place where many billions of dollars await. This is not for the lack of effort. This one has just been a particularly tough nut to crack.

For example, there are 15 approved polymerase inhibitors for HIV (these are called reverse transcriptase inhibitors in the case of HIV), mostly introduced over the course of one decade, but 23 years since the discovery of hepatitis C, there are zero. About two dozen polymerase inhibitors have failed in the clinic thus far, either from lack of efficacy or toxicity, so this is clearly a more difficult target.

Which I'm guessing that the folks at BMS are now well aware of.

A quote from BMS CEO Lamberto Andreotti back in January is of particular interest: "The acquisition of Inhibitex builds on Bristol-Myers Squibb's long history of discovering, developing and delivering innovative new medicines in virology and enriches our portfolio of investigational medicines for hepatitis C."

Uh, no it doesn't. They simply bought a company to get its drug and it blew up in their face-- 2.5 billion times.

Cancer drugs get approved faster and more often in the US than the EU, according to the latest impact report by the Tufts Center for the Study of Drug Development.

Looking at FDA and EMA data between 2002 and 2011, the report found that:

"Approval times for non-oncology drugs in the EU were 27% shorter than similar approvals in the U.S., but 54% longer for oncology therapeutics."

Graph 1.png

The results shouldn't come as a huge surprise because, as Yevgeniy Feyman mentioned in a previous post, the US spends, by far, the most money on cancer research of all OECD countries, and the FDA prioritizes oncology drugs and treatments.

Despite the good news for the FDA, the report also points out that total development time for oncological and non-oncological drugs in the US were roughly the same, despite much shorter approval times for oncology drugs. Credit is given to the growing challenges of oncology drug development such as "smaller patient populations and longer periods for evaluation of treatment response." The latest PDUFA reauthorization contained new provisions encouraging the FDA to streamline drug development based on new clinical or surrogate endpoints, and for "breakthrough" products.

Such efforts may help cut drug development times and lower costs, bringing much needed new treatments to patients faster. While the FDA has embraced surrogate markers and accelerated approval for cancer, HIV, and some orphan drugs, there's widespread agreement that more needs to be done to improve so called "translational medicine" pathways for other diseases (like diabetes, obesity, etc) and make better use of rapidly advancing new technologies like whole genome sequencing and proteomics.  

Ironically, while the science may be tractable, the politics doesn't seem to be. A huge headache for the medical device industry is the looming 2.3 percent excise tax set to be imposed on medical device companies beginning in January 2013. This new tax on earnings (not on profits) is predicated on the Obama Administration's belief that the newly insured under the ACA will provide an influx of new patients for these companies.

The problem here, as outlined in a report this month from Roth Capital, is that the average age of newly insured patients is much lower than that of the average medical device user (many of the uninsured are young and healthy - hardly candidates for a new artificial hip or pacemaker, for instance).

As such, there will be no increase in patients for med tech from the ACA and the companies will be taxed for a "benefit" they will not receive. With a 2.3 percent tax on sales, it is foreseeable that the companies will be unable to operate as normal if the tax prevents them from turning a profit. Smaller companies will likely be forced to merge with large ones, and the larger ones will have to start charging more (if they can) or outsource more manufacturing operations to lower cost foreign sites. This will create an economic climate in which there are fewer medical device companies in the market, less competition, and less incentive to innovate.

To illustrate this point, let's look at Cook Medical, a medical device company based in Indiana. The company had planned to open five new plants in the US over the next five years. However, with the projected costs of the excise tax, Cook has since canceled those plans and will look to international markets for further physical expansion. In an interview with Fox News, Cook's VP for federal affairs stated,

Unfortunately, we have had to shelve these expansion plans and look overseas for that...It's a huge amount for us.

Graph 2.png

This graph from the Roth report shows the declining trend in 510(k) and PMA approvals for medical devices in recent years - a grim trend for U.S. patients. . Med tech developers have been complaining about increased regulatory uncertainty at the agency for some time now, but the addition of the excise tax will even further inhibit companies' ability to invest in new research and development in the first place. If nothing changes, expect even further declines in U.S. based med tech investments and submissions for approval, as more companies switch to an "off shore" strategy for commercializing new medical technologies.

Congress just reauthorized the medical device user fee agreements, so it's unlikely to revisit them again soon, but it needs to repeal the excise tax to prevent other medical device companies from having to make the same choice that Cook Medical made. The long term shift of research capacity abroad could put the industry on a permanent pathway to decline - leaving American patients with reduced access to innovative and life-saving medical devices.


One thing to understand about the joint federal-state Medicaid program for the poor is that it is both a cash cow and a money pit for the states.

Let's talk about the cash cow issue today. Medicaid's fragmented financing system (about a 60/40 funding split between the feds and the states) allows state providers and advocacy groups, particularly in higher income states like New York, to lobby state lawmakers for expanded Medicaid benefits and higher Medicaid reimbursements for covered populations.

In their 2010 book, Medicaid Everyone Can Count On, Thomas Grannemann and Mark Pauly note that:

In general, Medicaid benefits are considerably higher in higher-income states than in lower-income states, as are Medicaid payments per beneficiary, despite the much higher federal matching percentage share in lower income states. This spending level is about 89 percent greater in the highest quintile of states by income compared to the lowest.

In other words, Medicaid's financing system arguably creates systemic inequity in how scarce taxpayer dollars are spent on financing health care for the poor. Not only do poorer states tend to have higher proportions of poor and uninsured citizens, their lower average state incomes limit their ability to finance a more generous level of benefits compared to wealthier states.

Pure spending aside, there's also an alphabet soup worth of financing "strategies" (read: gimmicks) that states use to draw down yet more federal dollars: certified public expenditures (CPEs), disproportionate hospital share funding (DSH), and upper payment limit (UPL) payments to providers. What makes these strategies so troubling, from a fiscal point of view, is that they allow states to increase spending (with matching federal dollars) to targeted institutions (often state or county owned facilities) based on complex formulas that have very little relationship to the actual care delivered to patients.

New York apparently, has gotten very, very good at this type of shell game, as noted in recent reports from the Congressional Committee on Oversight and Government Reform and the Office of the Inspector General at the U.S. Department of Health and Human Services. (Hat tip: E.J. McMahon and The Torch.)

Last week, the House Committee on Oversight and Government Reform noted that

In a May 2012 report, the Office of Inspector General (OIG) at the U.S. Department of Health and Human Services (HHS) revealed that New York State developmental centers, which treat and house individuals with developmental disabilities, received $1.5 million per year per resident in Medicaid reimbursement in fiscal year (FY) 2009.

Total Medicaid payments to New York's State-operated developmental centers in FY 2009 totaled nearly $2.3 billion, an amount OIG found to be $1.7 billion beyond the facilities' reported costs. Medicaid payment rates to the developmental centers were ten times higher than Medicaid payment rates to New York's privately-run Intermediate Care Facilities, which OIG found to be comparable to the developmental centers. OIG found that these overpayments have occurred for two decades and are still occurring. By FY 2011, the daily payment rate at New York's developmental centers had increased another 24 percent, to $5,118, or the equivalent of $1.9 million per year for a single patient.

The report goes on to estimate that New York may have received at least $15 billion in excessive payments over the last 20 years.

To get some idea of the discrepancy in payments that the state received compared to other comparable facilities see the chart below.


How is it possible that such an enormous (and blatant) overbilling scheme went on for 20 years? According to Congressional testimony, once the feds and New York agreed on a funding formula in 1991, no one bothered to check again for decades:

Developmental center payment rates are set using a complex methodology detailed in Attachment 4.19-D, Part II, of New York's Medicaid State plan. The first major revisions to the rate-setting reimbursement methodology for the developmental centers were approved in January 1986, retroactive to April 1984 under state plan amendment (SPA) 84-10.

This state plan amendment allowed New York to use a trend factor and volume variance adjustment. At this point, the rates were on a 2-year cycle. In year 1 of the cycle, rates were based on actual cost reports with yearend volume variance adjustments, while year 2 rates were based on the same cost reports, but trended forward with a volume variance adjustment. The following year, the rates would be readjusted using new cost reports to start the process over.

In 1991, SPA 90-12 was approved, effectively eliminating the link between actual costs and total reimbursable costs by allowing New York to use base rates set in 1986 to be trended forward.

Adding insult to injury, it also seems that the feds paid for the same population twice: once at the overpriced state developmental centers, and again at other facilities they had been moved to.

Here's the rub: the only reason we even know about New York's massive overbilling scheme is thanks to a terrific series of investigative articles by the Poughkeepsie Journal.

Responding to pressure from Congress, federal regulators have said that New York's reimbursements for these centers may be cut by as much as 80 percent or $1 billion annually, but they won't say when the cuts will take effect.

New York is currently lobbying the federal government to move all of its developmentally disabled and other high cost Medicaid populations into Medicaid managed care, and changes in this reimbursement formula will figure into the final agreement. The state is hoping for a massive infusion of federal dollars, with the claim that upfront spending will save both New York and the federal government more money in the long term.

The $15 billion dollar question is whether New York is asking the federal regulators to base new Medicaid payment estimates on the state's actual costs, or the earlier and massively inflated costs they have (and continue) to bill Medicaid for.

If it's the latter, the shell game may very well continue. We won't know until the final agreement is released to the public.

Two final thoughts.

First, this shows why Congress needs to block grant the Medicaid program. Medicaid block grants based on the actual costs of treating separate categories of Medicaid enrollees (healthy adults and children, disabled, long term care for the elderly) would finally force states like New York to rationalize their health care systems and focus on using scarce taxpayer dollars to purchase high quality care for low-income populations. It would also provide a baseline for spending on the poor regardless of which state they happened to live in. For a discussion of how to build a sensible block grant program, see my new issue brief on How Block Grants Can Make Medicaid Work.

Second, if this was a private company defrauding Medicaid of billions of dollars annually, there would be a huge hue and cry from the press, the Department of Justice would be threatening to file criminal charges and debar them from doing business with Medicaid and (at the very least) the company would be paying an enormous fine and would be placed under a very restrictive corporate integrity agreement to ensure that this type of fraud doesn't happen again for a very long time.

That nothing even approaching this will happen to New York is an indictment of how bad - and how hypocritical - the federal government's own standards for Medicaid auditing and compliance is. After all, this is just one canary in the Medicaid coal mine.

And given how long it took to uncover this scheme, you can bet that there is a whole chorus out there that we don't even know about yet.

The 112th Congress has been one of the least productive in recent history. (AP)

Certainly, few would accuse the legislature of being efficient, but the recent set of appropriations passed to keep the government running past January leave much to be desired.

Some $500 billion in previous appropriations bills are reauthorized to keep agencies like the FDA and HHS running. The appropriations bill, however, fails to address any measures of the upcoming fiscal cliff, which is set to cut $110 billion across numerous federal agencies.

Among the measures left intact is the nearly 30 percent cut in Medicare's Sustainable Growth Rate (SGR) reimbursement to physicians. The SGR is the schedule according to which doctors are reimbursed for providing services to Medicare patients. The looming cut would reduce reimbursement rates to around Medicaid levels - some 60 percent of private insurance. 

As we and others have noted, a cut of such magnitude would simply lead to fewer doctors accepting Medicare. Fewer doctors accepting Medicare means fewer seniors having access to care.

Perhaps this is good news for the Obama administration - with SGR cuts still in place, they can still claim that the Affordable Care Act (ACA) doesn't cut benefits and extends Medicare's solvency (despite the fact that the money will have already been spent on funding insurance exchange subsidies and administration).

The fact that politicians have failed to fix the SGR, time and time again, instead simply holding off the cuts, points to the failure of Medicare's political structure. Real reform must start with a sustainable, market-based system that would encourage competition by allowing seniors to pick cost effective coverage that meets their real needs.

For an example of how this would work, see Jim Capretta's discussion of Medicare premium support here.

Otherwise, year after year, we will continue to subject the fate of our country's seniors to political maneuvering.

With "Mediscare" accusations being thrown back and forth, we wanted to take a moment to discuss one aspect of Medicare reform that has been under fire, but is often misunderstood: premium support, also known as managed competition.


The basic idea behind premium support is that individuals, given the right information, can make smart, cost-conscious choices. People receive a subsidy from the government that scales with income. They use this subsidy to shop around for private insurance plans that provide the coverage they want at the lowest price. Applying premium support to Medicare would give seniors and the disabled the option of using the subsidy to purchase private insurance. This is the Medicare reform written into the Romney-Ryan health reform plan.


Under the Romney-Ryan plan, the amount of the subsidy would be based on bids that the government receives from private insurance companies, and would cover at least the same coverage that traditional Medicare does. 


The cost of the second cheapest plan would be the "benchmark" used to set the amount of money Medicare beneficiaries would need to purchase affordable insurance coverage.  If seniors opted for a cheaper insurance plan, they could keep the difference.  If they chose a more expensive plan than the benchmark, they would have to pay more out of pocket to cover the difference. 


As Yuval Levin notes, the subsidy


[W]ould not prove insufficient to buy decent coverage because its value would be determined by the cost of decent coverage in the very market in which it would be used. 


The goal of premium support is to encourage efficient consumer behavior and also to promote competition between insurance companies to provide the best coverage at the lowest cost.


In his speech to the Democratic National Convention earlier this month, President Obama promised that seniors would never spend another penny out of pocket on Medicare, saying,


I will never turn Medicare into a voucher.  No American should ever have to spend their golden years at the mercy of insurance companies.


However, as Alain Enthoven points out in his 2011 report, To Reform Medicare, Reform Incentives and Organization, premium support is not a voucher system.


"Managed competition" is not a "free market" without rules.  It is not a "voucher" plan in which people are left to fend for themselves.  Rules include a guaranteed right to enroll in the plan of the consumer's choice; the same price for same coverage without discrimination against the sick; risk-adjusted payments by government or employer so that plans are not penalized for enrolling sick people; and one or a few standard coverage contracts to make comparisons easy.


The president misrepresented the Romney-Ryan plan by implying that senior citizens would have to pay thousands of extra dollars for the same care they already receive under Medicare (whether they'll continue to receive this care is questionable given that providers will likely stop accepting Medicare if reimbursement rates fall too low). 


Joseph Minarik, senior vice president and director of research at the Committee for Economic Development, suggested that Ryan's original, older version, was too partisan in this respect:   


Rep. Ryan was unfortunately partisan in his original rollout of the idea...and somewhat poisoned the well.  His harsh original formulation gave Democrats a clear route to the political jugular, and they continue to speak to that version of the Ryan plan even though Ryan himself has moderated his approach in a subsequent revision, in collaboration with Senator Ron Wyden (D-Or).


That's a fair assessment. On the other hand, Ryan's budget plans are just a political flag in the sand - the House Budget Committee doesn't originate legislation, and Ryan undoubtedly viewed the plan as a starting point for a serious bipartisan discussion on Medicare reform.  Indeed, he did that just that by evolving the plan with Senator Wyden. 


Unfortunately, Senate Democrats and the Administration never took the opportunity to offer a serious counterplan of their own, and have only attacked Ryan for having the temerity to propose it in the first place.


Notably, the key accusation against the Romney-Ryan plan is just wrong.  Their premium support plan does not raise costs for seniors who cannot afford them.  Medicare beneficiaries will receive a set amount of money from the government which they are to use toward their health insurance.  However, all that means is that consumers will shop around for the best value, and wouldn't have to spend any more out of pocket than they do for Medicare now if they chose the benchmark plan. It does not add financial hardship to seniors since the money is coming from a federal subsidy, and will be adjusted for sicker or poorer seniors. 


The key point is referenced in Governor Romney's campaign platform:


For markets to work, consumers must have the information and the power to make decisions about their own care.  Placing the patient at the center of the process will drive quality up and cost down while ensuring that services are designed to provide what Americans really want.


It is an undeniable truth that health care costs are rising. All projections show that the ACA will not 'bend the curve.' The question is how to realistically stem these costs.  Joe Minarik sums it up best when he says,


A categorical commitment never to raise the costs of any beneficiary, no matter how affluent, would render totally non-viable the essential Medicare guarantee of access to insurance coverage for all seniors, no matter how old or how sick.  It is in no one's interest to expose that guarantee to crisis...That means expanding the playing field to include the creative alternative of premium support--absolutely with protections for those among the elderly who are less than affluent, and for those who are already in close relationships with doctors to undertake treatment for serious conditions.


The Democratic opposition to the Romney-Ryan health care plan is doubly odd, because the idea for premium support is based on an aspect of the ACA that Congressman Ryan adopted as a way of seeking bipartisan support for Medicare reform.  Managed competition is a solution to Medicare's unsustainable cost growth.  To reiterate Avik Roy, if it's good enough for most of America, why can't senior citizens have it too?

Although the U.S. economy is the world's most wealthy and advanced, it isn't - and shouldn't be - growing as quickly as many countries, particularly in the developing world. In countries like India, China, and Singapore, GDP growth is much higher, as consumers see their incomes and living standards rise. As poor countries move up the income scale and middle income economies become wealthier, American companies benefit from selling more goods and services to the 95% of the global population that lives outside our borders.

Global trade is a "win-win" for U.S. companies, consumers, and employees. Profits earned abroad can be reinvested in the U.S., creating more U.S. jobs and manufacturing when it makes good competitive sense to base those jobs here. New capital can also be used in R&D, inventing new products for sale at home and abroad. Lower wage jobs abroad often mean higher wage jobs at home. (Let's leave aside for the moment whether we have an education system that can prepare people for those jobs.)

Global GDP growth rates 2000-11.png

Unfortunately, our corporate tax code puts America's multinational companies at a disadvantage versus their foreign competitors, and limits the ability of companies to reinvest profits earned abroad in the U.S. The U.S. currently has a global tax system, where U.S. companies are taxed on their global profits when those profits are returned to the U.S. We also have one of the world's highest corporate tax rates, making the U.S. economy less attractive to foreign investment.

This makes no sense, and both Democrats and Republicans recognize that corporate tax reform is badly needed. What they disagree on is how to do it. As noted in an earlier MPT blog by Yevgeniy Feyman, almost all other OECD countries have a territorial tax system, in which companies are only taxed on their domestic profits, not foreign profits. The few that do have a global tax system, have lower rates than the U.S.

President Obama has proposed lowering the corporate tax rate - but thinks that it's unfair that Multinational Corporations (MNCs) that operate abroad could pay lower taxes than companies that are only U.S. based. So he's proposed a minimum global tax for those companies - one where companies would be taxed whether or not they repatriate their profits.

What this would mean, effectively, is that companies operating affiliates abroad would be unable to take advantage of lower tax jurisdictions, as their effective rate would automatically become the U.S. statutory rate (deductions and exemptions aside, of course).

How would this look? Say Pfizer, an American pharmaceutical company establishes an affiliate in Switzerland. When they do so, they compete directly with domestic Swiss firms. Under the President's proposal, Pfizer would be paying around 11 percent on their Swiss profits. They would then be subject to a 28 percent tax of their U.S.-based profits, and their Swiss profits (for simplicity's sake, let's assume they operate only in the U.S. and Switzerland), minus the amount paid to the Swiss government - we're left with Pfizer paying the U.S. 17 percent of Swiss profits and 28 percent of U.S. profits. Competing with a Swiss firm that only pays 11 percent is suddenly much more difficult.

What's the logical next step for a profit-maximizing firm? Let's say that two global companies, one U.S. based, are thinking about merging. Where do you want to put your global headquarters? In the U.S., where you'll face uncompetitive taxation on profits if you invest in lower tax countries outside the U.S.? Or outside the U.S., where you'll benefit from a lower tax regime and won't face global taxes on profits?

Companies headquartered in low-tax jurisdictions will be more than happy (and will be fiscally more equipped) to gobble up American companies - the Novartis-Alcon acquisition comes to mind. American companies will be more likely to merge, shedding jobs in the process, as the Roche-Genentech merger showed.

A better approach (as proposed by Mitt Romney) is to move to both a territorial tax system and a lower corporate tax rate (at least the OECD average, but lower would be even better).

This is how the CEO of Caremark described the importance of tax reform for his company in testimony to the U.S. Senate:

Tax reform is important to CVS Caremark because we anticipate that it will serve to lower our cost of capital and enable the company to make additional investments in our core business. We support broad reform that enhances the competitiveness of U.S. companies around the world and encourages the free flow of capital. For CVS Caremark, however, the key component of any tax reform initiative is a reduction in the maximum corporate income tax rate. Reform that includes a corporate rate reduction would allow us to accelerate our investments in U.S. jobs, technology and infrastructure that would enable CVS Caremark to (i) more effectively manage pharmaceutical and health care costs, (ii) increase patient adherence, (iii) increase access to primary care services, (iv) improve health outcomes, and (v) educate our customers in health enhancing behaviors.

This is exactly right. Corporate tax reform is pro-U.S., and pro-competitive. Right now our tax code is anti-competitive, and deters the optimal level of investment in the U.S. economy. Fixing it is a win-win for American companies and consumers, and will stimulate job creation and economic growth.

Corporate Tax Reform


Paul Howard, with economist Douglas Holtz-Eakin, counters comments made by Vice President Biden by discussing how the territorial tax system could actually help save American jobs, especially medical ones.

"We need to make sure that we can take advantage of the places that are growing most rapidly. 95% of the consumers are outside the U.S., that is where we are going to see the market grow. We should be able to get into those markets, and bring the money back."

Listen to their discussion.

Read Douglas Holtz-Eakins paper on corporate tax reform for the US Chamber of Commerce: The Need for Pro-Growth Corporate Tax Reform

Read a recent blog post discussing corporate tax reform by Yevgeniy Feyman: A Better Tax Policy

Allow me to riff on a point that Jim Pinkerton made in a recent blog post on Medicare, that the parties are competing to accuse each other of being the ones to "betray" Medicare through cuts.

Big Data.jpg

Jim has made the point elsewhere, as have I (here), that you can't cut your way out of the large fiscal cliff that we're facing as an aging population demands more health care, becomes more prone to devastating diseases like Alzheimer's, and becomes eligible for expensive nursing home care.

Is there any way out? The President's strategy is to adopt across the board Medicare cuts and then leverage them through expert advisory panels like the Independent Payment Advisory Board, which will strong arm Congress to make yet more politically unppalatable cuts (we'll see how well that works in the long run).

Indeed, Medicare's own actuary expects that these cuts are unsustainable. The conservative strategy, which I support, is to move to more market-based arrangements, where seniors (and all Americans) choose among competing private insurance plans, with some protections for ensuring that everyone can afford at least basic coverage.

But this, by itself, won't save us from the tsunami of rising health care costs we've mentioned before. So what would? Jim suggests a "cure strategy" to conquer expensive and debilitating diseaeses - along the lines of a vaccine for polio or smallpox - which would be both popular and effective in terms of lowering costs. Jim writes that:

If either party, Republican or Democratic, were leading with a "Cure Strategy," as opposed to a "Cut Strategy," it's hard to see how they would be suffering at the polls as a result.

That is, who in America would have voted against the Democrats in 2010 if Dems had announced a crash effort to eliminate, say, Alzheimer's? Similarly, who would be voting against Republicans today if the GOP had made the same cure-Alzheimer's argument in 2012?

If the answer, in both cases, is "no one," then you have to wonder why neither party chose to advance that cure-first argument.

Thankfully, the private sector is already ahead of the politicos. Innovative companies are already harnessing "big data" to drive large improvements in how we diagnose, treat, and (eventually) even prevent disease. Take GNS Healthcare, profiled in this month's Burill Report

By applying artificial intelligence and increasingly sophisticated software algorithms, modern health data analytics companies like GNS are using integrated data sources, such as electronic health records and genomics data, to move beyond historical, retrospective reporting toward real-time, predictive analysis. It's an approach that is driving healthcare into a future in which data analytics will be utilized at every point of care...

The company's main product, its Reverse Engineering and Forward Simulation platform, uses a supercomputer-backed framework to automate the extraction of causal network models directly from observational data. It then uses high-throughput simulations to generate new insights about disease starting, in effect, with no hypothesis, just data.

The GNS strategy - along with many other companies exploring the same space - will push health care towards both towards more automation (which means lower labor costs as artificial intelligence helps streamline treatment and diagnosis of complex diseases) and towards more personalized treatments for patients (and more personalized treatments=fewer wasted treatments and better health outcomes).

So why not build a cures strategy to help this vision become a reality faster? Advancing this argument requires both political parties to go against their instincts.

Democrats would have to admit that private companies are the only entities that are nimble enough to actually implement a "cures strategy", and they're going to make an awful lot of money doing it (even though it will save lots of money in the long run and spur economic growth).

Republicans are used to touting market cures, but are somewhat less adept in articulating the case for the places where government can get things right: investments in basic research (NIH), getting the patent and intellectual property regimes correct, and serving as a "neutral ground" where all of the critical parties could come together to hash out the key issues involved (How do we handle patient privacy concerns? What to do about the inevtiable lawsuits? Etc.)

Finally, the companies working in this sector who have the biggest potential to blow up the status quo, the biotech and pharmaceutical companies, the innovative start ups like GNS, and non-traditional health care operators (like retail clinics) are relative political lightweights.

Legacy health care players like nursing homes, hospitals, and (to a lesser extent) doctors carry more votes and are often more organized (think: SEIU 1199). This translates into much greater ability to set the terms of the debate when Washington sits down to write legislation.

In short, the political inertia is enormous to argue about what the legacy players care about, i.e., what they're paid for operating in today's system. This leaves both parties fighting over reimbursement strategies and formulas (private insurance v. public, increasing taxes v. entitlement reform), rather than thinking about what's around the corner and how to get there.

To be fair, plenty of very smart people in government and the private sector are thinking and talking about the evolution of personalized medicine. It just hasn't bubbled up into our politics yet as a topline issue.

But we can help make it a topline issue. Ultimately, I think Jim's cure strategy would work very well with the kinds of consumer-driven and patient-driven strategies that conservatives traditionally embrace. It should appeal to Mainstreet as well as Wall Street, because the gains, in human and economic terms are mind boggling. Save grandmother from Alzheimer's, and save yourself and your kids along the way.

So we need to do a lot more talking about not just what's wrong with the current system, but how to build a future that will make our current obsessions obsolete. (The same way that curing polio left iron lung wards in hospitals obsolete.)

Last but not least, we should remember that our competitors - Singapore, China, and the EU, are scrambling to try and develop the same cures we are. If we don't invent the "cures strategy" here, someone else undoubtedly will. And while that will be just as good for global health, I think that the U.S. is positioned to do it much faster and more efficiently, and (all other things being equal) I'd prefer the U.S. to spearhead the strategy and reap the economic benefits.

Advancing medical innovation is a cure both for the diseases that afflict us and the economic woes that beset us. As a matter of political optics and strategy, it is a low-hanging fruit that remains stubbornly unplucked.

Jim, back to you.

Thursday's controversial prohibition on big soda in New York City brings with it a slew of flaws that point to the hypocrisy and inefficiency of Mayor Bloomberg's proposal.  As criticisms of the plan have pointed out, the plan will likely spur unintended consequences that will block its intended effects.  While obesity, a condition that kills around 6,000 New Yorkers and costs half a trillion dollars annually (over 20 percent of National Health Expenditures) is a condition that warrants policymakers' attention, this proposal will likely do little or nothing to ameliorate these problems. 


For starters, the plan is hypocritical because it targets sugary beverages (while leaving out sugary milk- and coffee-based drinks) and ignores other calorie-packed, low-nutrition foods.  This begs the question: if soda-consumption is at a 16-year low and the obesity rate is at an all-time high of 35.7 percent, why target soda and ignore ice cream or French fries, for example?


Moreover, that the restriction on the size of sugary beverages only applies to city-regulated food service establishments (e.g., restaurants, food carts, and concession stands), and not to supermarkets or grocery stores gives more reason to doubt the law's efficiency. 


Missing from this list of soon-to-be soda speakeasies are all of the convenience stores, bodegas, and gas stations that sell sweetened drinks by the bucket-full.  This is because such businesses are regulated by the state and therefore the city has no jurisdiction over them. 


Mayor Bloomberg himself indirectly acknowledged the inefficiency in the plan.  As the Associated Press reports,


"The mayor rejected suggestions that the rule constitutes an assault on personal liberty.  'Nobody is banning anything,' he said, noting that restaurant customers can still buy as much soda as they want, as long as they are willing to carry it in multiple containers."


Mayor Bloomberg is right that 'nobody is banning anything'. And that is the crux of the problem with his plan.


Assuming that such economic disincentives work (this theory itself has been questioned), how effective will they actually be? Let's say that I sit down at a diner and order a 16 oz. soda with my cheeseburger and side order of fries. As I'm eating, I'll finish my soda and the server will come by to offer me a refill - either free, the same price as my original soda, or a discounted price. If it's free, there is no reason to think that I won't take the refill. If it's the same price or discounted, it's a slight inconvenience to me, but if I'm really thirsty for more soda, chances are I'll be okay with paying an extra dollar or two for a refill.


Disincentives work when there is a hard cost passed onto consumers - the difference in restaurants' pricing schemes and the weakness of this 'stealth tax' will make it much less effective than proponents think.


Some have taken a different view. If you change consumers' 'default' choice, they will be more likely to go with the new choice. There is certainly some truth to this and behavioral economics generally supports this idea. However, this misses the point. The new 'default' imposed by this ban carries little in the way of cost to the consumer. Sure, I'll have to get a 16 oz. instead of a 20 oz. But if two 16 oz. drinks are relatively cheap, why wouldn't I go for that?


A more effective (if still questionable) policy would take the same approach we've taken to other vices like cigarettes - a tax. Imposing a tax based on the size of a soda has a very real and measurable cost that consumers can't ignore and is more effective at changing consumer behavior. While this would be marginally more effective, the tax would have to be fairly substantial to change consumer behavior. Such a policy would also fall disproportionately on low-income consumers, since crème brulées or Starbucks Venti mochas would not be taxed.


Additionally, an issue that seems to be ignored (and as David Gratzer points out) is that through such paternalism we start looking at basic food items on the same level as decidedly harmful products - alcohol and tobacco. To put it bluntly, no amount of tobacco is 'good' for you; calories and sugar are necessary to survive.


Make no mistake, dealing with the growing obesity problem should be a priority for public health authorities. However, there is no silver bullet to doing so. A comprehensive basket of policies - better nutrition education in public schools and encouraging more judicious use of government benefits like food stamps - can go a long way and do more than Bloomberg's heavy-handed approach.


The Bloomberg administration's goals - however noble - are unlikely to be achieved through a paternalistic imposition, and risks exacerbating the problem instead.

The headline in The New York Times today gets right to the point: "Challenged on Medicare, G.O.P. Loses Ground." Either this is just another blatant case of media bias--or Republicans have a problem.

We'll know the answer for sure in about seven weeks, but in the meantime, we might at least consider the thrust of reporter Jackie Calmes' Times story. Calmes recalls that in 2010, the Republicans seemed to have found a winning formula: Attack Democrats for cutting Medicare, which they had done, in fact, as part of their Obamacare legislation. Back then, it was the Democrats who were throwing around such scary concepts as rationing--which Sarah Palin so memorably tangibilized into "death panels."

Indeed, it was easy to argue--because it was true--that Obamacare drained away money from Medicare. Democrats screamed that Republicans were attacking them for doing what they, Republicans, had long wanted to do, namely, cut Medicare. But the Democrats' complaints were to no avail. And so on that issue, among others, the Democrats were clobbered in the 2010 midterms.

It's possible that Republicans might have come away from that happy experience with the lesson that Medicare is sacrosanct, but, according to Calmes, that isn't what happened. Instead, the GOP took away a different lesson: Republicans, spearheaded by Paul Ryan, can go on the offensive; they can run, and win, on Medicare reform. And yet if the Times and its data are to be believed, it's not working out so well:

In the Times/CBS poll, more than three-quarters of voters favored keeping Medicare the way it is rather than switching to a system like the one backed by Mr. Romney and Mr. Ryan. From the White House on down, Democrats are calling the Republican approach a "voucher" plan, suggesting that it borders on privatizing the system; Republicans prefer the term "premium support."

And Calmes next quotes a well-known pollster, Andrew Kohut of the Pew Research Center, on the impact of Paul Ryan, his past House budget proposals, and the Medicare issue right now:

"The Republicans brought it back to life," Mr. Kohut added -- first by House Republicans' approval this year and last of the Ryan budgets, which died in the Democratic-controlled Senate, and most of all by Mr. Romney's elevation of Mr. Ryan to the presidential ticket.

Of course, Kohut is a pillar of the DC polling/media establishment--having long worked for the parent company of The Los Angeles Times--and so some will no doubt dismiss him as simply another spokesman for liberal interests. Once again, we'll have to wait a while to know for sure whether Kohut's Medicare meditations are a case of analyzing--or spinning.

Meanwhile, there's more from Calmes, suggesting that the Democrats are seeking to take advantage of past Republican pushes on entitlements, even beyond Medicare:

Soon, strategists say, Democrats will buttress their Medicare message by charging that a Romney-Ryan administration could also seek to alter Social Security, the other popular entitlement program. They will point out Mr. Ryan's support in 2005 for President George W. Bush's proposal to allow workers to divert Social Security payroll taxes into private accounts, a plan that flopped even though Republicans controlled both houses of Congress.

So is this Democratic attack going to work? Most in the conservative/libertarian intelligentsia say "no," even "hell no," but Democrats do seem confident that Medicare is a killer app of an issue. Here's House Minority Leader Nancy Pelosi, according to a CNN story that appeared under the headline, "Pelosi says Ryan pick makes it easier for Dems to take House":

We have been saying there are three important issues in this campaign. And in alphabetical order, they are Medicare, Medicare, Medicare.

So who's right? Who's going to win on Medicare? The Pelosi Democrats--or the Ryan Republicans? Once again, we'll know in seven weeks--51 days, to be exact.

But we do know this: If either party, Republican or Democratic, were leading with a "Cure Strategy," as opposed to a "Cut Strategy," it's hard to see how they would be suffering at the polls as a result.

That is, who in America would have voted against the Democrats in 2010 if Dems had announced a crash effort to eliminate, say, Alzheimer's? Similarly, who would be voting against Republicans today if the GOP had made the same cure-Alzheimer's argument in 2012?

If the answer, in both cases, is "no one," then you have to wonder why neither party chose to advance that cure-first argument.

My first live interview yesterday. About the J&J decision to remove essentially harmless chemicals from some of their products.

I don't think Oprah has anything to worry about, but at least I didn't make a flaming jackass out of myself.

The headline blares, "Omega-3 Supplements Don't Lower Heart Disease Risk After All." The headline is directly and flagrantly lying.

What if you studied patients who took omega-3 fish oil pills and the actual data showed that the rates of all-cause mortality, cardiac death, sudden death, myocardial infarction, and stroke were identical between the patients who took the supplements and those who didn't? Well, then you could say that the fish oil pills did not help. That's what the headline above implies. But the reality is surprisingly different.

In an article published in the Journal of the American Medical Association on 12 September 2012, a meta analysis of 68,680 patients showed that patients taking omega-3 fish oil pills had a 4% lower all-cause mortality rate, 9% lower cardiac death rate, 13% lower sudden death rate, 11% lower myocardial infarction rate, and a 5% higher rate of stroke.

The headline says fish oil pills don't lower heart disease risk after all. But these data show that they do. However, if you say that the results must be statistically significant to the 0.63 percent level--in other words, there must be less than a 0.63 percent chance that the results are due to luck--as this study did, then the results do fall short. However, the headline should be changed to, "Omega-3 Supplements Lower Heart Disease Risk But Results Not Strong Enough To Be Convincing."

Statisticians have misled people with statistical significance. There are really two results. The numerical results (fish oil pills lower risk) and the chance the results might be wrong (the results aren't convincing). To say that fish oil pills don't work because the statisticians aren't convinced is to butcher both the English language and logic. It's similar to someone saying that the Ferrari 458 Italia isn't any faster than the Toyota Prius because they simply don't believe any company marketing materials. Perhaps he or she is right and marketing materials are misleading, but don't say what isn't true. Don't say the two cars are equally fast. Instead, say that company marketing materials are unreliable. Don't confuse an assessment of the quality of the data with the data itself.

Statisticians want us to act as if we are in a court of law and we want to know whether the results have been objectively proven (they are statistically significant) or disproved (not significant). It's not that straightforward. There are two main weaknesses of statistical significance: the threshold used to show significance and the sample size. Both the threshold and the sample size are arbitrary and they both directly affect the results. One arbitrary number was selected by statisticians and the other just happened to be the number of people who participated in the studies. If a higher statistical significance threshold had been selected (just as arbitrary as the other one) or if more patients had been studied, then the results might have passed the test and the headline would have roared, "Omega-3 Supplements Lower Heart Disease Risk."

Why do so many people uphold statistical significance as a measure of objective, rational truth when it is based on two arbitrary quantities? Why do so many people confuse their assessment of the quality of the data with the data itself?

A Better Tax Policy

Getting tax policy right - particularly for encouraging investments in R&D and job creation - is critical for growing the American economy.  So it was discouraging that in his speech at the Democratic National Convention in Charlotte, North Carolina, Vice President Biden attacked Governor Romney's call for a territorial tax system:

"Governor Romney['s]...budget proposal...calls for a new tax. It's called a territorial tax, which the experts have looked at and they acknowledged it will create 800,000 new jobs. All of them overseas. All of them."

At first glance, it appears to be a devastating indictment of a territorial tax system (if true). The implications of Biden's argument are that American jobs would be siphoned off to our competitors, as Joe and Suzy Smith try to make ends meet.

And the study from which the vice president draws his numbers does find that switching to a territorial tax system (one where corporations' profits are taxed only domestically instead of internationally as they are now) would create 800,000 new jobs in foreign countries; moreover, it finds that such a tax system would cost the treasury $90 billion a year in lost revenue. This is due to marginal tax incentives - the ability to move more investments into lower tax jurisdictions without facing any form of US taxation is certainly appealing.

This is where Biden's charge gets more than a little hazy, however. Nowhere in the study does the author, an economist at Reed College, say that foreign job creation will result in lost US jobs.  And it also ignores the other critical prong of the Romney tax strategy: lowering the U.S. corporate tax rate to a more competitive level.  This is critical to remember since the U.S. has one of the highest corporate tax rates in the world. (Japan used to be higher, but they recently reduced their rates.)

In fact, a recent study by the Tax Foundation cites several economists who argue that foreign direct investment abroad (FDI) will actually stimulate demand domestically, though perhaps at a lower rate. This happens because investment, regardless of whether it is domestic or foreign, boosts firm productivity. Productivity gains are not geographically constrained, and will resonate firm-wide, spurring demand for labor in other regions.

You could also wonder why switching to a territorial system would increase foreign investment abroad compared to today's system, because taxes on profits earned by  U.S. corporations abroad are only taxed when they are returned to the U.S. So the current system - through tax deferment - already encourages U.S. based corporations to invest more of those profits abroad, as opposed to returning them to the U.S., where they would be taxed twice (i.e., a U.S. company operating in France is taxed once by French authorities, and then again on any remaining profits repatriated to the U.S.).

Not only that, but the author acknowledges that her analysis does not take into account the impact of a lower corporate tax rate - this would act as a counter-incentive, encouraging firms to keep earnings and assets domestically - a key part of Romney's budget proposal (and a part of President Obama's proposal for tax reform as well).  Biden strategically ignores this fact. 

Lastly, and this is touched on briefly in the study, 27 out of 34 OECD countries have switched to a territorial tax system - and the ones that maintain worldwide systems have corporate tax rates significantly lower than the United States' rate of 39.2 percent (not including the potential dividend rate).

Other studies have addressed directly the merits of a territorial tax system (or at least a repatriation tax holiday), arguing that the resulting infusion of capital back into the economy could stimulate economic growth and employment. The merits of shifting to a territorial tax system are clear - reducing unnecessary distortions between the US and foreign markets, accessing the $1.7 trillion in capital locked in foreign jurisdictions, and spurring economic growth domestically and abroad.  In particular, these benefits can help the U.S. based biopharmaceutical industry, where the U.S. has a long-time competitive advantage versus its foreign competitors.


The chart above shows the allocation of 2011 earnings for the 5 largest US-based pharmaceutical companies. The tendency to keep earnings abroad means that these foreign earnings do not generate tax revenue for the US (remember that they can be deferred until repatriation - though most are not repatriated due to the high cost of doing so), and so, despite our worldwide system's long theoretical reach, we see little benefit from it.

Johnson & Johnson for instance, had an effective worldwide tax rate of around 21.8 percent in 2011. That simple, low number belies its huge domestic tax burden - a whopping effective rate of 46.8 percent on its domestic operations, compared to a foreign burden of only 11 percent; in 2010 these were 32.2 percent and 14.7 percent, respectively. (Admittedly, it is rare for a company to pay rates higher than the statutory rate, but generally, the U.S. leads in effective tax rates for pharmaceutical companies.)

What would switching to a territorial tax system with a lower corporate tax rate mean for American biopharmaceutical companies?  Companies like Johnson & Johnson could repatriate more profits, invest in job creation, expand its manufacturing base in the U.S., or increase R&D.  Tax distortions between the US and foreign markets would start to disappear as the U.S. became an even more attractive destination for capital. 

It is possible that companies might move some capital outside the U.S., to avoid paying U.S. taxes on that income.  But they can do this already, and it would be based on decisions about the highest returns for working capital.  Arguably, we have the worst of both worlds now: an uncompetitive tax rate and a tax system that encourages America's most innovative companies to invest more abroad than at home. 

Shifting to a territorial tax system and a lower corporate tax rate would encourage job and investment growth at home, and make U.S. companies more competitive in the global market. 

What's not to like about that?

To everything, there is a season. A season for healthcare finance, and a season for medical science. And now, we are seeing a turn of the seasons, from the former to the latter--from finance to science. Why? Because, to borrow a phrase, there is no alternative. Today we are seeing all healthcare-finance schemes, right and left, puddle into each other, into an ever-more expensive muddle; eventually people will realize that if people are sick, they are expensive--and so disease should be the focus, far more than insurance.

The headline in Monday's Washington Post tells the tale: "Romney would keep key parts of health-care reform." As Mitt Romney said Sunday on NBC's "Meet the Press," he wants to repeal Obamacare, except for the parts that he likes:

Well, I'm not getting rid of all of health care reform. Of course there are a number of things that I like in health care reform that I'm going to put in place. One is to make sure that those with pre-existing conditions can get coverage. Two is to assure that the marketplace allows for individuals to have policies that cover their family up to whatever age they might like.

Considerable confusion has ensued. If those two insurance provisions--each one its own kind of mandate on the insurance companies--are preserved in place, then the private insurance market becomes non-viable in the event that the better-known third mandate, the personal mandate, is repealed. Thus in the event that Romney were to win this November, the insurance industry can be counted on to join with the new president in preserving selected parts of Obamacare. That is, if Romney would be fighting for the preservation of the pre-existing conditions mandate and the family mandate, the insurance companies would, in turn, be fighting for the preservation of the personal mandate.

Faced with this prospect, the right is, by various turns, professedly worried and professedly not worried. Meanwhile, the left is having its fun accusing Romney of flipping and flopping. But the bottom line can be put most simply: An Associated Press headline reads, "Romney shifts toward center, says he'd keep parts of Obama's health plan."

To the extent that Romney is moving to the center--and taking Paul Ryan with him--that will probably help the GOP's chances this November. However, the new 45th President would then face the challenge of reducing spending while holding Medicare spending harmless. After all, Paul Ryan's "Road Map" plan calls for the protection of Medicare, as is, over the next ten years; that's two years longer than the Romney presidency, under the best-case scenario. Indeed, The Case of the Purloined $716 Billion seems to have been solved by both parties pledging not to "raid" Medicare. Meanwhile, of course, Alzheimer's Disease alone is on its way to a trillion-dollar-a-year cost by mid-century, mocking all attempts to control costs by the use of financialist tools.

To put it bluntly, in a democratic society in which the elderly can vote, market forces and management forces are likely to prove less powerful than "disease forces." Or, to put it even more bluntly, 10 lbs. of sickness is, well, 10 lbs. of sickness, no matter how it is financed or accounted for--it simply won't all fit into a 5 lbs. bag.

It's no wonder, therefore, that national healthcare expenditures are projected to rise 7.5 percent in 2013. The basic reason is simple: until we figure out how to replace vast amounts of low-productivity labor with high-productivity technology, it's inevitable that healthcare costs will continue to rise.

And so while plenty of worthwhile targets for federal budget-cutting can always be found, the dollar totals for such cuts, even if they are achieved, would be relatively small. Yes, Medicare fraud is a big potential target, but the history of anti-fraud efforts is discouraging, in large part because millions of elderly people, most of them sick with something, tend not be receptive to any discussion of budget cuts; people don't trust the budget-cutters, and crafty politicians--many of them backed by the fraudsters themselves--are eager to play to that mistrust.

So perhaps one way to prove to the elderly, and to others, that Medicare reform is not synonymous with cuts is to do just that--show that there's more to Medicare reform than cuts. If no cuts to Medicare are coming, anyway, for ten years, why not use the coming decade to earn some good-will with oldsters by focusing on their immediate health problems, as opposed to our overall long-term fiscal problems?

Yes, let's move the center of gravity of health, from financial bean-counting to medical discovery-making. That would improve the health not only of seniors, but also of all of us--and heathy people, of course, are cheaper than ill people.

In fact, deadly diseases are coming into costly prospect. The West Nile Virus and the latest Hantavirus are killing people. For the moment, the authorities seem to be concentrating on spraying, but over time, it will dawn on the public that it would be better to eradicate the bugs rather than fumigate the general population. And in India, public-health authorities are confronting something new: "totally drug-resistant tuberculosis." So we might ask: If any of those diseases were to break loose in the US, what would happen then? Whose budget projections would have any validity at all? And who would care about who has health insurance or not? Enlightened self-interest, as well as compassion, would require the hospitalizing/quarantining of everyone afflicted--costs be damned.

After all, as everyone in the field knows, we've had a primitive form of national health insurance since 1986, in the form of EMTALA, which guarantees "coverage" to everyone who can get himself or herself to a hospital emergency room--and nobody is talking about repealing that law.

Indeed, when a medical crunch comes, authorities can be counted on to waive healthcare costs. In a society that is both televised and compassionate, the money will always come from somewhere.

So are we stuck? Trapped in fiscal mire forever? No, not at all. Because we can, in fact, walk and chew gum at the same time. That is, we can pay our existing bills, and also figure out to how to reduce future costs by curing present-day illnesses. Yes, such an effort would be a big change; it would mean focusing on science, and science-related issues, such as research money, patent reform, FDA streamlining, and so on. Still, when a way forward is blocked, for reasons we have seen, it's important to find a new way forward.

Let's start with Democrats. Dr. Elaine Kamarck of Harvard's Kennedy School, a veteran of the Clinton-Gore White House and current member of the Democratic National Committee, recently wrote in The Daily Beast that it's time to "switch the paradigm" on healthcare. That is, as she put it, we should "have the government focus on curing diseases that cost so much to treat." Kamarck concluded, "Voters will support federal dollars to cure the diseases that cost us so much. What they will not support, after all this time, is a fundamental change to Medicare."

To be sure, there are plenty of experts still championing fundamental changes to Medicare--defined as financial changes--but Kamarck has a point: The voters, by a pretty big margin, don't agree with those experts. And as we have been reminded just in the past month of presidential campaigning, the voters have a way of "bending the curve" of politicians' wills, persuading pols to agree, after all, to keep Medicare as it is.

Another Democrat. US Rep. Rob Andrews of New Jersey, published an opinion piece in The Wall Street Journal last week, under the headline, "An Apollo Program Against Disease." Andrews' piece was part of a symposium on Democratic advice to President Obama in the event that he wins a second term, but it was good advice for all of us:

We are at our best when we focus on great purposes that transform society and transcend politics--uniting the nation and expanding settlement through the construction of a transcontinental railroad, defeating Nazism, and reaching new celestial heights through the Apollo program.

In a second term, President Obama should focus on a similar great purpose: championing cures for the destructive diseases--including dementia, cancer, diabetes and HIV/AIDS--that have tragically taken the lives of countless friends and neighbors.

Three elements essential for success are present. First, even with the scant resources we have devoted to cures, scientists have constructed some of the key building blocks for breakthroughs, such as the Harvard-Columbia work on the tau protein and its role in the development of Alzheimer's. Second, it is now very inexpensive to obtain vast amounts of working capital at historically low interest rates. Finally, public support for a "cures project" is exceptionally strong among people of all ideologies and backgrounds--independents, Democrats and Republicans.

The mechanics and specifics of how to raise, finance and allocate the funds for cures would need fleshing out. However, before we paralyze ourselves in disputes over the means, a re-elected President Obama should call us together to fulfill a compelling moral purpose, strengthen our lagging economy with a cascade of new industries, companies and jobs, and dramatically improve our fiscal position.

Again, here indeed is a JFK-like vision for medical science--the sort of vision that could rally the American people in a big way.

Meanwhile, over on the right, earlier this month I wrote a piece for The American Conservative entitled "The GOP's Alzheimer's Opportunity." The piece lamented the "crash" of Serious Medicine over the last few decades then lauded the prominence afforded to Alzheimer's research--along with other kinds of research--in the 2012 Republican Platform, and, finally, suggested that the real opportunity was for Romney:

So here could be Mitt Romney's big opportunity: opening up his image, and opening up the election, by embracing a big positive vision for healthcare-that is, better science, not just better finance.

Even Romney's fiercest detractors have to concede that he would be effective at organizing an imaginative public-private consortium, in the manner of the Olympics, on Alzheimer's-that is, calling in moguls, medical experts, pharma corporations, maybe even an international partner or two.

And of course, Romney could attempt the same elixir-one part enterprise zone, one part X-Prize, one part corporate, and, yes, one part government-for other maladies, too. What American, for example, wouldn't salute a serious effort to heal wounded warriors of traumatic brain injuries?

Medical progress offers something that few politicians are offering today: hope. Barack Obama had it four years ago, and he has lost it since. Romney does not have it now, but he could have it if he wanted it. Paradoxical as it seems, the hope that Romney needs today could be found in that most depressing of topics-Alzheimer's.

Okay, that's just one opinion. But interestingly, my article was tweeted out by US Rep. Michele Bachmann (R-Minn.).

Any time Democrat Andrews (Americans for Democratic Action 2010 rating--latest available--90 percent; American Conservative Union lifetime rating, 14 percent) and Republican Bachmann (ADA 2010 rating 5 percent; ACU lifetime rating, 99 percent) can agree on something, that's a hopeful sign that medical progress is possible.

If we want to save money, and save lives, we have to focus on science, not finance. Finance can't affect health directly. By contrast, science can affect health directly, and that, in turn, can affect finance. And so that's why we need a lot more science, because it makes everything cheaper, including health.

After all, as we have seen, there is no alternative.

We've been talking about this on MPT for a while, but a few weeks ago Eric Topol, director of the Scripps Translational Institute, and author of the new book The Creative Destruction of Medicine, explains why we should and can eliminate long, expensive, and cumbersome randomized clinical trials in the age of genomics and targeted diagnostics:

We have this big thing about evidence-based medicine and, of course, the sanctimonious randomized, placebo-controlled clinical trial. Well, that's great if one can do that, but often we're talking about needing thousands, if not tens of thousands, of patients for these types of clinical trials. And things are changing so fast with respect to medicine and, for example, genomically guided interventions that it's going to become increasingly difficult to justify these very large clinical trials.

For example, there was a drug trial for melanoma and the mutation of BRAF, which is the gene that is found in about 60% of people with malignant melanoma. When that trial was done, there was a placebo control, and there was a big ethical charge asking whether it is justifiable to have a body count. This was a matched drug for the biology underpinning metastatic melanoma, which is essentially a fatal condition within 1 year, and researchers were giving some individuals a placebo.

Would we even do that kind of trial in the future when we now have such elegant matching of the biological defect and the specific drug intervention? A remarkable example of a trial of the future was announced in May.[1] For this trial, the National Institutes of Health is working with [Banner Alzheimer's Institute] in Arizona, the University of Antioquia in Colombia, and Genentech to have a specific mutation studied in a large extended family living in the country of Colombia in South America. There is a family of 8000 individuals who have the so-called Paisa mutation, a presenilin gene mutation, which results in every member of this family developing dementia in their 40s.

Researchers will be testing a drug that binds amyloid, a monoclonal antibody, in just [300][1] family members. They're not following these patients out to the point of where they get dementia. Instead, they are using surrogate markers to see whether or not the process of developing Alzheimer's can be blocked using this drug. This is an exciting way in which we can study treatments that can potentially prevent Alzheimer's in a very well-demarcated, very restricted population with a genetic defect, and then branch out to a much broader population of people who are at risk for Alzheimer's. These are the types of trials of the future and, in fact, it would be great if we could get rid of the randomization and the placebo-controlled era going forward.

One of things that I've been trying to push is that we need a different position at the FDA. Now, we can find great efficacy, but the problem is that establishing safety often also requires thousands, or tens of thousands, of patients. That is not going to happen in the contrived clinical trial world. We need to get to the real world and into this digital world where we would have electronic surveillance of every single patient who is admitted and enrolled in a trial. Why can't we do that? Why can't we have conditional approval for a new drug or device or even a diagnostic test, and then monitor that very carefully. Then we can grant, if the data are supported, final approval.


Of course, I think this is a splendid idea. It would slash drug development times and allow patient's much faster access to therapies that were matched to the underlying biochemistry of their disease.

Cancer is the area where we're seeing this "molecular hammer, meet molecular nail" approach develop fastest. Take Seattle Genetics drug Adcetris, a CD30 inhibitor approved by the FDA in 2011 for Hodgkin's lymphoma and anaplastic large cell lymphoma (ALCL).

If you're a cancer researcher, the first thing you want to know is how many other cancers overexpress CD30? It turns out, according to Xconomy, that researchers at MD Anderson and Stanford started looking at Adcetris as a treatment for a disease that wasn't even on Seattle Genetics radar screen, cutaneous T-cell lymphoma (CTCL). If researchers get a hit, and they did, Seattle Genetics can then turn around and run a larger trial to confirm the benefit.

But here's the rub. Assuming you've got a molecular hammer like Adcetris, and the molecular taxonomy of your disease - maybe it's cancer, maybe it's something else - implicates CD30 you know that you've got a high likelihood of some efficacy. Do you want to wait for a Phase III trial? No. Are you going to want to go into a placebo controlled trial? Or even a standard of care trial where you might get an untargeted treatment with serious side effects? No. And is your physician likely to prescribe the drug to you off label anyway? You betcha.

In these circumstances, the randomized clinical trial just doesn't make much sense. It's going to be overtaken rapidly by patients who know their own genomes, and the diagnostic tools that allow them to run N=1 trials that will allow them to rapidly screen drugs that might help them battle these diseases.

The key here is that you want a map of all the diseases that implicates this gene (or really, constellations of genes), and then you want to test the drug in these populations and find out what happens. Capturing that information and rapidly distributing it will be the coin of the genetic realm, leading to success for patients, regulators, and companies.

Safety, as Topol suggests, is something that we'll follow in the postmarket, because we'll have a confirmatory efficacy signal very early on with targeted therapies. Right now, the requirement for large trials that parse increasingly rare safety signals is the Berlin Wall facing drug developers, particularly for chronic diseases like obesity.

For more thoughts on the development of precision medicine, which is what we're really talking about, see this and this.

In his speech to the Democratic National Convention, former president Clinton spent a significant portion of his 48 minutes defending the Obama administration's fight for health care reform.   At one point, the former president made the claim that

"For the last two years, after going up at three times the rate of inflation for a care costs have been under 4 percent in both years for the first time in 50 years." 

Here, former president Clinton attempts to link President Obama's largest piece of domestic policy legislation  to allegedly lower growth of medical costs.  This would be a very interesting claim on its own, since the major components of Obamacare (the Affordable Care Act) won't actually come into effect until 2014.  But let's not quibble with that (for now).

However, something that President Clinton clearly fails to address is that health care cost growth has slowed (somewhat) only because the economy has been so sluggish - hardly a point of pride for the Obama Administration.


As the graph above shows, the economic downturn of 2008-09 sunk the economy, pulling inflation down with it.  Even though health care costs continued to rise, the weakened economy slowed the rate of this growth by around 0.5 percent. 

The repercussions of the economic decline reverberated into 2010 and 2011, the two years of alleged slow growth, which former president Clinton referred to.   The former president is correct on one point here: health care costs did dip below a 4 percent growth rate in these two years, largely caused by a weak economy. 

Unfortunately, even at this 'low' rate, medical expenditures still outpace the rate of inflation while Americans remain trapped in the worst economic recovery on record.

Just to be thorough, one more point of contention.  It's striking that President Clinton displays such a poor recollection of events during his own administration.  Health care costs grew at a rate significantly below 4 percent for four consecutive years between 1996 and 1999 - hardly fifty years ago. 

This draws an even more unpleasant comparison between the current president's achievements on the economy and that of his most recent Democratic predecessor, when there was both economic growth and a check on health care inflation.

President Clinton, undoubtedly, would be horrified by such a comparison.  

With the Democratic Convention in full swing, we find a good opportunity to address a piece of the Affordable Care Act (ACA) that will undoubtedly be heralded as a success of the Obama administration - the Minimum Loss Ratio (MLR) requirements.

MLR is simply the percentage of premiums that must be spent on medical care (not administration or other overhead). The ACA establishes a minimum MLR of 80 percent for small group plans and 85 percent for large group. If any less is spent on medical care, the difference is refunded to the policy holder in the form of a rebate from the insurance company. Belying its populist appeal, however, are massive flaws in MLR requirements that will lead to further inefficiency in an already messy market - consolidation, and monopoly power.

Steve Pearlstein at the Washington Post addressed how consolidation creates inefficiencies in the market. An 'arms race' is started between insurers and hospitals, with each side trying to grow bigger to be able to negotiate more favorable terms for themselves. The decreased competition allows both insurers and hospitals to charge higher prices. But what does the MLR have to do with consolidation?

What Pearlstein failed to note, but AEI Fellow J.D. Kleinke explained several days ago, is how the MLR will lead us down the path of more mergers among insurers:

What would any rational firm in a slow-motion marketplace do when it faces a new lockdown rate on its administrative and marketing costs and profits? First, find ways to let the cost basis for the lockdown rise, i.e., let medical costs inch up. Then acquire competitors to minimize friction for the strategy. Finally, buy up suppliers - i.e., those generating the bulk of medical costs, namely hospitals and doctors - so as to capture what would have been capped margins upstream of the insurer's MLR calculation.

This process is directly catalyzed by the ACA's MLR requirements and inevitably leads to reduced competition, a less efficient market, and in turn higher costs for consumers, with no clear benefits aside from a small (occasional) rebate check.

As a final note, it is true that economies of scale may be at work to an extent in hospitals. That is, as you increase the output of a hospital - more patients, more procedures, and simply more hospitals in a given system - without increasing the capital resources of the hospital (the fixed cost) you reduce average cost per patient as you increase output. (Let's put aside for a moment whether the incentives are right, via Medicare reimbursement rates, for any particular bundle of hospital goods and services - Medicare may still be incentivizing inefficiency in the delivery of care in the hospital setting.  But all other things being equal, economies of scale in industries with large fixed costs are certainly possible.)

While this may be true for hospitals, but there is no evidence that this is true for insurers. Indeed, any incentive that encourages agglomerations of insurers and hospitals is dangerous for consumers and should at least be re-tooled, or better yet eliminated. 

We've known for two years now that Obamacare's patchwork of mandates, employer penalties, and expensive subsidies for the uninsured will disrupt America's labor market and reduce incentives to climb the income ladder - particularly for low-income Americans. Center-right scholars and commentators have been pointing out these problems since the law took effect, but a new paper by University of California law professor David Gamage updates many of the same criticisms.

And what makes his analysis especially powerful is that Gamage is a former Obama Administration official who is otherwise very supportive of the law.

We'll get to Gamage's analysis shortly. But in the meantime, it's worth reflecting that the negative employment and labor effects of the Affordable Care Act aren't accidental - they're a reflection of the political choices that President Obama and Congressional Democrats made that helped them pass the law.

Recall that Congressional Democrats had two conflicting priorities: First, they wanted to cover as many of the uninsured as possible (to reach the Holy Grail of universal coverage). Second, they had to keep the overall price tag for the legislation below $1 trillion and (hopefully) reduce the deficit.

The problem is that the first priority requires large subsidies for insurance coverage, particularly at the low-income end. That makes the bill very expensive, particularly if it encourages employees (and employers) to opt out of current employer-based insurance coverage. So to keep the price tag of their legislation down, Democrats had to institute an employer penalty, hopefully inducing most employers and employees to stay put and keeping the employer-based insurance system intact. Whatever the policy merits of shifting to individual-based coverage (which I support), Obamacare's combination of comprehensive coverage and lavish subsidies far up the income ladder make it awfully expensive.

Democrats thought they could cut the Gordian knot by having Obamacare contain both an individual mandate (encouraging people to buy insurance - the "stick"), rich subsidies (the "carrots", up to 400% of the Federal Poverty Level or about $90,000 for family of 4), and employer penalties (ranging from $2,000-3,000 per employee) to discourage employers from dumping employees into the exchanges (more sticks).

Sound complicated? It is, and we haven't even started talking about how the IRS interpretation of the law will affect how it all turns out.

From the NY Post, Sept. 5

The coming gonorrhea epidemic


Last Updated: 1:03 AM, September 5, 2012

Posted: 11:09 PM, September 4, 2012

Gonorrhea is becoming untreatable. This common and potentially serious sexually transmitted disease was once easily cured. But now, of the 50 antibiotics once used to treat the infection, only one drug works -- and just barely.

Bacterial resistance to antibiotics isn't just a problem in hospitals anymore. Resistant bacteria are hitting the streets -- and we lack the tools to deal with the growing crisis.

The bacteria that cause gonorrhea have grown resistant to all other antibiotics; ceftriaxone, the sole survivor, is hanging on for dear life. To preserve its efficacy, the Centers for Disease Control and Prevention has come up with new guidelines for treating the infection.

Rather than being handed pills, patients must now get an injection of ceftriaxone accompanied by a second oral antibiotic. This will slow the progression of bacterial resistance to the drug, but it won't stop it.

There is no way to win the resistance war against bacteria. Over time, even with the most prudent use of antibiotics, resistance is all but certain. The best we can do is to "keep up" with the germs by discovering new antibiotics that will kill the resistant strains.

Yet the federal Food and Drug Administration effectively discourages research into new antibiotics.

During the late 1990s, the FDA suddenly decided to require "better" statistical power for clinical trials of antibiotics by requiring companiesto enroll about twice as many subjects, making trials much lengthier and prohibitively expensive -- yet no more medically relevant.

Dr. David Shlaes, the former vice president of infectious disease research at Wyeth, found himself squarely in the middle of this battle in 1999. After countless meetings with the FDA over a three-year period, he finally convinced the agency to postpone its new clinical requirements so that Wyeth could continue the development of its antibiotic Tigacyl, which would have otherwise been dropped.

Back then, Shlaes predicted that if the FDA didn't reverse course, it would bring antibiotic research in the US to a screeching halt. He was right -- research died.

One by one, drug companies pulled the plug on their antibiotic programs -- including, ultimately, Wyeth.

We're now starting to pay dearly for this. Only two new antibiotics have been approved in the United States since 2007, compared to an average of four a year in the 1980s. Only four of the 12 major drug companies remain in this area of research at all.

The absence of robust antibiotic discovery programs threatens to profoundly alter the practice of infectious disease medicine, to some extent binging us back to 1940, before antibiotics were available.

We are now this close to having no drugs to treat gonorrhea -- an infection that 300,000 Americans a year contract even when we have antibiotics to control it.

The nation is looking at a very scary public-health problem.

Warns Shlaes, "This is a train wreck already in motion. As other resistant bacteria continue to work their way through the general public, we will soon be seeing more cases of pneumonia and urinary tract infections that will be impossible to treat."

There is at least a glimmer of hope. At a lecture in May, Dr. Janet Woodcock, director of the FDA's Center for Drug Evaluation and Research, said that the agency will soon "reboot its approach to antibacterial development."

Shlaes hopes it is not too late: "If the FDA does not reboot soon, Americans will be left to fend for themselves with increasing numbers of untreatable infections. This will be very bad indeed."

Josh Bloom is the director of chemical andpharmaceutical sciences at the American Council on Science and Health.

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