November 2012 Archives

It is hardly surprising that The New York Times comes out with an anti-pharmaceutical screed on a regular basis. I usually just ignore them, but Thursday's article in Business Day was so slanted and amateurish that I couldn't pass up the opportunity to call them out.

The headline itself was the worst offender: "Brand-Name Drug Prices Rise Sharply, Report Says."

I'm guessing that they hoped that their readers would simply read the headline, mentally file away yet another pharmaceutical industry crime against humanity (soaking the consumer even more), and move on to the sports section to read about the Jets (arguably another crime against humanity).

Because if anyone had bothered to read the whole article, what is really going on is staring you straight in the face. But first, let's talk about some of the more disingenuous aspects of the report.

The first sentence reads "The price of brand-name prescription medicines is rising far faster than the inflation rate, while the price of generic drugs has plummeted, creating the largest gap so far between the two, according to a report published Wednesday by the pharmacy benefits manager Express Scripts."

The increase in branded drugs is 13 percent over the past year, while the price of generics has fallen by 22 percent. These numbers are both misleading and meaningless.

The obvious conclusion from the headline is: Those awful drug companies are making out like bandits, while the "little guys"--the generic companies-- are suffering. And the difference between the rate of inflation and brand name drug prices is bona fide proof of this. Sounds good, but in this case, the use of the inflation rate as a surrogate measure of pharmaceutical company "greediness" is not only utterly meaningless, but intentionally deceiving.

Buried in the middle of the article are two sentences which give the real reason for the price increases, and I have to give them some credit for at least mentioning it. The report cited the growth of specialty drugs, which treat diseases like cancer and multiple sclerosis, as a major reason for the increase in spending on branded drugs. Spending on specialty medicines increased nearly 23 percent during the first three quarters of 2012, compared with the same period in 2011.

New brand name drugs are nothing like they were 10 or 20 years ago. We are talking about a whole different animal, so drawing any conclusion from these data is impossible. You might as well use the price of pork bellies on the Chicago Mercantile Exchange. Here's why.

The well-known "patent cliff" and supposed "lack of innovation" have put pharmaceutical companies in bad shape. This has not only led to the ongoing deconstruction of US-based research, but also a radical shift in the type of research that is being done.

A major consequence of this trend is that pills are pretty much passé. Virtually the entire industry has rapidly re-focused on specialty drugs--very expensive and often individualized therapies (most are biologics) that are mostly new therapies for cancer and autoimmune disorders--the areas that people (and sometimes insurance companies) are willing to pay $100 thousand dollars per year for a new drug.

The Express Scripts report explains quite nicely what is really going on--almost all of the newly approved drugs since July 1 fall under the category of speciality drugs. And yes--they are very expensive.

This is why branded drugs are outpacing inflation (as if that has anything to do with anything)--not because we are seeing massive price hikes on older brand drugs.

The fact that this shift in drug research has led to the use of much more personalized, difficult to manufacture and expensive drugs is the real story. Blindly comparing meaningless inflation data to make a point is disingenuous and inaccurate. One would think that The Times would strive for higher standards than the junk they put out this week.

Paul Howard & Yevgeniy Feyman

Democrats sold -and continue to sell the ACA - as a way to cover the "millions of people" with pre-existing conditions who can't get affordable insurance. For instance, in defending their recently released guaranteed issue regulations, HHS claimed that 129 million Americans have pre-existing conditions.

This is a huge bait and switch. The vast majority of Americans with "pre-existing conditions" already have insurance. Why? Age is strongly correlated with developing a chronic illness - and seniors are covered by Medicare. If you're disabled and poor, and can't work, you're eligible for Medicare and Medicaid. The low-income poor (healthy or not) are already eligible for Medicaid. In between, the majority of Americans have employer-provided insurance, and are also already protected from pre-existing insurance exclusions or rate hikes due to illness, through HIPAA.
Who's left then? Not that many people.

In fact, preliminary results from the Center for Disease Control and Prevention's (CDC) National Health Interview Survey indicate that even among the uninsured, only 1.7 percent considered themselves to be in poor health, compared to 6.8 percent of those in Medicaid, and just .6 percent of those with private insurance.

A Medical Expenditure Panel Survey report from 2007-08 also estimated that only 16 percent of the uninsured had two or more chronic conditions - compared to one-third of those with private insurance and 50 percent for public (Medicare and Medicaid).

In a 2010 National Affairs article, James Capretta and Tom Miller estimate that only 2-4 million uninsured Americans with pre-existing conditions need additional financial help accessing insurance, preferably through high risk pools.

High risk pools allow people with serious pre-existing conditions get affordable coverage without increasing insurance costs for young and healthy uninsured. Yet this is where Obamacare has also failed, despite a modest effort. Under the law, federal high-risk pools were established to provide access to healthcare for patients without insurance, and with pre-existing conditions. A recent evaluation has found that only about 45,000 people signed up for these pools; a fraction of the 375,000 that CMS expected. Reasons proposed for the failure of the pools include low funding (only about $5 billion) and high costs for signing up. Regardless, for the last four years Obamacare has failed to expand healthcare to those with pre-existing conditions who really needed it.

Ironically, Obamacare also attacks consumer driven health plans - which a recent Mercer report credits with helping to hold down health insurance inflation to a 15-year low - threatening to drive up insurance costs just as we're identifying the tools to keep them in check . Various requirements such as the Minimum Loss Ratio (that insurers must spend at least 80 percent of premiums on benefits) and minimum actuarial value (that plans must cover a minimum of 60 percent of expected healthcare costs) make consumer driven health plans - which often have low premiums with high deductibles - less viable.

Ultimately, the biggest flaw with the ACA's insurance market reform is that it enforces expensive insurance regulations on the entire small group and individual insurance markets, increasing the cost of getting insurance for the vast majority of uninsured who are basically in good health. It also scales those subsidies up to 400% of the poverty level, to people who could easily afford to purchase it on their own.

Obamacare's failure at what should have been its primary goals leaves the door open for conservatives to start pushing for reform. The House could pass legislation repealing Obamacare's community rating and guaranteed issue regulations (as our colleague Avik Roy has suggested), and fixing Obamacare's flawed high risk pools. Paring back the subsidies (from 400% to 200% or 300%) would also lower Obamacare's price tag while still helping people who need it the most.

Governors of states that refuse to establish Obamacare's health exchanges (or expand Medicaid coverage) could also push for legislation to allow Medicaid funds to be used to help purchase private insurance for that vast majority of non-disabled or elderly Medicaid enrollees. This would provide high quality private coverage, and prevent people from shuffling between Medicaid and private insurance as their income changed. True state flexibility in Medicaid program design might also convince many governors to re-think their opposition to Obamacare's Medicaid expansion.

The debate on fixing or fighting Obamacare is likely to continue to for years to come. In the meantime, moderates and conservatives should point out that Obamacare's biggest shortcomings are self-inflicted - they didn't have to happen in the first place but can (and should) be remedied.

Let's not kid ourselves. In the wake of that Washington Post article on Sunday, the path to FDA reform just got harder--much harder. The translational "Valley of Death" for new drugs just got deeper and deadlier. So yes, regrettably, maybe we could face, as Yevgeniy Feyman writes, "A Future Without Antibiotics"--at least in the US.

The headline of the Post article, online, was tough: "As drug industry's influence over research grows, so does the potential for bias." But the headline in the hard copy of the Post--front page, above the fold with a picture, plus two full pages inside the paper--was much tougher: "Can Drug Research Still Be Trusted?" And the subhead read, "Even in the most respected of medical journals, firms' influence over studies opens door to bias."

The text of Peter Whoriskey's article leads off with a powerful anecdote detailing the financial interests of those involved in a 2006 New England Journal of Medicine article, praising the potential of the diabetes drug Avandia:

What only careful readers of the article would have gleaned is the extent of the financial connections between the drugmaker and the research. The trial had been funded by GlaxoSmithKline, and each of the 11 authors had received money from the company. Four were employees and held company stock. The other seven were academic experts who had received grants or consultant fees from the firm.

The Post's Whoriskey shied away from any accusation that the financial ties might have affected the judgment of the authors: "Whether these ties altered the report on Avandia may be impossible for readers to know." But then the Post writer added the kick in the gut: "A Food and Drug Administration scientist later estimated that the drug had been associated with 83,000 heart attacks and deaths." Pow!

The Pharmaceutical Research and Manufacturers of America had a response, of course, describing the Post story "one-sided." PhRMA noted, for example, that everyone is getting paid by someone:

The article is based upon the unfounded assumption that any industry funding of clinical research inherently leads to a conflict of interest and thus bias in results. It presumes such inherent bias does not exist when funding is provided by other sources, such as government or academic institutions.

A fair point by PhRMA. Indeed, all healthcare decisions are made by human beings who have financial, personal--and bureaucratic--interests. James Buchanan won the 1986 Nobel Prize for Economics, demonstrating, through his "public choice" argument, that public-sector employees, are inclined, in their own way, to develop strategies to maximize their welfare.

Without a doubt, Post piece had more than a whiff of Naderism, defined as the near-certainty that corporations are determined to cheat the public interest. Indeed, Naderism was seen in such rhetorical flourishes as the following characterization of private funding: "That money is also part of a high-risk quest for profits, and over the past decade corporate interference has repeatedly muddled the nation's drug science, sometimes with potentially lethal consequences."

Still, facts are facts. And so if all the authors of the NEJM piece had a financial interest--however large or small, whether or not it affected their judgment--somebody was going to notice. And the Post did.

Others are noticing, too. As of Tuesday evening, the Post article had received 795 comments posted on the newspaper's website; it had been retweeted 497 times and recommended on Facebook some 3600 times.

Meanwhile, other observers, too, have taken note: "Big Pharma's Hold on Drug Research Hides the Truth / Drug companies' close involvement in trials of their own products means we can't trust the results, an investigation shows"--that was the headline atop one health blog.

And perhaps the most powerful single private-sector player in healthcare policy, AARP, weighed in, too. The headline of its comment read, "Drug-Research Scandal: Patients Lose Again." We might note the Naderish "again." As AARP put it, "Increasingly, patients are left wondering if anyone is looking out for their welfare and not just the bottom line."

The FDA, of course, is supposed to be the public's watchdog, and so one can readily imagine the enormous pressure on the FDA. The agency has long been cautious and restrictive--too cautious and restrictive, most readers of this site will agree. Well, now it will be even more so.

In the same article, AARP pointed to another incident, the outbreak of spinal meningitis, for which the FDA seems to bear some blame. As The New York Times reported on November 22:

Newly released documents add vivid detail to the emerging portrait of the Food and Drug Administration's ineffective and halting efforts to regulate a Massachusetts company implicated in a national meningitis outbreak that has sickened nearly 500 people and killed 34.

A shocking and unnecessary tragedy, to be sure, but again, not anything that Big Pharma had anything to do with. Yet the meningitis outbreak was a huge blow to the FDA's prestige, and one needn't be a public-choice economist to realize that appropriate damage control for the FDA will include a toughening up of oversight and scrutiny--on everything. Public scorn, as well as Congressional oversight is already intense, and it will only grow more intense.

So the FDA will respond. Here's a safe-bet prediction: To the best of the FDA's ability, everything is going to be reviewed again, checked again--and, inevitably, stalled. Such will be the ongoing pain-minimization strategy for FDA officials, leery of public scorn and televised Congressional criticism.

In spirit, Frances Kelsey is back at the FDA.

In the next installment, we will consider possible new strategies for the forces of medical progress.

Anyone who has taken an introductory economics course has learned that all else equal, it is preferable to have an economy in equilibrium. What this means is simply that we arrive at the best outcome when demand for a particular good equals the supply of that particular good.

Healthcare, in and of itself, is no different than any other good. There are suppliers (doctors) and consumers (patients). When the total supply of healthcare available is able to meet the total demand, everyone benefits - patients are able to receive the care they need for a given price, while doctors are available to provide the care that patients demand, at the price determined by the market.

Let's say for a moment, that all else held equal, the amount of money that doctors are paid for one set of patients is reduced to between 70 and 80 percent of what another set of patients pays. One of several things can happen - doctors can pass on the difference in costs to other patients, doctors can stop seeing the patients that pay less, or doctors can be forced to accept the costs. None of those situations is good for either patients or doctors. Inevitably, the result will be higher costs for some patients who subsidize others, greater access problems for patients who pay less, fewer doctors available in general (those who can't meet their variable costs will be driven out of business, and potential new doctors may be deterred by the higher barriers to entry), or some combination of the three.

Sound familiar? It should. This is the reality of the American healthcare system.

And the Affordable Care Act (ACA) only makes it worse. Here's why.


Note: The chart above is log-scaled for ease of comparison of the two datasets

Most projections estimate that the number of Americans without health insurance will fall from around 15 percent now to about 7 percent by 2020 (these are fairly optimistic estimates as they assume that all states undergo the Medicaid expansion) - a drop of nearly 50 percent.  The Bureau of Labor Statistics (BLS), however, estimates that there will be a corresponding increase in physicians of only about 24 percent by 2020. What this means, is that there will be greater healthcare utilization (more people have health insurance and thus will use health services more often), while the number of physicians as a percentage of the population stays relatively static. In other words, the big ugly monster known as a "physician shortage" will rear its ugly head.

Even left-of-center economists, like Brad DeLong of UC Berkeley, have noted the impending shortage.

A shortage of this magnitude will likely lead to fewer doctors accepting Medicare and Medicaid (which pay much less than private insurance), while others may simply forgo accepting insurance altogether. Alternatively, healthcare rationing may take hold, in which case Americans will have to wait significantly longerfor primary care appointments, surgeries and other medical procedures.

The root of the problem lies in the lack of true pricing in the American healthcare system, and fragmented insurance programs with varying reimbursement schemes. The ACA does very little (for two years, Medicaid rates rise to Medicare levels for primary care providers) to address this, and by throwing more people into the broken system we have now, it simply reinforces the status quo.

For an example of how the ACA could be remedied, see Avik Roy's post at the Apothecary, which lays out a path towards a market-based system with more price transparency and greater consumer choice. In addition, domestic regulations and requirements for physicians' educations should be reduced, which would make it more attractive for individuals to pursue a medical education and further help limit the physician shortage. (See my previous post on why physician pay is so high in the U.S.)

A final bit of irony: if the ACA's coverage expansion doesn't work out the way its proponents hope, we may very well avoid the looming physician shortage but we're no better off than where we started. Yet, if it does work out, we've made it that much more difficult to truly reform America's fragmented healthcare system. 

Tami-flu the Coop?

Roche has recently been taking considerable heat for not providing certain clinical data on Tamiflu (oseltamivir), its flu drug that has been on the market since 1999. During the 2009 H1N1 flu scare, hospitals, governments and many individuals were panic buying it, and some of them are not too happy about spending a load of money on something that doesn't work very well.

If taken within the first two days of coming down with the flu, Tamiflu seems to knock off about one day (7 days down to 6) of the illness. It may also have some effect in reducing symptoms, but this is not clear. It also has some fairly nasty side effects. Given all of this, I have always considered it to be a marginal drug at best.

And if it wasn't especially effective before, it is becoming even less so now. To understand why, one needs to know a little about how viruses work.

Viruses are obligate parasites-- they can only replicate within the host cell that they infect. They have have come up with some fiendishly clever ways to survive and prosper.

All viruses use more or less this same strategy to replicate: After the virus binds to a particular receptor on the surface of its host cell (in the case of flu, these are lung and nasal cells) it enters the cell and "hijacks" the normal reproductive machinery of the host cell, tricking it into making the DNA or RNA of the virus instead of that of the cell. Then, using enzymes that are contained in the virus, new viral particles are assembled within the cell and burst in large numbers, where they seek new host cells, spreading the infection.

If any of these steps is short circuited by the presence of a drug, replication will stop. These discreet steps are referred to as targets, and most antiviral drugs (HIV being the best example) work by inhibiting a specific viral target.

The discovery of Tamiflu, as flawed as it is, represents a nice example of one of the spiffier technologies used in drug discovery--computer assisted drug design (CADD). In this case, the technique was used to design molecules that could interfere with the function of one of flu's essential enzymes--neuramidase.

Oseltamivir binds to and inhibits neuramidase (the "N" in H1N1; the "H" stands for hemagglutinin, and good luck using that bad boy in Scrabble), thus preventing it from doing its job--acting like a pair of molecular scissors. After the flu virus is finished replicating within a cell, the new viruses burst through the host cell membrane, however, they are still stuck to the membrane until neuramidase comes along-- cutting off the new flu virus particles allowing them up escape and infect other cells thus perpetuating the infection. If neuramidase doesn't function, the new viruses won't be released, and the infection can't spread.

Below is an example of CADD--oseltamivir (the mostly pink blob in the middle) bound to neuramidase (the colored ribbons). Using information derived from a technique called x-ray crystallography, chemists were able to visualize at the atomic level (in three dimensions) a set of imaginary molecules that would bind tightly and inhibit neuramidase. This led them to synthesize a series of molecules that did just that. One of these molecules was later named oseltamivir. And it worked--at least a little.


CADD has led to the discovery of many drugs--especially for HIV, and the science involved is elegant. But viruses don't much care for elegance--they simply want to replicate. And even the most scientifically rigorous and creative technology can be outdone by the tricks that the virus has up its sleeve. The most effective trick in its arsenal is mutation--a slight change in the structure of the virus or one of its components.

Most viruses mutate like crazy, and the best way to encourage them to do this is by exposing them to a single drug that inhibits the replication of the natural strain of the virus. Doing this promotes the growth of mutant strains that are less sensitive to the drug, allowing them to flourish in the absence of the natural strain--as perfect an example of evolution as you'll ever find.

This was never more clear than in 1987 when AZT, the first HIV inhibitor was approved for treatment of AIDS. It was a complete flop. Although AZT did inhibit the growth of HIV for a short period of time, the virus rapidly mutated rendering AZT essentially useless.

And this is exactly what is happening with Tamiflu.

According to a March 2012 paper in Lancet Infectious Diseases, in 2007/2008, a type A (H1N1) influenza virus was found to have developed resistance to Tamiflu. Within one year, this strain of flu had spread globally, such that virtually every strain of this virus around the world was resistant to this drug.

Whether other strains of flu will develop resistance of this magnitude remains to be seen, but Tamiflu is clearly an imperfect drug that may be of little or no use in the future.

Roll up your sleeve.

Imagine waking up in the morning, your throat hurts a little, your nose is running, and you've got a light fever. You take the day off, and go see your doctor. A few hours and a throat culture later you're told that you have strep throat - a bacterial infection caused by the streptococcal bacteria, usually treated with a regimen of penicillin or amoxicillin. However, your doctor tells you that there's not much he can do for you - even if he were to prescribe the antibiotic it would do little to help you because the bacteria has become resistant to most antibiotics.

Though this may sound like something out of a third-world country, this may be the direction that the U.S. is heading in without swift and decisive regulatory reform.

Antibiotic resistance is an ever growing problem, with more deaths from methicillin-resistant Staphylococcus aureus (an antibiotic-resistant staph bacterium also known as MRSA) than from AIDS according to the Centers for Disease Control and Prevention (CDC). Yet, at the same time, antibiotic development is progressing at a snail's pace. The expected returns from antibiotic drugs (the Net-Present Value or NPV) are a paltry $100 million for pharmaceutical companies, compared with over $1 billion for musculo-skeletal drugs or $300 million for oncology drugs (the latter of which has a much faster approval pathway) according to a 2009 report by the London School of Economics; it should be no surprise then that fewer antibiotics are being developed less often. (To be fair, the relatively low NPV of antibiotics is also illustrative of the fundamental difference between antibiotic regimens and chronic-disease regimens - the former is a short-term therapy, while the latter is long-term. Still, the regulatory barriers imposed by the FDA are significant.)

Development hasn't halted, however. The Belgian biotech group, Galapagos, just announced that they have identified an antibiotic drug candidate - that has shown promise in treating MRSA infections, with hopes of beginning clinical trials by 2014. Without regulatory reform at the FDA, however, it is likely that Galapagos, as other drugmakers, will conduct trials and seek approval outside of the U.S.

And the regulatory burden of outdated clinical trial requirements is where much of the difficulty in developing new antibiotics lies. For instance, the FDA's non-inferiority requirements (the margin by which a new drug may be worse than a comparator to qualify for approval) are much more rigid than those required by the EMA (the EU's medicines regulator), which allows for more discretion by the investigator. Other regulatory inefficiencies include requirements for no antibiotic use 30 days before the trial (because patients are usually given antibiotics when being admitted into hospitals, this is a very difficult requirement to meet) and overly burdensome clinical endpoints. Indeed, even the FDA itself has recognized the need for reform to address antibiotic resistance, though progress has been rather slow. (For more on FDA's reform attempts, see Paul Howard's previous post.)

Reform should focus on establishing a predictable development pathway for antibiotics.  In particular, it should allow more broadly the use of pharmacometric data (David Shlaes at The Perfect Storm explores how the EMA has acknowledged "big data's" importance) to establish patient samples, give more discretion to investigators in establishing non-inferiority margins, and be more lenient with clinical endpoints than the current 24-48 hour overall success requirement. Moreover, faster approval of antibiotic drugs will increase the NPV of such drug candidates, making them more attractive investment opportunities. 

While states mull over decisions on health insurance exchanges, another decision is looming on the horizon - whether or not to expand Medicaid as the Affordable Care Act (ACA) calls for.

Many governors have held off until after the election to make their decisions, with a number of states like Texas and Florida deciding not to, but the majority still remains undecided. Though the ACA calls for the federal government to foot 90 percent of the cost, the remaining 10 percent still represents an increase in states' costs in the midst of a dire budgetary crisis plaguing much of the country.

Budgets, however, are not the only decision rule states should be using to determine whether or not to expand their Medicaid rolls. Medicaid's track record on access to care and health outcomes is generally poor when compared to private insurance, and these measures often end up being only slightly better than for those who are uninsured, and are often statistically insignificant.

A study released today in the Journal of the American Medical Association (JAMA) looked at postoperative morbidity rates for patients that received surgeries for brain tumors, controlling for the insurance status of the patient. The results? At first glance, unsurprising. After fully adjusting for patient characteristics and comorbidity, uninsured patients were 2.62 times as likely (a hazard ratio of 2.62) to die after surgery as those with private insurance.

While in the adjusted analysis, the results for Medicaid recipients were not statistically significant (the results found Medicaid patients 2.03 times as likely to die relative to those with private insurance, but were not significant at the 5 percent confidence level [analogous to a 95 percent confidence interval]), the original, unadjusted  analysis (which doesn't take into account differences in patient characteristics) shows no statistically significant difference between Medicaid patient survival rate and the uninsured (2.6 percent and 2.3 percent, respectively).

This is yet another study that sheds light on the relatively poor outcomes of patients on Medicaid, which may not be significantly better than those of the uninsured. The relatively poor outcomes should come as no surprise, as Medicaid's lower reimbursement rates for specialists tends to cause significant access to care problems. And poor access to care will likely make Medicaid patients on the whole less healthy than those with private insurance, increasing the chances that they will have other complications that may lead to higher mortality.

A critique in JAMA brings up important issues that need to be taken into account. Of relevance is one in particular - the number of uninsured patients who enrolled in Medicaid during their hospital stay; these patients would be better categorized as being uninsured rather than having Medicaid. Nonetheless, the results echo what many have been arguing for some time - that Medicaid delivers poor outcomes that are cost-inefficient for states.

For a science-based agency that prides itself as being the world's "gold standard" for drug and medical device regulation, the FDA's approach to antibiotic drug development has been - for the lack of a better word - mystifying for the better part of a decade. As Infectious Diseases Society of America (IDSA) president Thomas Slama noted in a letter to HHS Secretary Kathleen Sebelius in August "...regulatory disincentives resulting from the lack of clear and feasible antibacterial clinical guidance for industry has become a towering impediment to antibiotic development."

How did the FDA become a "towering impediment to antibiotic development"? It's a long story, but starts with Congress (especially Senator Chuck Grassley and Representative Ed Markey) attacking the agency's approval of the antibiotic Ketek in 2004 - basically accusing the FDA of being in cahoots with drugmakers to foist a dangerous drug on the public.

The Congressional assault gave cover to a clique of regulators at the FDA who wanted to enforce draconian new clinical trials requirements for antibiotics that sharply increased the cost and time required to bring new medicines to market. (It's also worth noting that experts agree that the FDA's European equivalent, the EMA, is way ahead of the agency in terms of creating a more practical and financially attractive environment for antibiotic drug development.)

As a result, since 2006 the FDA has insisted on clinical trial designs for new antibiotics that they were warned (then and since) were totally impractical and unfeasible by outside clinical and industry experts.

Now, after the problem of antibiotic drug resistance has grown to near crisis levels and antibiotic drug development is in free fall, the agency has said that they are willing to rethink their previously inflexible standards. (The whole story is detailed in an excellent article in the current issue of BioCentury: "Antibiotics Reset", subscription required.)

MRSA deaths v AIDS.png

Indeed, in 2005, the latest year for which data is available from the CDC, deaths from methicillin-resistant Staphylococcus aureus (MRSA) significantly outpaced AIDs-related deaths, yet the drug availability for HIV/AIDs treatments is much more robust than the few and far between treatments for MRSA.

Thankfully, the recent PDUFA V reauthorization contained some important provisions that have pushed the FDA to revamp its antibiotic drug standards and improved (at least marginally) financial incentives for drugmakers. For instance, the GAIN Act adds market exclusivity for new antibiotics, and mandates Priority Reviews for antibiotic New Drug Applications (NDAs), making the field marginally more attractive for drug developers.

The law also mandates that the FDA create a "pathogen focused antibacterial drug development pathway," so multiple clinical trials of the same infection but at different parts of the body can be used in support of the same new drug application. The law also requires the FDA to provide advice for developers of drugs for "limited spectrum" pathogens, i.e., drug resistant bacteria like MRSA.

Both provisions should provide a modest but welcome boost for antibiotic focused companies. The FDA is also working with stakeholders to develop new legislation for a Limited Population Antibacterial Drug approval pathway that would essentially allow orphan-drug style approvals - in smaller, faster clinical trials - for antibiotics in narrow populations. This would allow companies to quickly target emerging pathogens and drug resistant strains before they become widespread.

BioCentury notes that "senior FDA officials say the agency is committed to rapidly replacing infeasible requirements for antibiotics with pragmatic standards based on the realities of clinical practice at a pace commensurate with the public health threat posed by rapidly evolving pathogens." This is great news, and long overdue.

But more important questions still have to be answered. Here are three questions Congress should ask the agency:

Why did the agency create "infeasible" antibiotic drug development standards that were so wide of the mark in the first place?

Why did it take the agency so long - six years and counting - to recognize and correct the problem?

How is the agency going to ensure that the same flawed decision making process doesn't happen again, and isn't happening now for other disease indications?

Better yet, the agency's antibiotic "reboot" should be used by Congress to implement a total review of the agency's management procedures, practices, and policies for incorporating new scientific information into regulatory guidance for industry.

It would also be helpful to create an outside scientific board of advisors that would both help the agency keep abreast of the latest scientific developments, and provide regular reports to Congress on FDA's performance. This would go beyond PDUFA requirements, which are focused on relatively narrow procedural metrics, and examine the FDA's performance in advancing innovation through regulatory reforms, instituting consistent management practices across centers, and working more collaboratively with the FDA's scientific partners in industry, the NIH, and academic medicine to develop sensible regulatory standards.

As part of a top-down FDA review, Congress also shouldn't ignore its own impact on the agency. As long as the FDA is used by Congress as a convenient punching bag, FDA staff will continue to produce overly cautious regulations - even if it is at the expense of public health.

At least according to Matthew Yglesias of Slate Magazine.

The myriad rules and regulations of Obamacare include one rule in particular that's caused a stir among some employers - that employers with 50 or more workers must offer health insurance to those working full-time. Common sense tells us that this will increase costs for employers - covering a larger number of workers necessarily costs more than covering a smaller number.

And some employers have been more vocal about the impact than others - Papa John's CEO John Schnatter riled against the healthcare law, claiming that it would raise costs between 11 and 14 cents per pizza. More recently, a Denny's franchise owner announced that he would be adding a 5 percent surcharge to customers' bills. Other businesses have taken more creative approaches, like that of Darden restaurants, which is shifting many of its workers to part-time to avoid the mandate.

To make a long-story short, the impact of the law is very real. Companies will face higher operating expenses under Obamacare, and will react by passing on the costs to customers when possible, or by creatively changing their hiring policies (indirectly shifting costs to employees in the form of fewer hours, and therefore lower wages).

Yglesias seems to think that this is all being blown out of proportion, arguing that

[I]f there was ever a time when firms were prepared to eat higher costs because of reduced profits that time is today.  

Yglesias is correct that corporate after-tax profits are at a record high, but this only tells part of the story. Though Yglesias makes a valiant attempt to show that businesses are in good shape while workers are suffering from low-wages, his point falls a little flat. (Yglesias uses the variable "Labor's Share of Income in the Nonfarm Business Sector," which has been critiqued in a 2004 paper published by the Cleveland Fed.)


Note: Red Line is Labor Share; Green Line is Real Compensation Per Hour, Blue Line is Unit Labor Cost

Graph and data available at:

For starters, real hourly labor compensation as well as unit labor costs (which themselves are strong proxies of labor compensation) have increasing as well and are both close to all-time highs. More importantly, compensation includes employer contribution to pension plans, health insurance etc.

Yglesias' solution to the problem of increasing business' labor cost? Deny, deny, deny. Arguing that there is no "problem," he instead claims that businesses are merely politicizing their decisions to make more money, likening it to a business facing price shocks throughout the year.

The problem with this analogy? Price shocks are temporary, and often are accompanied by a market correction of the prices. Obamacare represents a permanent increase in the cost of hiring full-time employees for employers with 50 or more workers.

To be fair, he makes a good point that "legislative fiat" will likely not increase workers' compensation, and gains in compensation will be tied to productivity. Unfortunately, Yglesias doesn't take this idea any further.

The likely impact of trying to improve workers' livelihood through Obamacare will either be: costs being passed onto the customers; fewer hours for workers resulting in lower wages; fewer workers resulting in higher unemployment than otherwise; stagnant wages as a result of compensation being more tied in with health insurance; or some combination.

Indeed, in a paper published earlier this year, David Gamage of UC Berkeley, noted some of the perverse impacts the healthcare law would have, including that

The ACA will deter low- and moderate-income taxpayers from accepting jobs with employers that offer affordable health insurance.


The ACA will discourage many low- and moderate-income taxpayers from attempting to increase their household incomes.

These are impacts that Yglesias is oddly sanguine about, despite his concern for the plight of the worker.

Ultimately, businesses respond to increases in cost, and businesses are now telling us how they will respond to Obamacare's increases. We can ignore them or we can listen, but the reality is that the mandate will comes with a slew of undesirable effects. 

Thanks to my partner, Michael N. Abrams, M.A., for his contribution to this post.

In a recent New York Times blog post, esteemed healthcare economist Uwe Reinhardt recently proffered a solution to the challenge of encouraging more medical students to become primary care physicians (PCPs) over more lucrative specialty options. I'm reassured to see that someone is paying attention to this problem. The Association of American Medical Colleges estimates that in 2015 the country will have 62,900 fewer doctors than needed. That number will more than double by 2025, as expanded insurance coverage and aging baby boomers drive up demand for care. And this just when we've rediscovered the idea that coordination of care is a keystone to increased quality and reduced cost!

Bearing in mind that his audience is not made up of Princeton Ph.D.s like himself, Dr. Reinhart kept the possibilities simple; make it cheaper to become a PCP, or tax PCPs less once they begin earning money. Dismissing the first solution as too complicated, he proposed using a feature of the current tax law as a vehicle to lower the tax burden on PCPs.

Oddly enough, Dr. Reinhardt drew a parallel between PCPs and hedge fund managers. Hedge fund managers (who manage the investment of other peoples' capital) are compensated on the returns they achieve. When the fund yields capital gains, the manager receives a percentage of those gains. Current tax law treats that compensation as a capital gain rather than as wages, and at least at the moment, taxes it at a lower rate. Dr. Reinhardt suggests that net profit in a PCP's practice be treated in the same way to encourage medical students to choose this career path.

With all due respect to Dr. Reinhardt, neither his analogy nor his solution stands up to scrutiny. Hedge fund managers are compensated and taxed in the same way as their clients (investors) so that their interests are exactly aligned. If PCPs were compensated in the same way, they'd be paid based on the health status of the patients that they manage. The fact that they're not is part of the incentive misalignment problem that has our healthcare system speeding over its own fiscal cliff.

Instead of rewarding PCPs for improving health outcomes, the current fee-for-service model encourages them to perform and charge for services that may not be absolutely necessary, and to use the vagaries of the payment system to maximize revenue. A reimbursement system based on coding services provided at the level of minutiae, and not compensating for planning or coordination discourages doctors from spending significant time with their patients in order to really get to understand their health situation or develop a preventative care plan.

Using the tax code to lighten PCPs' tax burden will not discourage such practices, nor will it better align the interests of physicians with those they treat than they are now. This recommendation also ignores the fact that constraints of the reimbursement system on their ability to practice medicine has played as great - if not a greater - role in the exodus of PCPs than dissatisfaction with the financial rewards.

Although I've not detected much urgency around the subject, all of us -- government, payers, providers, and, last but not least, consumers - have a significant stake in building the capacity of our healthcare system to coordinate care. Since we already have a shortfall in the number of available PCPs, if the increased coverage provided by the ACA translates into utilization, we can expect an access crisis. If we started tomorrow, we might see increases in the supply of PCPs in a decade. So the question is, what should we do now to improve the capacity of the system in the short and the longer term? If we want to focus PCPs on keeping their patients well, we should reform the payment system so that their compensation reflects the health results they achieve. Are there other things we can do to make a career in primary care more attractive, while still working toward the overall goal of better health outcomes at lower cost? What do you think?

In a report that is sure to be misused and abused by those championing states' Medicaid expansions, the Government Accountability Office (GAO) announced that based on their survey of the states, and an analysis of national expenditure data, Medicaid beneficiaries have no more trouble accessing medical care than those on private insurance. If true, this finding would dispel the notion that cutting provider payments creates access problems. The problem isn't with GAO's report or methodology - it's with people that will only read the top-line heading and run with it.

The report found that among Medicaid beneficiaries who had full-year coverage, differences in those reporting problems with access to care were not statistically significant. Specifically: 3 percent of those with private insurance had difficulty with access to medical care, compared to 3.7 percent of those with Medicaid; 2.4 percent of those with private insurance had difficulty with access to prescription medicine, compared to 2.7 percent of those with Medicaid; and 3.7 percent of those with private insurance had difficulty with access to dental care compared to 5.4 percent of those with Medicaid.

Thumbnail image for gao_difficulty_care.png

According to GAO's methodology, the confidence interval for these estimates is about ±1.5, which makes only differences in dental care access problems statistically significant for those with a full-year of insurance.

If this was all that GAO reported, it would be fair to say that Medicaid has no access problem compared to private insurance.

It isn't.

First off, GAO notes that across the years they analyzed, more states increased payment rates for providers than the number that reduced them - this would mitigate the access problem to an extent.



Note: some states increased payment for some providers, cutting payments for others; totals don't add up to 50.

Where Medicaid's access problems show up, however, is in GAO's analysis looking at working-age adults and whether coverage was maintained for a full-year or less.


The difference between those with private insurance and Medicaid is astounding. While only 3.3 percent of those with full-year private insurance had access problems, a full 7.8 percent of those with full-year Medicaid coverage had access problems. Even the uninsured who had coverage for part of the year fared better than those with partial-year Medicaid coverage; the difference between them and those who had Medicaid coverage for a full-year was statistically insignificant. (The confidence interval is ±1.7 for this sample.)

Finally, waiting times were a significant problem for those with Medicaid (9.4 percent versus 4.2 percent of those with private insurance versus 6.8 percent of those who were uninsured).

The reality is that the GAO report merely reinforces what should be common sense about Medicaid - if you pay providers less than private insurance, you will encounter access problems. But it also indicates that there is something systemic about younger (under 18) and older (over 65) patients that causes them to have fewer access problems than working-age adults, even with Medicaid. The aggregate numbers presented earlier in this post include children covered under Medicaid and Medicare/Medicaid dual-eligibles (seniors who qualify for Medicaid and Medicare). Children are likely will be healthier and will likely be seeing a care provider for more routine causes like a checkup or a flu shot. Because these are more routine, less expensive procedures, it will be easier to find a provider. For dual-eligibles, Medicare would cover many routine procedures; because of its higher reimbursement rate compared to Medicaid, access problems would be mitigated. As a report from MedPAC in 2004 confirms, dual-eligibles generally have good access to care, and those with supplemental insurance, even better.

GAO's findings should make states question whether to expand their Medicaid programs as they are - particularly when outcomes, relative to private insurance and even no insurance, are questionable. Avik Roy, at the Apothecary has written extensively about this. To be fair, Austin Frakt at The Incidental Economist has pointed out repeatedly that outcome-based measures in Medicaid don't necessarily imply causation and could very well be a product of self-selection into the program.

My good friend Steve Parente, professor of finance at the University of Minnesota, had a great op-ed in Politico on a "grand bargain" on deficit reduction in July 2011 . It is well worth re-reading before the President and Republicans meet on Friday to try and avert the "fiscal cliff" and, just possibly, find a serious way to address the spending challenges facing the nation.

First, a word about taxes. The president's proposal rests on the premise that fixing our fiscal woes cannot be accomplished without repealing the Bush tax cuts for Americans making more than $200,000 for individuals, and $250,000 for families. Veronique de Rugy, from the Mercatus Center, puts the president's proposal in context - how much he proposes to raise, and how much he proposes to spend over the next 10 years.


To put it another way, the president's proposal will raise about $80 billion annually in new revenues from "the rich" - when the U.S. is running annual deficits of about $1 trillion, or more than 10x that amount.

So where is he proposing to get the other 90% in spending cuts or revenues to balance the budget and pay down the debt, currently pegged at over $16 trillion?

(Cue the crickets.)

Taxing the rich is nice campaign slogan, but as a policy proposal it is utterly vacuous.

What would a serious policy proposal look like? That's where Steve comes in. His proposal would
generate $4 trillion in deficit reduction over the next 10 years, and over twice that further out. How?

1. Eliminate the employer tax deduction for health insurance and replace it with a much smaller individual tax credit. The current deduction costs the Treasury over $250 billion a year today, and helps drive up health care inflation. But wait - wouldn't the president object to this? Yes, but he'd be breathtakingly cynical about it. Obamacare already contains a 40% excise tax on Cadillac plans that is a back door way of attacking the employer tax deduction. Conveniently, it doesn't take effect until years after president Obama leaves office. Move it up, and make it serious.

2. Turn Medicare into a defined contribution plan with growth pegged at inflation plus one-half of the three years' previous growth in U.S. productivity. This would allow seniors to shop for plans that met their basic needs and focus lawmakers on making the U.S. economy as productive as possible, growing the wealth needed to sustain our entitlement programs.

3. Cap subsidies under Obamacare at 300% of the federal poverty level (down from 400%), repeal the medical device tax, and cap Medicaid growth and allow states to draw down their capped allotment from the federal treasury - this could be modeled after the current Rhode Island global Medicaid waiver.

The mix of revenue raising strategies, entitlement reforms that spur competition in health care markets, and Medicaid reforms would produce enormous savings and help rationalize federal spending.

As Steve notes,

This health bargain is likely to yield a savings of $4 trillion over 10 years, extrapolating from existing Congressional Budget Office estimates, and more than twice that amount over 20 years. Because these policies are based on existing CBO estimates, legislation can be gift-wrapped and delivered to the president's desk.

The likelihood of such a grand bargain seems slim at this point, since the President has given no serious signals that he's willing to consider reforms to existing entitlements, let alone the Affordable Care Act.

But it would be worth pushing for. The President could be calling for raising taxes on the "wealthy" as cover on his left flank for fundamental reforms and a grand compromise with Republicans. After all, at this point he doesn't need to worry about his base for his next re-election.

And if conservatives and moderates push for a grand bargain and are rebuffed it will at least clarify who is really serious about fixing the house of cards that is the U.S. budget.

Amidst populist rhetoric about skyrocketing insurance costs in the private sector, leading, of course, to justifying Obamacare's taxes, subsidies, and mandates, a brief overview of the facts paints a different picture.

The results of a survey just released by Mercer, a global consulting firm, show that growth in health benefit costs per employee have dropped to a 15-year low. More importantly, these savings came mainly from Consumer Directed Health Plans (CDHPs), with 59 percent of the largest employers offering a CDHP. These plans implement smart cost-sharing strategies (such as low premiums with high deductibles), with a Health Savings Account (HSA) that allows employees to save pre-tax dollars for routine medical spending, like over-the-counter drugs, while using insurance to cover non-routine spending like doctor visits.

Others (45 percent of all employers) are currently using or considering implementing a defined contribution model to fund employees' health insurance. Under such an approach, employers would contribute a set dollar amount to employees' insurance costs, which would typically allow employees a decent level of coverage, and if employees want extra coverage they add on their own money.

A large majority of employers have also embraced wellness strategies as a long-term strategy for controlling health spending. Employers typically provide a rebate or some other incentive if employees complete an annual health assessment, go to the gym, or stop smoking. Others, like Wal-Mart, have even established centers where a set of medical procedures (spinal surgery in Wal-Mart's case), are completely covered for eligible employees.

These savings have come from employers' desire to control health costs and keep their workforce healthy and productive - not from government mandates. Indeed, Obamacare attacks the cost-control measures that work best.

For instance, the law establishes a minimum actuarial value threshold of 60 percent for health insurance - this means that plans must cover at least 60 percent of a person's health expenditures. Of course, HSA-based plans cover less than 60 percent by definition, because they offer low premiums and rely on the individual's own contributions. Moreover, the Minimum Loss Ratio (MLR) rule in the law requires 80 percent of premiums collected to be paid as benefits. Once again, because HSA-based plans collect low premiums, they will often fail to meet these guidelines. Instead, insurers offering such plans will reduce deductibles and raise premiums, making them much less useful in controlling costs.

Other cost-control innovations are sprouting in the private sector as well. In 2010, United Healthcare began a pilot program with several cancer-treatment centers around the country to experiment with bundled payment systems. Instead of reimbursing doctors as they go, they would negotiate a fixed sum for a typical six to twelve month treatment regimen, allowing the oncologist to determine the details of the treatment. While results are still forthcoming, a study published in the Journal of of Oncology Practice that tracked the treatment costs of patients on "evidence-based pathways" and those that weren't, found that the survival rate was almost identical, while savings came to $9,000 in the last month of treatment. A bundled payment system would encourage evidence-based treatment, usually less expensive, rather than the more expensive, experimental treatment that may not improve survival.

The private sector's success in controlling health insurance costs should be a lesson to policymakers as discussions of how to control Medicare's spending without cutting benefits begin.

At the last interim meeting of the American Medical Association (AMA), which concluded on November 13, delegates from around the country voted to officially support transitioning Medicare from a defined benefit entitlement, to defined contribution - this is essentially what Mitt Romney proposed during the past election.

Currently, Medicare operates under a defined benefit scheme - a set of benefits are covered under Parts A and B (inpatient and outpatient care, respectively) with the option to purchase Part D (prescription drug) coverage as well, for relatively low premiums. Because neither premiums nor the Medicare tax revenue come close to covering the costs of the coverage, Medicare tries to shift costs around by using an outdated formula called the resource based relative value scale (RBRVS), and ends up paying doctors around 80 percent of what private insurance does.

Even with Medicare's creative fiscal magic, Medicare's actuaries routinely note that the pace of spending is unsustainable - neither in the short-run nor the long-run, and its solvency is at best projected to last through 2024.

A proposal routinely offered as an alternative to Medicare's unsustainable trajectory is competitive bidding with premium support. Under this type of reform, private insurance plans would bid for Medicare beneficiaries, with a benchmark plan (under the Romney plan, the second-cheapest plan would be the benchmark) setting the level of support from the government (in the form of subsidies to beneficiaries), which would be scaled based on income. Most proposals also keep traditional Medicare intact for seniors who choose to remain in it.

In essence, this is what the AMA endorsed as a means of protecting seniors' access to affordable health insurance, while trying to fix Medicare's financial woes.

Critics are often quick to point out that Medicare Part C (also known as Medicare Advantage), which allows beneficiaries to purchase private insurance, costs about eight percent more than traditional Medicare. While this may be technically true, these critics address only one set of numbers to draw their conclusions - the amount that the government pays these plans. These amounts are set by a complicated benchmark formula, which private insurers routinely underbid. However, rather than paying private insurers the amount that they do bid (which is about $717 less expensive than traditional Medicare), Medicare pays them the benchmark amount, which is greater than traditional Medicare.

If the benchmark were to be set through the bidding process (based on what the second-cheapest plan bids), rather than government administration, there is more than enough reason to believe that the plans could deliver the same coverage as traditional Medicare at less cost.

While premium support may be off the table for the time being, the AMA's backing may lead Senate Democrats to take such proposals more seriously in the future.

As Congress teeters on the fiscal cliff, expect liberal advocates to resurrect the idea of having HHS "negotiate" directly with drugmakers for medicines covered by Part D, in addition to inflicting automatic Medicaid rebates onto medicines for dual eligible seniors (eligible for both Medicare and Medicaid) as well as seniors who are eligible for low-income subsidies.

This is a bad idea. First, CBO has said that there is no evidence that HHS could get any better deals than the Part D Pharmacy Benefit Managers (PBMs) are getting, at least not without creating a restrictive drug formulary that would ration seniors' access to new medicines. Since Medicare accounts for about 25% of U.S. prescription drug sales, this would represent a tremendous blow to innovation, allowing some savings today in return for fewer medicines tomorrow - along with more unalleviated suffering and death.

The President is always talking about the need to invest in the nation's future "infrastructure," and Part D is a market-based investment in America's ability to continue to produce cutting edge medical advances. It's a program with a proven track record of high satisfaction among seniors (about 90%), fiscal savings for taxpayers (about 40% below initial estimates), and promotes a much needed focus on competition and value in health care markets. Rather than figuring out how to gut Part D, we should be modeling the rest of Medicare around it.

Markets also show signs of developing new paradigms for cost control in areas that haven't seen much evidence of it in the past, like oncology. Take the recent decision by Memorial Sloan Kettering to not use a high priced colon cancer drug from Sanofi that doesn't (at least according to MSK) offer any advantage compared to existing colon cancer therapies like Avastin.

Individual cancer centers haven't normally entered into the cost debate, because they are directly reimbursed by Medicare at cost-plus, a 6% mark-up based on the average price of the drug. Kudos to MSK for pushing back, and getting a price concession from Sanofi.

This is the way markets are supposed to work, with providers, insurers, and manufacturers negotiating in an open market. Insurers can then compete on price and quality for consumers' business - something that doesn't happen much in Medicare outside of Part D and Medicare Advantage plans. Instead, most seniors opt for fee-for-service health care provided by any willing provider, no matter how inefficient or expensive. Until seniors have better incentives to actually shop for value, Medicare won't be able to consistently deliver high quality, cost effective care.

For all of the bad press that drug companies get, pricing for pharmaceuticals is actually much more competitive and transparent than in many other parts of the health care sector (like surgery, for instance), because drug companies submit reams of data on product safety and effectiveness when they submit New Drug Applications to the FDA. This data can then be mined by insurers and PBMs to create drug formularies and tiered pricing arrangements for consumers. Also, when drugs lose patent protection, they become cheap generics, generating massive cost savings for the health care system while still delivering enormous benefits.

But this all depends on companies being able to recoup their massive costs in drug research and development during the relatively brief time their medicines are still protected by patents. Price controls for Medicare Part D would undermine incentives for innovation - without encouraging providers to create better bundles of care that would also include drugs, tests, physician services, etc.

In other words, we shouldn't be setting prices in any discrete health care silos (for drugs, hospital care, etc.) if we want to generate maximum value for seniors and taxpayers.

Medicare's history of price setting has unleashed a tsunami of unintended consequences across the health care system, since it is the nation's single largest health insurer. As the HHS inspector general noted recently, providers are in the habit of gaming Medicare reimbursement costs ("upcoding") to maximize reimbursements.

As a result, under Medicare's administered pricing scheme we get both too little of some services (that are poorly reimbursed) and too many of other services (that are overcompensated). Medicare can never find the "right" price, because providers have much more fine grained information about the costs of their products and services, and their own patient mix, than Medicare does. The result is a game of Medicare price whack-a-mole that never really controls costs or offers consistently high quality care across Medicare's vast universe of doctors and physicians.

Since premium support is likely off the table for the time being, there are still many other things that Medicare can do to improve care coordination and value. We should bundle Medicare services by putting Parts A&B together, with one premium for seniors, which would encourage providers to better coordinate care. We should allow administrative services organizations (ASOs), widely used by large private employers, to set up networks of preferred providers in Medicare, and offer seniors incentives - through reduced co-pays or enhanced benefits - to utilize low-cost, high quality providers.

ASOs could also represent an appealing ideological mid-point between premium support, traditional Medicare FFS, and Medicare Advantage plans. The key would be to bundle payments and have all providers "go naked" on their outcomes data so we have some correlation between the money spent and actual performance. Additional, web-based tools could then help seniors find the providers who offered the best care at the lowest cost.

Indeed, this approach is already being tested by United Healthcare at a number of oncology centers around the country. In an effort to control costs of cancer treatment, the insurer will provide up-front payments for a typical 6 to 12 month course of treatment, and allow the oncologist to determine the specifics, rather than paying by volume of care.

UHG oncology pricing.jpgAn earlier study published in the Journal of Oncology Practice found evidence to support this type of approach, identifying some $9,000 in savings for patients on evidence-based pathways in the treatment of lung cancer, with little change in 12 months survival rate. Studies like this can provide a benchmark for weighing how different treatment strategies and practice designs affect the cost of care and health outcomes and - most importantly - inform patient choice in the oncology setting.

UHG Oncology outcomes.jpgACOs, traditional insurers, physicians groups, etc. could all bid to create these types of networks, available on the same type of exchange mechanism used in Medicare Part D. The upside of this approach is that providers will finally have better incentives to offer the best bundle of care for seniors, rather than perennially lobbying Medicare and Congress for this or that billing code or reimbursement tweak (think SGR). For more information on how this might work, see my colleague Avik Roy's discussion of ASOs on his Apothecary blog.

There are very few true pricing signals available to seniors in Medicare today. Without those signals, Medicare will inevitably drag the rest of the economy over a fiscal cliff, no matter how many price controls Congress mandates for the program.

The nation's largest private employer, with some 1.4 million workers, just announced looming increases in healthcare premiums for its workers as a result of rising healthcare costs. While the increases are expected to be lower than the national average, for Wal-Mart's relatively low-paid workforce, the increases can mean the difference between signing up for coverage or not.

Indeed, many workers will choose to forego health coverage; these workers will either end up on Medicaid rolls or at the yet-to-be-established state health insurance exchanges - in either case, much of the cost will be footed by taxpayers. However, tempting as it may be to pin the rise in premiums to the Affordable Care Act (the ACA or Obamacare), the most pernicious regulations - essential health benefits, community ratings, the health insurance premium tax, and the individual mandate have yet to enter into force.

Where the healthcare law's immediate impact is beginning to emerge, however, is in employment decisions.

Prior to the passage of the ACA, Wal-Mart offered insurance to those employees that worked at least 24 hours a week. However, under the law, employers are only required to provide insurance to those working 30 hours or more, meaning that those who don't (or can't) work 30 hours a week, will be left without insurance. Moreover, it will give Wal-Mart and other employers more incentive to keep existing workers part-time, cut other workers' hours, and hire part-time rather than full-time workers.

The last point isn't merely speculation, either. Earlier this year, Darden Restaurants and Sears announced cut-backs in employee hours to avoid the ACA's mandate. Other firms have been taking similar actions.

The ACA may be "law of the land," but it doesn't inoculate against basic economic principles. Firms are beginning to react to over-regulation, and will continue to do so as more parts of the ACA come into play.

Last month I wrote a blog entry on this site entitled Inderal Indatoilet, which discussed two studies that seemed to indicate that beta-blockers--a class drugs used for many years to treat patients with heart disease and high blood pressure--may not work at all.

My expanded op-ed on this surprising development was just published in New Scientist Magazine.

Among the new catchy tech terms of the past decade is one with many lessons for the future - "Big Data." Essentially, it refers to datasets so large and complex, that processing them requires a huge amount of computing power. More importantly, big data brings new ways to model past trends more accurately and make ever more accurate predictions for the future.

The 2012 election should push big data even more into the spotlight - Obama's campaign team raised $1 billion not by repeating their 2008 approach, which was successful, but still flawed, but by taking a new "measure everything" approach. They tested whether phone calls from a swing state were more effective than calls from a non-swing state, whose emails performed best in which season, and allocated resources based on computer simulations of the election. To make it all work, the campaign hired an analytics team was twice the size of what it was in 2008, with a "chief scientist" who had experience crunching huge data. It was this fine-grained approach to campaigning that helped the President land his second term in office; something the GOP has yet to learn.

Big data also proved useful in predicting the election results - long criticized by both sides of the aisle, Nate Silver, a statistician and political analyst, correctly predicted every single state's votes this election season, and the 2008 election with extreme accuracy. Silver's model eschews the conventional wisdom of the industry that follows day-to-day poll results and instead uses various factors - economic and others - that have influenced election outcomes in the past, to make rational, and surprisingly accurate projections.

But big data isn't unique to political analysis - far from it.  In fact, its application in other fields may be even more intriguing and beneficial.

A natural candidate is the bio-pharmaceutical industry, where a huge drop-off in patents along with increased clinical trial costs have left a void that big data can help to fill.

Recently, GNS Healthcare, a big data analytics company, announced that it is partnering with Mount Sinai School of Medicine to develop a big-data-based computer model of multiple myeloma - a rare bone cancer that can require a bone marrow transplant to treat. Researchers will use the model to help study new potential targets and tailor prospective treatments to each patient.

This approach, which uses computerized models based on clinical data, offers a cost-effective, efficient way forward to developing new treatments for diseases, particularly orphan diseases - those that occur in fewer than 200,000 individuals in the U.S., making typical randomized clinical trials difficult and extraordinarily expensive.

While ten years ago, processing power would have been a roadblock, now only regulatory barriers exist. The FDA has yet to fully embrace the big data revolution, and still relies mostly on outmoded clinical trial guidelines (with the exception of some cancers and HIV drugs). Large-scale clinical trials were suitable for dealing with infectious diseases of the past, but complex chronic diseases - cancers, Alzheimer's, and various neurological ailments, require a new approach. Allowing drug developers to apply big data methods to find molecular targets and match them to patients based on electronic medical records will open a new frontier in drug development (see my colleague Paul Howard's discussion of personalized, individually tailored medicine and its application to oncology).

What are the hurdles here? Standardizing electronic medical records to carry genomic or other biomarker data; getting more patients to agree to allow their data to be "mined", with appropriate privacy protections; and building the databases that will allow practicing oncologists to access the latest research in real time.  Data, after all, is a two way street, flowing up from patients and doctors, but flowing back down again as researchers plumb cancer's complex molecular networks.   

Utilizing "Big Data" would allow drug companies to cut the costs of development and focus on many more prospective drug candidates, as well as weeding out ineffective compounds faster.  And better targeted medicine translates into better value for patients and payers.

Regulatory reform along these lines would also send a broader signal to pharmaceutical companies that the U.S. is committed to remaining at the cutting edge  of pharmaceutical development, ensuring that the associated benefits - first access to novel drugs and sustained domestic R&D - accrue to Americans.

As the Affordable Care Act's, aka Obamacare, rules edge ever closer to reality, one rule in particular is already beginning to affect business decisions.

In 2014, the rule that requires large employers to provide health insurance to full time employees or pay a $2,000/worker penalty, will go into force. In anticipation, some employers such as Pillar Hotels & Resorts (parent company of Sheraton hotels) are considering shifting more employees to part-time positions, to avoid falling under the rule's purview.

Alan Gladstone, CEO of Anna's Linens (with 1,100 employees), was cited in a WSJ article today, which explained that:

[T]he costs of providing coverage to all 1,100 sales associates who work at least 30 hours a week would be prohibitive, although he was weighing alternative options, such as raising prices.

While health insurance costs are only one part of a corporation's cost equation, and employers like Costco (which already provides health insurance to most employees) are unlikely to make any changes, any move towards a "part-time economy" is dangerous, particularly for young and low-wage workers who are trying to climb the economic ladder. In a 2010 report, the CBO confirmed that Obamacare's policies will have a tendency to hit low-wage workers the hardest, as firms will respond by "hiring fewer low-wage workers" or "[hiring] more part-time or seasonal employees," in lieu of full-time workers.

Although the job gains from September looked great on paper, the unemployment rate drop below 8 percent belied a perverse "new normal" - most of the jobs "created" were part time. As Mark Perry at AEI ideas, noted, the October report marked the highest employment level of "temporary help services" since 2008.

While increase in part-time employment versus full-time employment may be a symptom of a slow recovery, Obamacare's perverse incentives to employers threaten to strengthen that symptom into a chronic condition of the national economy.

My article discussing the drug company KV Pharmaceutical and its drug Makena was published today by the Library of Economics and Liberty. Here's the blurb:

Since 1938, the Food and Drug Administration has required that pharmaceutical drugs be proven safe before they are allowed to be sold. In 1962, Congress added a requirement for proof of efficacy. So you would think that the FDA would be a strong enforcer of those requirements, right? Well, not in one case. Despite the law, the FDA, pressured by Congress, refused to enforce the standards on companies that made one particular compound. Thus, via a bait-and-switch tactic, the FDA pushed the only company actually following the rules into bankruptcy. Read on.

National Public Radio (NPR) is apparently 'baffled' at Governor Romney's claim that doctors will begin seeing fewer Medicare patients as a result of the Affordable Care Act (ACA). Romney is being, at best, untruthful according to Harold Pollack, a public health policy professor at U-Chicago. According to professor Pollack, the ACA does "nothing" to cut physicians' fees.

Let's look at the facts.

As part of the $716 billion cut to Medicare, about $415 billion comes from reductions in the annual updates to Medicare's payment rates to providers. These cuts include reductions in hospital service payments, home health services, and others.

Certainly, as Pollack notes, the problem with Medicare payments predates the ACA. As I explained in a previous post, cuts to Medicare's Sustainable Growth Rate (SGR) have been looming over physicians for a long time, despite being postponed through Congressional action. However, this doesn't change the fact that the ACA cuts in Medicare reimbursement rates are very real and will affect patients' access to care.


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