February 2013 Archives


In the past month, analysts, pundits, bloggers, journalists, economists, politicians and everyone in between has had a chance to voice their opinions on the CBO's latest budget outlook. For wonks, these updates are like scripture - but of course, as all other mere mortals, even policy wonks fall prey to confirmation bias. That means that we often choose to ignore the parts of these reports that make our preferred policies seem less appealing or we try to rationalize them away.

And it turns out that one critical part of the budget outlook has been ignored by those on the left.

A favored argument against deficit reduction is that we can't cut our way to growth - indeed, President Obama said as much in his State of the Union address. Some on the left have taken this argument further - Paul Krugman, the Nobel prize-winning economist often launches into diatribes against the conservatives' push for austerity and in favor of more government spending - as long as we have near zero percent interest rates, the argument goes, we should be borrowing like mad. (Almost) free money is a tempting mistress.

On the surface, this would appear to be a solid argument. But what does the CBO say about it?

At current projections, net interest costs will rise from 1.5 percent of GDP in 2014, to 3.3 percent of GDP by 2023. This assumes that CBO's current projected interest rates remain on track - 4 percent for 3-month t-bills and 5.2 percent for 10-year notes. This alone should be a cause for concern - rising interest rates keep domestic investment down as more borrowing happens from abroad and more of the federal budget is devoted to paying down interest. A vicious cycle ensues as interest rates go up because of growing federal debt. Under normal economic circumstances, this may not be a problem - when interest rates are low, inflation and GDP grows; interest rates are then driven up in order to keep the growth stable and moderate the eventual downturn. But we are now at a point with near-zero interest rates and near-zero inflation - far from ideal, which means that interest rates are certainly something to be worried about.

But the CBO offers one piece of advice that seemingly, no one on the left chooses to heed:

If interest rates on all types of Treasury securities were 1 percentage point higher or lower each year from 2014 through 2023...for the 10-year period would be about $1.1 trillion  higher or lower (excluding the additional costs of servicing the federal debt).

This means that if interest rates on 3-month bills hit 5 percent while hitting 6.2 percent for 10-year notes, non-interest spending would be over a trillion dollars greater over 10 years - an extra $100 billion in spending annually! 

Krugman's "don't worry, be happy" attitude towards interest rates might be defensible if current U.S. borrowing was being used to fund innovation or growth. But the money we're borrowing now isn't being invested in areas that are likely to spur higher productivity or GDP growth later - it's being invested in health care, a sector notoriously resistant to productivity gains.   In fact,  cumulative spending on government health care programs by 2023 will be the single largest source of federal spending.

Cumulative Spending (2014-2023) in $trillions 

Social Security

$11.1

Health Care

$13.9

Income Security

$3.3

Federal Civilian & Military Retirement

$1.8

Veterans

$0.96

Other Programs

$0.56

 Source: CBO 2013 Budget and Economic Outlook; Table 1-3

Even when accounting for offsetting receipts in health care programs (like Medicare premiums), the cumulative total comes to $12.2 trillion.

Health care programs are largely what drive the national debt - this has been acknowledged by CBO and other analysts time after time.

If the cost of borrowing rises even a smidge above CBO's expectations (1 percentage point) - these programs can wreak even more havoc with the federal budget. Stemming the growth of major health care programs is even more critical now, when interest rates are low, and national health care spending has slowed somewhat. Addressing the cost of the "doc fix" for instance, now stands at $138 billion plus $29 billion in debt service. An increase in the interest rate of one percentage point above CBO's projections (between a 19 and 25 percent increase in borrowing costs) would increase the debt service portion to between $34.5 billion and $36.25 billion over 10 years - and this is just for one relatively inexpensive fix to Medicare.   

Capping federal health spending would also free up more money on the kinds of investments that Professor Krugman likes - and that Republicans might find more palatable. 

In the meantime, President Obama and supporters want to shield health programs from additional cuts.  It's a $1 trillion gamble.  Who would take that bet?


American doctors make significantly more than their European counterparts - in 2008, an Orthopedic physician in France averaged $154,000 annually; in American, it's almost three times as much at a whopping $442,000 - and this is after adjusting for costs of living. And a common refrain from those concerned about America's health care spending is that these doctors are significantly overpaid. Matt Yglesias at Slate argues this in two posts, coming to the conclusion that Medicare's monopsonistic position should be used to "negotiate" down doctor's salaries:

But when it comes to the question of health care costs overall, Medicare is the solution. Its vast bargaining clout lets it get much better prices than any private insurer, and we should be relying on it more to pay our bills, not less.

It makes sense to start with one of Yglesias' first comparisons - the U.S. versus Canada. He notes that while American doctors get paid quite a bit more than Canadian doctors, Canada has 25% more doctors' consultations per capita than America. He also briefly mentions "overprices" for medical equipment and pharmaceuticals as other cleavages between us and Canada, but not surprisingly, leaves it at that.

If there's a bell going off in your head right about now, there's a good reason. Canada has one of the longest waiting times for elective surgery in the OECD - in 2010 25 percent of people that received elective surgery had to wait more than four months for it! In the U.S., this is a mere 7 percent. The comparison also holds when looking at waiting times to see specialists. This is an important tradeoff - if you want more government sponsored health care, or at least more intervention, you will likely see reduced access.

But this doesn't change the fact that American doctors do get paid a lot more than those in other countries - this alone, however, isn't terribly problematic. Wage variations among countries exist - American office clerks make about 20 percent more than British office clerks; meanwhile, British firefighters make about 13 percent more than French firefighters. Does this mean we should "bargain" down the salaries of British firefighters or American office clerks? There are literally hundreds of reasons that certain jobs have wage variations among similar economies - unionization, differences in work weeks, or the amount of training required - these factors can and do affect wage differences. The last point is especially salient in explaining the American variation - American doctors face the largest barriers to entry, in terms of the amount of education required (minimum of 11 years including undergrad for a general practitioner), licensing exams, and the steep cost of a medical education. Given that we are already facing a shortage of GPs, it seems unwise to focus on restricting their salaries. (Although, part of this shortage would certainly be explained by Medicare's hugely specialist-skewed reimbursement rates).

The other point that should be skewered is that Medicare is "cheaper" than private insurance. Part of this argument stems from the statistic that Medicare's administrative costs are a mere two percent. The first problem is that this only uses one measure of Medicare's administrative costs - the one published by Medicare's trustees. In reality, there are two different measures - one from the National Health Expenditure Accounts and the other from the trustees. The former shows Medicare's admin costs growing to about 6 percent in 2010; the latter shows them at less than 2 percent in 2010 - quite a large variation. But even with these two divergent measures of admin costs - one important source of costs is excluded: fraud and waste. The GAO has routinely found that Medicare and Medicaid (with Medicare making up more than half) made about $70 billion in improper payments in 2010 - close to 10 percent of the two programs. Other estimates by the RAND Corporation, however find that fraud and abuse may be as high as $98 billion in the program. The second problem with thinking that Medicare is cheaper than private insurance is simply that it isn't - the latest Health Expenditure Accounts show that benefits provided by Medicare cost more than twice the same benefits provided by private insurance. The overall point is that not counting the fraud rate or these per-enrollee costs paints an incomplete picture of Medicare - to no one's benefit.  

Yglesias comes from the perspective that Medicare's reimbursement of physicians is more in-line with their actual costs and reducing all-around reimbursement to those levels would help shave down health care spending - but this looks at Medicare in a vacuum. The literature has found that hospitals respond to lower Medicare reimbursement by shifting costs to private insurers (in a competitive market they focus on cutting costs, but other literature has indicated that hospitals often operate in more concentrated markets). Indeed, what Yglesias seems to miss is that Medicare may very well drive part of the growth in health care costs by shifting them.

To his credit, Yglesias touches on some important physician-related reforms - he acknowledges that medical school is extremely expensive and that addressing malpractice reform can encourage more people to become doctors. But he stops short of real reforms - reducing the requirements to become a GP; fixing Medicare's terrible specialist-skewed payment model; and aligning Medicare away from the ACO model which encourages consolidation (and drives up costs). These reforms would begin to address both the supply (barriers to entry and consolidation) and demand (Medicare's payment model) side of the equation in a meaningful way.


The U.S. spends a lot of money on prescription drugs. Since 1980, this spending has grown over 1,400 percent and recently, it has emerged as a newfound concern, with some on the left calling for price controls to stem this growth. But other ideas have also permeated into the health care debate - one in particular is concerned with pharmaceutical advertising and promotion. The U.S. is one of the only countries in the world that allows direct to consumer advertising, and pharmaceutical companies routinely argue that advertising directed at consumers and at doctors has important benefits - it increases communication between the physician and the patient, and educates patients and providers on what may or may not be appropriate treatment options. Others, however, maintain that pharmaceutical advertising drives up drug costs and increases utilization of brand-name drugs over generics.

So who's right?

A study by Bentley University economist, Dhaval M. Dave, reviews a wealth of literature on the issue and finds that "pharmaceutical promotion has effects which can be health-promoting and welfare-enhancing," while also cautioning that there may be "adverse effects through potential over-treatment, cost-ineffective substitutions, and potential misuse." Indeed, Dave's review finds that at most, direct to consumer and direct to physician advertising may slightly raise drug prices, but certainly not at rates to be concerned about.

But what about the market for new drugs? Certainly, there may be anti-competitive impacts from this kind of communication. Here too, Dave finds that the evidence generally shows no strong impacts on generic deterrence. Indeed, because direct to consumer advertising provides low-cost information (relative to the high cost of seeking out on your own, there may be pro­-competitive impacts that increase the number of new products in development. This likely also makes consumers more price-responsive which can help mute some of the impacts of price increases.

The last point, but arguably the most important is that of patient welfare. On this point, the evidence is also generally in favor of the advertising - the findings indicate that patient and physician advertising helps educate both; in particular, because patient advertising is often directed at underprivileged groups who often have under-treated diseases, the positive education impacts on these groups may be especially salient. Essentially, direct to consumer advertising may help alleviate health-related disparities.

As with any studies, there are of course limitations that are likely to persist - primarily, most studies will have issues of endogeneity; advertising impacts price and demand for a drug - however, promotion is likely a function of revenues as well (which themselves are a function of demand); one study applies a dual-stage model and another uses instrumental variables to attempt to account for this simultaneity and reverse causality - but these introduce other limitations.

Overall the economic literature points to the fact that increased pharmaceutical communication is generally good for doctors, patients, and the market itself - and this applies to off-label use as well. As my colleagues at the Manhattan Institute, Paul Howard and Jim Copland, have written:

[T]he FDA should adopt a "safe harbor" to allow drug companies to communicate truthful information about off-label drug use to physicians...to improve medical research and public health by increasing learning about what happens after drugs are licensed and making the best use of pharmaceuticals on the market.

This holds true for off-label and on-label use - the more that the public and physicians know about new and existing drugs, the better off patients will be.

Drowning in Morons
| 3 Comments

My organization, The American Council on Science and Health is conducting a pilot program to see if we can better spread our message via a Facebook campaign. So far it is going very well.

I am managing a page called "Infectious Diseases and Vaccines." I suggest you check it out. Entertaining and informative, in my humble opinion.

The good news is that the process is quite interactive and I have numerous opportunities to interact with the public.

The bad news is that the process is quite interactive and I have numerous opportunities to interact with the public.

Because over the past few weeks I have been exposed to such an array of stomach-churning idiocy that my Maalox budget for the whole year is already shot.

So, I thought I'd share. They are ordered in inverse proportion to the pH of my stomach when I first read them. Hope you have a robust digestive system.

1. I posted an amazing photo of an HIV-infected Kenyan man, showing him obviously near death in 2005, and looking like a triathlete in 2012--after he had been treated with antiretroviral drugs. There is no debating this photo or the miraculous transformation that took place. Or is there?

Some guy named Brian commented: Watch the "House of Numbers" He will succumb to liver failure due to the "wonder Drugs!"

Me: Hey Brian- You might want to bone up on your risk/benefit logic. Let's see: If he doesn't take the drugs he's dead 7 years ago. If he *does* take the drugs, he may or may not run into liver problems (and this is doubtful anyhow) X number of years from now. Don't know what you do for a living, but I hope it isn't practicing medicine.

Brian apparently doesn't know when to quit when he's behind: I am not a Dupe of Big Pharma, A yep! I practice Medicine! Likewise I hope you don't attempt the practice either!

Me: Brian- I am not a dupe either, although given the choice of being a dupe or a dope, I would choose the former. I'm going to go out on a limb and guess you are a chiropractor with an irrational anti-drug bias. But just in case I'm wrong, and you somehow have a medical degree (and may god help your patients), answer the following: if you have a patient who was infected with HIV, what would you do?

No more from Brian.

What will Brian come up with next? Here's my guess: "Hmm, I better not pick up this 20 dollar bill on the street, because if I do, I may stick it in my pocket for 7 years, then discover it and use it to buy a pastrami sandwich which might choke me to death."

2. Courtesy of Nancy: "I believe that the pharmaceutical industry has a cure for cancer, but keeps it secret so they can sell chemotherapy drugs."

I don't know why I'm even bother to humor her, but here goes. In order for her statement to be credible, all of the following criteria must be met:
a) The pharmaceutical actually has the knowhow to cure cancer. Not quite there yet. Having done oncology research I can safely say that they are just about as close to curing cancer as they are to curing death.
b) The shadowy executives that are withholding this cure obviously care more about money than the lives of their families (and themselves)-- many of whom will die from cancer.
c) The tens of thousands of scientists who have found this "cure" have all decided not to leak this information because they are afraid to lose their jobs--something which is happening anyhow.
d) You must be a moron.

Advice to Nancy: I read that the CIA has hidden a microchip in your toaster, which takes pictures of you when you are naked. You better check this out ASAP.

3. Saving the best for last, there is Tom. He is apparently not a big fan of vaccines. He's also not infatuated with our government:

"If Vaccines worked the Pharmaceutical companies would be cutting into their profit."
Comment: I have no idea what he's talking about.

"I don't wanna face a "REAL" virus if I was ready for the Dumb down version.."
Comment: I think he got his wish.

"I am not a Sheeple.... I have a brain free of Fluoride too..."
Comment: Fluoride is just one of many things Tom's brain is free of.

"9-11 was an inside job..... buy [sic] the U.S. Government, Buildings don't fall like that. building # 7 fell for no reason..."

Comment: Tom apparently needs a little vacation in the Rubber Ramada. I wish him well.

Seriously, it is more than vaguely disturbing that there are plenty of people out there that actually believe this stuff. And they are allowed to vote. And breed.

And people wonder why the U.S. ranks 27th out of 29 developed countries in the proportion of college graduates with degrees in science and education.

Too bad the pharmaceutical industry is also withholding a cure for idiocy. There is quite a market.


terminator-medic.jpg

In a brilliant op-ed at the Wall Street Journal, Harvard Business School professor Clayton Christensen &co. make the point that the American healthcare system needs a strong dose of disruptive innovation to start addressing the issue of costs. At the core, he writes, the problem with the ACA is that Accountable Care Organizations "most assuredly will not...deliver [this] disruptive innovation."

Christensen is definitely on to something - particularly when he recognizes the importance of technologies that allow price and quality competition (such as telemedicine) to give more control over health care decisions to patients. And it shouldn't be surprising that a recent foray into this market has arrived at Wal-Mart.

The super-retailer already offers retail walk-in clinics at many locations, with low-cost services that include vaccinations, blood sugar testing, and cholesterol screenings. But it seems this was only the beginning for Wal-Mart. The cheaper a technology is (assuming equivalent quality), the more disruptive it is. What's cheaper than free? In October of last year, the retailer partnered with Solohealth, a company that develops retail "health stations" that offer basic medical tests, to install hundreds of the health stations at its retail locations.

These health stations will allow Wal-Mart customers to run basic tests like a vision and BMI check at no cost. Based on the test results, the health station will spit out a list of doctors in the surrounding area that the customer can go see. Certainly, this is a brilliant move on Wal-Mart's part - you probably rarely go to the doctor, but you're at Wal-Mart pretty often. But more than that, this echoes Christensen's point about disruptive health care innovation - while these health stations won't replace a doctor (and are not a panacea for growing health care costs), they're a great step towards more efficient use of health care resources. It isn't a stretch to imagine similar health stations offering quick and cheap video calls with doctors to answer some basic questions. Looking further down the line is even more exciting - algorithms and whole language machine learning are making computers as smart (or smarter) than the best human doctor (think of the holographic doctor in Star Trek Voyager).  And the cost of sending these "doctors" to medical school is essentially zero for the marginal patient. But one step at a time.

By ensuring that these health kiosks will be at one of the world's largest retailers, people may even start thinking about health care a little differently. Right now, when someone thinks about health care, they don't think of it as a commodity - you don't pay for it; your insurance company does. When you see your doctor and he tells you that you have a cold but he'll prescribe antibiotics anyway "just to be safe" - you don't ask why. And part of this is due to the informational asymmetry inherent in health care - let's face it, the doctor is a professional and holds a wealth of knowledge about human physiology that you, as a consumer, likely don't have. But that doesn't mean you can't be a little more educated. When you go to get your car fixed after a fender-bender and one body shop quotes you $500 and another quotes you $1,000, you'll probably feel comfortable enough asking why. When it comes to medicine and health care, we don't have that same comfort. And though it may be too early to start jumping for joy, greater commoditization of health care is a terrific way to slow future cost growth and maybe, just maybe, have more educated patients.

Image source: http://conflicthealth.com/robo-medics/


To put it bluntly - duh.

The FDA just approved the first-ever "bionic eye" for patients with retinitis pigmentosa, a rare genetic eye condition in which the retina deteriorates over time. The Argus II Retinal Prosthesis System (Second Sight, the developer, should have hired a better marketing department) comes with a pair of eyeglasses that has a video camera attached. This camera wirelessly connects to an artificial retina implanted into the eye, which bypasses the original, deteriorated retina. Though the Argus II doesn't actually restore sight - hence, not a cure, per se - it allows patients to distinguish between light and dark in the environment, helping them get around.

This is surely a cause for celebration for patients with what is otherwise untreatable blindness, and the researchers who developed the artificial retina hope that in the future, they will be able to use the device to treat all causes of blindness including macular degeneration (affecting some 2 million people in the U.S.).

The device was approved under the FDA's "humanitarian use" pathway, which is used to rush approval for devices that that treat a condition in fewer than 4,000 people per year; the condition must also have no alternative treatment available. And the Argus II certainly qualified - RP is a condition present in less than 1 in every 4,000 Americans.

The clinical study for the device included only 30 patients - most of them were able to perform basic activities much better, and only 11 experienced serious adverse effects. This should be great news for those concerned with the FDA's regulatory burdens, but there's more that can be done. (One bit of news that's not so great, though, is that Europe has had the Argus II for a year already).

There's no reason why a "humanitarian use" pathway should apply only to such the small number of conditions that affect 1 in 4,000 Americans - surely, many patients who suffer from MS, ALS, Alzheimer's and a slew of other chronic conditions would be willing to accept certain risks to potentially treat their conditions (even though treatments exist, they are often ineffective). The humanitarian use pathway should be expanded - if a patient, with consultation from his doctor, of course, decides that the potential benefits of an untested treatment outweigh the risks (communication with pharmaceutical and biotech companies is critical here) - there is no reason why the treatment shouldn't be made available. And the results of the treatment, whether good or bad, should be recorded for use in future clinical trials.

We are at a potential watershed moment for the FDA - the organization has acknowledged that it has a problem with clinical trial designs and limited approval pathways. And to the agency's credit, a few other pathways - the accelerated approval, priority review, and fast track designations have worked very well. More recently, the FDA accepted comments on development of a new pathway geared towards life-saving drugs, with a focus on antibiotic-resistant bacteria. In short, there is progress at the agency. The FDA should take note of the successes of its existing pathways and allow more drugs and devices to receive the appropriate designations, thus expanding the designations to broader populations.


In an issue brief for the left-leaning Centre for Economic and Policy Research, economist Dean Baker resurrects the idea that Medicare should "negotiate" (read set) prices for drugs. After all, if other federal health insurance programs require mandatory "rebates" for prescription drugs - the Veterans Administration and Medicaid, for instance - why shouldn't Medicare?

Baker's analysis largely focuses on cross-country comparisons with several countries that set prices for prescription drugs - Canada, Denmark, Japan, the Netherlands, and the UK - all of whom spend significantly less per-capita on prescription drugs than the U.S. He concludes that that through "negotiation" with drug companies (cleverly, he never uses the less palatable "price controls") we could save anywhere between $309 and $726 billion over 10-years - savings which would accrue to the federal government, states, and to individuals.

To his credit, Baker at least tries to rebut the pharmaceutical industry's argument that price controls would stifle innovation. According to Baker, strong patent protections (which give companies monopoly pricing power over their products) lead to a more corrupt drug industry, which in turn leads to dangerous drugs being approved (like the recent Vioxx scandal). He offers a proposal by Nobel Laureate Joseph Stiglitz as an alternative - that clinical testing of drugs should be financed entirely by the government, which he thinks would nullify the pharmaceutical industry's argument that patents are required to recoup the high costs and enormous risks required to bring new medicines to market.

(This is a bad idea layered on top of another bad idea. A bad idea sandwich. This would put the government in the position of both paying for new medicines and funding the clinical trials to test them, creating a massive conflict of interest, since approving fewer new medicines would also lower government expenditures. And the process of choosing which medicines to take through clinical trials - ED drugs, HIV, cancer, diabetes - would become hopelessly politicized by Congress.)

Still, Baker's love of price controls is clearly popular with the White House. The president voiced support in his SOTU address for health care cuts similar to Simpson-Bowles (which also included Medicare Part D price controls), and claimed that paying drug companies market prices through Medicare Part D is tantamount to a subsidy.

For what it's worth, Baker's paper is correct (or at least strictly tautological) in its assessment: if the United States were Canada, or Denmark, or Japan, we would pay for drugs like Canada, Denmark, or Japan - and probably pay lower prices. But that's not the case.

The U.S. is different in more than just how we structure our health care system. The U.S. is different in its demographics, per-capita income, social attitudes, and income distribution. All of these are areas where the U.S. varies tremendously with its OECD competitors, and these are salient factors when it comes to evaluating at U.S. health spending.

With that in mind, it is worthwhile to address some of the faults in Baker's assessment.

Comparison of Per-Capita Spending

To compare other countries' spending with that of the United States', Baker looks at PPP (purchasing power parity) adjusted per-capita spending levels on prescription drugs. Certainly, this offers an interesting comparison of prescription drug spending across countries while holding constant purchasing power (essentially what one American dollar buys elsewhere - hint: it buys less health care but more of other goods). But this ignores potential differences elsewhere in the health system - for instance, it may be that higher prescription drug spending reduces spending in other categories (as the CBO has seemingly, though not explicitly, taken into account in their modeling efforts).

For instance, it turns out that the U.S. tends to spend significantly less than Denmark, Canada, or the Netherlands (Baker's OECD sample choice) on long-term care services for the elderly.

percap_nursing.png

Source: OECD StatExtracts http://stats.oecd.org/Index.aspx?DataSetCode=SHA# 2010;
Note: latest data for Japan was 2009; UK Data was unavailable

Does this necessarily mean that these other countries should work to reduce their spending on long-term care? Not really. Demographic needs and provision of healthcare should (and do) reflect country specific policy and political choices - not rote conformity with economic peers. One size really doesn't fit all.

But this argument probably won't assuage those concerned about pharmaceutical price-gouging - so let's look at the issue from a different perspective. We already know that the U.S. spends more on healthcare as a percent of GDP and per-capita than any other OECD country. But what about the share of total health spending represented by prescription drugs?

drug_percent.png

Source: OECD StatExtracts http://stats.oecd.org/Index.aspx?DataSetCode=SHA# 2010;
Note: latest data for Japan was 2009; Netherlands & UK data on drug spending was unavailable

Here, America's spending on prescription drugs as a share of total health spending is lower than both Canada's (by 40%) and Japan's (by 80%). It's also about two-thirds higher than Denmark's. Again, per-capita costs only provide a crude comparison for health system comparison that doesn't take into account total spending, and the share of prescription drug costs as a burden on the health system as a whole. We might spend more on prescription drugs, but it's also far from the real sources or drivers of U.S. spending considered as a whole - well worth taking into account if you're really concerned about the drivers of U.S. health care spending (as opposed to just singling out a politically convenient industry).

The last aspect of these cross-country comparisons that Baker fails to address is the makeup of prescription drug spending. Who ultimately pays for the drugs? (Baker takes this into account when projecting U.S. savings, but assumes that the makeup would remain the same - probably an unrealistic assumption).

how_we_pay.png

Source: OECD StatExtracts http://stats.oecd.org/Index.aspx?DataSetCode=SHA# 2010;
Note: latest data for Japan was 2009; Netherlands and UK data on drug spending was unavailable;
U.S. data from CMS's National Health Expenditure Tables;
Japan's data does not sum to 100% due to rounding

In fact, when looking at who ultimately pays for prescription drugs, the relative share of spending varies significantly by payer. Likely, to imitate a country like Denmark, the U.S. government's share of spending on drugs would have to almost totally displace private insurance for prescription drugs. (President Obama or Baker might like this, but it's obviously a non-starter in Congress or for the American people.)

Without this shift, lowering prices for Medicare would just lead to a cost shift from public to private payers as drug makers tried to maintain their margins. In other words, employers and patients outside of Medicare would have to pay more, so that the government could pay less. There is no such thing as a free lunch, and so Baker's plan would be to leave someone else to pick up the check.    

Savings are Likely Exaggerated

Baker at least concedes that inflicting massive price cuts on drugs would hurt pharmaceutical innovation, and acknowledges that something would have to be done to offset the impact of the lost industry revenue. Implementing Joseph Stiglitz's proposal (aside from the bad features we mentioned earlier) would cost quite a bit of money and as such, that cost - at least tens of billions of dollars annually - should be deducted from any potential savings.

More on this point: A working paper by health economist Austin Frakt looks at potential savings from restricting Medicare's drug formulary to that of the Veteran's Administration (which is about 40 percent less generous, according to the authors). The results did find savings of about $14 billion if accounting for all Part D enrollees. But there is a significant loss of "consumer surplus" (the difference between what a person is willing to pay and what they do pay) to Medicare enrollees from reduced drug access - and because the authors assume that all drugs are valued equally between VA patients and Medicare beneficiaries (an important simplification), and the net savings are relatively small compared to the gross, these estimates are highly sensitive. In any case, Frakt et al's estimates are significantly less than those that Baker arrives at even over a decade. Certainly, the proposals are different - Frakt offers an operationally feasible proposal which would likely be a more realistic implementation of Baker's.

Finally, it is useful to look at the effects of price controls and restricted formularies on innovation (something that Frakt's paper doesn't explicitly address since it is cross-sectional in nature). In a 2005 report for the Manhattan Institute's Center for Medical Progress, Frank Lichtenberg, a Columbia University Economist, noted that after the VA tightened their drug formulary, VA patients' life expectancy may have declined because of reduced access to newer drugs for VA patients.

All in all, Baker's conclusion - that European-level price controls are compatible with saving money and sustaining innovation - is wildly optimistic.

Concluding Thoughts

Price controls have been shown to stifle innovation, and shifting to a European-based system would require numerous other changes to our health care system, and indeed, our economy as a whole, that would be innovation dampening.

Broadly speaking, European price controls are sustainable (at least in the short term) because the U.S. still allows something close to market pricing. As in the case of global defense spending, Europe can afford to pay much, much less, because the U.S. spends more - proving a global security umbrella.

 If the U.S. were to sharply reduce spending on prescription drugs, Europeans would have to pay much more, or global pharmaceutical innovation would decline sharply. If nothing else, access to new drugs would suffer tremendously as a 2011 essay in the Annals of Health Law notes:

The U.S. pharmaceutical industry has historically been characterized as the market-driven pharmaceutical system of the world...companies in the U.K. have endured profit controls...[this] has led to vast differences in the advancement of pharmaceutical innovation and to significant disparities in patient access to medicines.

Baker indulges in a favorite habit of the left - assuming that free lunches really are possible. In every other sector where governments have imposed price controls (food, housing, automobiles), supply, quality, and innovation dwindle sharply.

Pharmaceuticals may be an exception for the moment, because capital can still flow to jurisdictions (like the U.S.) where market-friendly rules still apply. Ironically, European price controls may benefit the U.S. by making America a destination for risk capital, and pharmaceutical R&D investment - along with the millions of jobs and the health benefits that come with enhanced innovation. Americans undoubtedly do pay more for drugs because Europeans pay less (economists call this third degree price discrimination) but the solution is to ask them to contribute more to global medical innovation, especially through bilateral trade agreements. The Europeans can free ride to some extent, but global medical innovation is lower than it would be if they were paying prices commensurate with their wealth level - and these losses are felt just as acutely by European patients suffering from Alzheimer's, cancer and other diseases.

America does need to rein in health care spending. The best idea in this regard may come from the bipartisan Simpson-Bowles Commission, which suggested capping federal health care spending growth at GDP +1%. (It also recommended Medicaid-level drug rebates for Medicare, but no plan is perfect). This would have the benefit of forcing providers and patients to shift towards the best mix of products and services. This might entail more use of pharmaceuticals, and thus more, not less drug spending but would also be welfare enhancing. Obamacare actually attempts something like this through its ACO model, and its selective productivity cuts to some Medicare providers. The problem is that policymakers insist on keeping their hands on the till, shifting the market to and fro based on the political winds of the moment.

It's a recipe for shipwreck, albeit a time honored one on the left. We can only hope that Washington has the foresight to recognize Baker's idea for what it is - a gross oversimplification that will only produce unwanted consequences. 


Paul Howard and Yevgeniy Feyman

For policy wonks, the words "Simpson-Bowles" hold a special place in their hearts. The commission, headed by former Senator Alan Simpson and former Clinton Chief of Staff Erskine Bowles, released a massive report at the end of 2010 that sought to completely eliminate the federal budget deficit by 2035 with a 2 to 1 spending/revenue ratio. The plan wasn't perfect, and ultimately didn't pass muster at the Senate, but many of the ideas it brought up were based on solid evidence with a real chance of achieving the broader budgetary goals.

One of the less palatable ideas proposed in the plan was to impose Medicaid drug rebates (price controls, in reality) for Medicare Part D for the dual-eligible population (those who are eligible for Medicaid and Medicare coverage). While it's been estimated that this plan could save $49 billion in Medicare spending, the impact on innovation could be significant - cutting prices for drugs dampens the incentive for drug companies to innovate. The dual-eligible population in particular often suffers chronic conditions for which innovative medicines are in short supply - these rebates wouldn't be of much help.

But bad ideas are like a boomerang - they always seem to return.

In his State of the Union address, President Obama characterized the price Medicare pays for drugs as subsidy to the pharmaceutical industry:

On Medicare, I'm prepared to enact reforms that will achieve the same amount of health care savings by the beginning of the next decade as the reforms proposed by the bipartisan Simpson-Bowles commission...We'll reduce taxpayer subsidies to prescription drug companies

To put it simply, paying the market price for a drug isn't a subsidy - it's business.

More importantly, however, by pursuing what are effectively price controls, the president is wasting a potential watershed moment for dealing with the dual-eligible population - a group of beneficiaries that account for 15 percent of Medicaid's population and 21 percent  of Medicare's population, but account for 39 and 36 percent of the programs' spending, respectively. Rather than focus on poorly conceived price controls (which will dampen the incentive to innovate and will likely shift costs to non-dual eligible) for a narrow population, the president should have instead announced a greater focus on care coordination and elimination of duplicative services for dual eligible.

Hiding behind the feel-good moniker of "bipartisanship" may help approval ratings, but it may leave dual-eligibles without the innovative drugs they need.


In a move sure to excite his base, President Obama recently declared that cuts to Medicaid are off the table, while simultaneously ruling out savings of over $100 billion to Medicare achieved through raising the eligibility age.

No doubt, in the State of the Union tonight, the president will say that he's still open to making "balanced" spending cuts.  The problem is that, as a matter of pure accounting, the president's position is deeply disingenuous. And a recent brief by the CBO illustrates precisely why.

growth_means-tested_programs.png

The above chart, from the first page of the CBO report, illustrates the growth in means tested programs since 1972, as a portion of the economy. While direct cash assistance and nutrition, housing and education programs have grown from 0.9 percent of GDP to 2.1 percent, means-tested healthcare programs (primarily the federal portion of Medicaid) have on their own have reached almost 2 percent of GDP. If you factor in state spending on Medicaid, that number is close to 2.5 percent.

But that's not all. Future growth is projected to increase at an increasing rate!

Thumbnail image for health_care_growth.png

This growth in health care spending will crowd out spending from the other two categories - spending on Nutrition and Education programs will actually fall, while cash assistance programs will grow at relatively slower rates.

The Obama administration operates on the idea that we might have a spending problem - if you squint your eyes hard enough you might be able to see some inefficient spending, and some places where we could shave off a few billion.  But the President's basic stance is that the largest and fastest growing parts of federal spending are the holy-of-holies, miraculously efficient and effective. 

Still, if you don't have a spending problem (but you have to acknowledge that there is some problem) the only thing left is a revenue problem! The president's continued insistence that "the rich pay their fair share" certainly echoes this mentality.

Unfortunately for the president, reality rears its ugly head again.

Spending & Revenues % of GDP

 

Revenues

Spending

65-year average

18.0%

19.6%

Current (2011)

16.7%

24.9%

Difference

1.3% below trend

5.3% above trend

Source: Bureau of Economic Analysis / Federal Reserve Bank of St. Louis Data (FRED)

As the table above shows, current U.S. spending is a full 5.3 percentage points above the 65-year average; meanwhile, revenues are only 1.3 percentage points below. As the economy continues to recover, revenues will catch up to the long terms trend fairly quickly.  But it's far from clear that the economy can grow fast enough to drag spending down to trend.

Recall that total Medicaid spending represents about 2.5 percentage points of GDP, but by 2021 is projected to hit nearly 4 percent. If we are to abide by the president's preference and leave Medicaid alone, our options for deficit and debt reduction become excruciatingly constrained. And not dealing with the deficit - as the CBO recently noted can lead to a long-term 0.5 percent drop in GDP over an 11-year horizon.

So as you watch the president's State of the Union address tonight, watch for the president to tell you that we've got to protect Medicare and Medicaid, and have a balanced approach to deficit reduction. 

And remember that if you do the first, you can't do the second. 


For the uninitiated, 3D printing is a fast-growing manufacturing technology that effectively allows "printing" of small objects like machinery components. Where the "revolution" part comes into play is that the "printers" are small enough and inexpensive enough to let almost anyone set up a mini-factory in their garage - or laboratories. These mini-factories are connected to a computer where 3D models are designed and fed into the printer (along with the necessary raw materials). Using high-powered lasers, the printer shapes the object according to the specifications.

Last December I wrote about Organovo - a 3D bioprinting company that was partnering with Autodesk to print living, architecturally correct human tissue. A new, potentially more exciting development is that researchers from the University of Edinburgh have developed a printer that is able to produce living, viable, embryonic stem cells. For those suffering from chronic diseases like Alzheimer's or Multiple Sclerosis - this has the potential to be life-changing.

While most adult tissue has its own stem cells, embryonic stem cells are unique - they are able to differentiate into almost any type of tissue to repair it after it has been damaged. In recent years, however, there's been quite a bit of controversy surrounding the ethics of using embryonic stem cells (which have to be harvested from human embryos), to say nothing of the possibility of rejection when injecting stem cells from one person into another.

While these issues remain, the ability to spit out these stem cells through a simple manufacturing process (the printer doesn't technically manufacture the cells - it clumps them into uniform droplets to keep them viable using two types of "bio-ink") provides a new, automated way of producing embryoid bodies (essentially a clump of stem cells) that can be used in treatments. And indeed, an ever growing body of research is indicating that stem cell treatments - even those derived from a person's own body (non-embryonic) may help to cure (not only treat) chronic diseases like MS.

Of course, any optimism should be tempered with reality. Printing stem cells that have biomarkers indicating pluripotency (the ability of a stem cell to differentiate into any type of cell) is very different from using those same cells to treat diseases in humans. It's unclear whether the human body will be able to accept these manufactured stem cells or how viable they will be in the long-run compared to natural stem cells.

There are also potential regulatory pitfalls. The FDA has been less than accommodating to companies that have tried using autologous stem cell treatments (where stem cells are taken out of a person, treated, and injected back into the same person), shutting down the laboratory of a promising venture in 2012. Though the FDA has a specific statute under which they regulate human cells and tissues, these newly manufactured cells would likely not fall under that statute. Instead, a company would probably need to pursue approval as a drug - but the long, winding, and expensive process of clinical trials is poorly suited to proving the ability of stem cells in treating chronic diseases.

A more stem-cell-friendly approach would allow companies offering these treatments to conduct "N=1" trials - for patients who have decided that an unproven treatment may very well be worth it if it has the possibility of curing a disease like MS - and submit this data over time to the FDA to help prove the efficacy of the treatment as well as to potentially help validate new surrogate endpoints.  


In a post on the FDA's web blog FDA Voice the agency notes that early communications with agency staff - called pre-investigational new drug meetings or pre-INDs - resulted in significantly faster drug development, shaving years off of total development time:

Recently, FDA has taken a look at the development times of new drugs that were approved with the benefit of pre-IND meetings and compared them to the development times for drugs that were approved without such meetings. The findings underscore the value of early communication. For those new drugs for which a pre-IND meeting between the drug developer and FDA was held, average clinical development times were substantially shorter than when a meeting was not held. For instance, for all new drugs approved between 2010 and 2012, the average clinical development time was more than 3 years faster when a pre-IND meeting was held than it was for drugs approved without a pre-IND meeting.

For orphan drugs used to treat rare diseases, the development time for products with a pre-IND meeting was 6 years shorter on average or about half of what it was for those orphan drugs that did not have such a meeting. Early communication is especially important for orphan drugs because these products require special attention and thus early talks can be especially beneficial

The FDA believes that these meetings are particularly helpful for products that are novel, and where clear development pathways don't exist.

The FDA's data is supported by earlier work from the Tufts Center for the Study of Drug Development, which looked at FDA approvals from 1987-95 and found that average development times were 27 months - more than two years - shorter for products with pre-IND meetings. They also found that meetings at another pivot pint for drug development - the end of Phase II trials - shaved 16 months off development times.

End of Phase II meetings were also associated with higher rates of first cycle approvals, according to a Booz-Allen report. One of the FDA programs for identifying and accelerating agency communications with companies developing the most promising medicines (Fast Track) also had a higher rate of first cycle approvals (58%) compared to non-Fast Track products (42%).

This is good news, and a datapoint that industry, regulators, and patients' groups can build upon. Policymakers should ensure that FDA has the resources and staffing it needs to encourage frequent industry-FDA communications early in the drug development process, while also ensuring that clear development and approval guidelines and pathways are available for all product classes. (Incremental innovations are just as important for improving patient care as breakthrough innovations, which are much rarer.)

The most recent FDA PDUFA reauthorization contains a number of provisions that will help accelerate these trends, which we noted in post late last year:

Among other things [the legislation] it encourages the FDA to expand the use of Fast Track and Accelerated approval beyond HIV and cancer; eliminates caps on conflict of interest waivers for FDA advisory committees; creates a new breakthrough therapies designation that is supposed to allow for expedited development and review of drugs for "serious and life threatening illnesses" that show significant improvement over existing treatments in early stage testing; expands PDUFA review deadlines by 60 days to allow for additional meetings between sponsors and FDA; and requires the FDA to establish a new risk/benefit framework for describing how reviewers are actually evaluating the benefits and risks of new medicines.

Flexibility and standardization would appear to be goals that mitigate against each other. But there can also be a learning process that occurs as sponsors and regulators look back at "what works" and integrate best practices into the normal review process - in this case, adding two months to the FDA's PDUFA clock to encourage more communications between the agency and stakeholders.

Another approach would be for the agency and stakeholders to continue to look beyond the curve - on stem cells, nanotechnology, gene therapy, and other cutting edge tech - and think about how to rapidly integrate new scientific discoveries into the development and review process, so that the learning curve isn't so steep when sponsors approach the agency with "first in class" technology.

Here's one crazy idea: create a fellowship program that would allow FDA reviewers to take sabbaticals of 6 months or a year and become "fellows-in-residence" at academic centers, small biotech start-ups, and big pharma companies that are working on cutting edge products and novel technologies. Companies could create a similar high-level exchange program for the agency, so they could get a better picture of how the FDA thinks, and what kinds of information it looks for when it reviews new products. (To address conflict of interest concerns, FDA fellowship alumnae could be barred from reviewing applications from host companies.)

While the FDA already offers a Commissioner's Fellowship Program for graduate students, a fellowship/exchange program for FDA employees and industry experts would help ferment intellectual exchange between industry and the FDA, give companies better insight into regulators' concerns, and allow the agency to get up to speed faster on novel technologies months or years before companies even submit an IND.

If occasional meetings are good, wouldn't longer term educational and exchange programs be even better?


Another year, another budget outlook.

The Congressional Budget Office just released their updated projections for how the economy and the federal budget will change over the next 11 years (2013-2023). Buried deep in the numbers is a slight (but not insignificant) increase in the total cost of the Affordable Care Act - from $1.165 trillion in a previous forecast, to $1.329 trillion projected now. The CBO credits a number of factors with this increased cost, mostly stemming from changes in insurance enrollment.

However, and this is important, the new cost projection is for the years 2013-2023 whereas the August 2012 baseline looked at 2012-2022. The cost projections for that period are virtually unchanged - however the internal numbers look a little different now.

Changes in Insurance Enrollment (in millions of people) - CBO Table A-2

 

Aug 2012

Feb 2013

Difference

Medicaid

11

12

1

Employment-based

-4

-7

-4

Nongroup

-3

-4

-1

Exchanges

25

26

(n/a)

Uninsured

-30

-27

4

 

Note: The above table indicates changes in enrollment rather than absolute numbers. For instance, the August 2012 uninsured number should be read as "30 million fewer uninsured over the forecast period" whereas the February 2013 number should be read as "27 million fewer uninsured over the forecast period." Some of the numbers in the "difference" column don't add up; this is because CBO offers a range of estimates (from -500,000 to +500,000) and rounds off the numbers.

One of the biggest shifts that will occur is that 4 million more people will lose employer-based coverage, as more employers will choose to pay the penalty instead, coming out to 7 million total that will lose coverage - that's 7 million that will be unable to keep their coverage even though they like it, despite the President's campaign promises. Some of these people may be able to get coverage through exchanges while others will remain uninsured and pay the penalty. When all is said and done, however, the projections for uninsured come 2022 is now 4 million greater.

But what else is buried in the economic forecast? For one, we know that continuing the "doc fix" where Medicare's payment cuts to physicians are constantly delayed will cost $167 billion (including debt service) from 2014-23.

The CBO makes a bigger point however - one that addresses the unsustainable course of federal healthcare spending. As a percentage of GDP, federal healthcare spending will increase from just under five percent now, to over six percent come 2023.

projected_spending.png

This doesn't even factor in the growth in net interest payments (which are heavily driven by increases in healthcare spending. In turn, spending on other programs (including defense) will wind down to less than three percent of GDP over 11 years. So, anyone that tells you we don't have a spending problem is being less than disingenuous - federal healthcare spending is, and will continue to, be the monster that crowds out all other spending; and Obamacare does not slow the growth.


A recent article in NPR resurrects an important, controversial issue for the FDA - stem cell treatments.

Often considered the body's "master cells", stem cells help form and repair damaged tissue in the body. The most potent, embryonic stem cells, can essentially differentiate into any other kind of cell - potentially allowing them to regenerate tissue in the brain, the spine, or anywhere else. As the name implies, however, embryonic stem cells only exist in embryos, raising ethical concerns. Also, stem cells derived from embryos face the prospect of tissue rejection when placed in a new host, potentially requiring recipients to take dangerous immunosuppressive drugs for life. 

Adult stem cells, however, exist in tissue across the body. These cells, however, are more specialized and can only repair specific types of tissue. In 2011, Celltex Therapeutics was formed - the company offered a process that would genetically alter adult cells to have certain properties of embryonic cells. These cells would then be re-injected into the patient from whom they came. The thought was that this could help patients with a variety of chronic diseases - Multiple Sclerosis, Alzheimer's, Amyotrophic lateral sclerosis (Lou Gehrig's Disease) - if not curing the diseases, at least offering a potentially effective treatment where often none exist.

In 2012 the FDA identified over 30 violations at the Celltex facility, most of which pointed in one direction - that Celltex was marketing an unapproved drug. Under traditional FDA regulations, medical procedures (referred to as the "practice of medicine") are largely unregulated beyond basic sanitary standards, along with any regulations the FDA imposes specifically on the associated laboratory tools or devices involved in the transplant. This stance covered the gamut from bone marrow transplants to in-vitro fertilization.

However, the FDA has taken an increasingly aggressive regulatory stance towards physician offered stem cell therapies, based on the more than "minimal manipulation" standards (and indeed, FDA's very broad statutory authority) that would allow regulation of the process under CFR 1271.3(f)(1) (the section of FDA's regulations that deal with the use of human tissue). Under this statue, the FDA determined that Celltex fell short, and thus their process could be regulated as a drug.

While the FDA has shown promise lately by working to develop more adaptive standards for clinical trials, their position on stem cell treatments is rather worrisome. The fact is that stem cell treatments similar to the process that Celltex was offering have already shown promise; proving the efficacy in double-blind randomized clinical trials, however, is extremely difficult.

Many of the diseases that stem cells would help treat are orphan diseases (those with fewer than 200,000 patients in the U.S.), making recruitment for large-scale trials very difficult. And for people suffering from diseases like Alzheimer's, the risk-benefit often falls on the side of taking a chance with what may be unproven treatment.

Instead of forcing companies like Celltex (which is now moving their operations to Mexico!) to comply with narrowly defined trial guidelines, the FDA should make it easier for such treatments to receive approval through an alternative pathway that recognizes the difference between Celltex's process and a cancer drug.

This would require a pathway that is more conducive to Bayesian analysis - for instance, multiple "N=1" trials (where one person decides to try an unproven treatment - like Ms. Wilkinson from NPR's piece) could be used to gather data on fairly simple clinical or surrogate endpoints (in the case of Ms. Wilkinson, 11 out of 25 of her MS symptoms improved!). This data could be used to both validate new surrogate endpoints for future use, and to offer additional data to the FDA as approval is pending. Certainly, shutting down a lab without recognizing that physicians have been traditional innovators in the medical field - and still invent new surgeries without FDA regulation - seems like an extreme step. Surely there was a middle of the road approach that would have recognized the value of the procedure while warning patients that they were highly experimental and collecting additional data that could be validated through other means.

But more importantly, when it comes to dealing with a part of your own body (remember, Celltex was taking stem cells out of person A and putting them back into person A) it seems rather draconian to classify the product in question as a drug.

While the long-term efficacy of stem cell treatments may not be certain, there is much evidence showing at least some short improvements in patients that receive them. For those with otherwise untreatable diseases, this is undoubtedly a gamble worth taking.


Doug Holtz-Eakin, president of the American Action Forum and former CBO director, is out with a new study confirming Obamacare's sticker shock. AAF surveyed insurers in 5 states to determine premium increases for younger, healthier workers and premium decreases for older, and less healthy workers.

The results while unsurprising, are very instructive: in the small group market premiums are expected to increase 149 percent on average for the younger population while they are expected to drop 26 percent on average for the older population. In the individual market the increase will be 189 percent for the young and the drop will be 18 percent for the older population.

Holtz-Eakin writes:

The results...indicate that there will be massive sticker shock to the relatively young and healthy in both the small group and individual markets.

While the sample may not be representative, and average premiums can be nudged one way or the other by high-or-low-utilization beneficiaries, uninsured 20-somethings have every reason to pay the $95 penalty and refuse health insurance come 2014.

But is there a fix?

One idea would be to allow the "community rating" (the provision that requires insurers to charge no more than three times more for an older person than a younger person - this drives a significant portion of the premium increases) provision of the health law to take effect gradually, over several years. This would achieve the goal of lowering healthcare costs through risk pool expansion, guaranteeing that younger people could still get preferential rates on health insurance. While initially there would be no statutory protection for premiums for the older population, by having a broader risk pool from the start, it would slow premium growth.

Others (including insurance companies) have called for a higher penalty to ensure that people don't skip out on insurance. This may resound with those on the left, but this would leave AAF's results unchanged.

Proponents of the ACA will, of course, argue that these aren't the actual costs people will be paying - and they would be correct. Much of the cost, especially for 20-somethings just starting out their careers, will be offset by premium subsidies. But the point is that these costs will still be paid by someone - there's no free lunch. Effectively, money will flow from non-health related industries into the healthcare sector - when people are forced to pay more money for insurance that leaves them with less money to spend on other goods and services.  

This guarantees that insurance costs will continue to rise; after all, when the government is paying your customer's bills, you're set for life.


Jonathan Cohn has a piece at the New Republic chastising those of us that are concerned about the cost of Obamacare.

The real story about Obamacare, the one the law's critics don't emphasize, is that far more people will actually pay less. And while those paying more may not be happy about it, they'll also be getting something for the extra premium dollars they pay up front.

Cohn argues that larger risk pools (as a result of the exchanges) and tax credits will make insurance cheaper for most. His argument, on its face, isn't entirely wrong. If Obamacare plays out exactly as proponents hope, then the sicker population that is riskier to insure will end up paying less for insurance because their risk will be offset by newly enrolled young, low-risk consumers. But that's a stretch and Cohn acknowledges it:

[T]he people who really will see higher prices...tend to be younger, healthier, and more affluent...These are also the people who, under the new system, will make too much money to qualify for large subsidies, enough to offset the cost of higher insurance.

And this is an important point - if the younger population opts to pay the fairly modest penalty ($95 in the first year) instead of purchasing insurance, then premiums will skyrocket for the new, forcibly enrolled sicker population. And this ignores more direct costs that will be passed on to the premiums - the health insurance tax and administrative fees levied by states for instance will raise premiums directly.

But let's assume for a second that everything does go according to plan. Plenty of young people purchase insurance on the exchanges - enough to offset the risk of insurers covering the sicker population. There's an even more direct cost associated with Obamacare - not just projections over how much premiums will rise or who will pay more.

Obamacare will cost money to implement. A lot of money. While official estimates from the CBO claim a deficit reduction of about $109 billion, they rely on shaky assumptions based in "current law" rather than "current policy". (Current law projections assume that law as written goes forward as intended - in the case of the ACA's bill, this assumption included cuts to Medicare that were set to happen (but were averted, as they have in the past with another "doc fix"); current policy projections make assumptions about policy alternatives - see CBO's latest discussion of their current law projections and current policy alternatives). Independent analysis has found that as a result of the law, spending will instead increase by around $500 billion in the first decade and $1.5 trillion in the second decade.

There's your sticker shock Mr. Cohn.


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Our Research

Rhetoric and Reality—The Obamacare Evaluation Project: Cost
by Paul Howard, Yevgeniy Feyman, March 2013


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