March 2013 Archives


NOTE: discussion edited and revised for clarity and accuracy.

MR. PAUL HOWARD: Today, I'm talking with Christopher J. Conover, a Scholar at Duke University's Center for Health Policy and Inequalities Research and an Adjunct Scholar at the American Enterprise Institute. He's also News and Notes Editor for the Journal of Health Politics, Policy and Law and the U.S. Health Policy Gateway. We're going to be talking about recently published and extraordinarily informative book, American Health Economy Illustrated. If you're looking for a single, easy to understand compendium of facts on the American health care system, look no further. For a health policy wonk, it's a real joy to read. Chris, thanks for joining us today.

MR. CHRISTOPHER CONOVER: Thank you, Paul.

PH: Chris, I'd like to talk about a few of the more interesting tables in your book, and how they debunk some of the common myths that both the public and policymakers often repeat about the U.S. health care system.
To start with, I think that one of biggest myths or misunderstanding is that if the U.S. was just to become more like our European cousins in terms of how the government pays for health care, many of the woes of our current system would just go away.
It is certainly true that there is a lot of waste in the U.S. system. But when you look at the U.S. system compared to our OECD competitors, there's a very interesting wrinkle in terms of how the U.S. compares in terms of out of pocket spending Could you talk about that for a moment?
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The first drop in spending in 20 years on drugs for common diseases like high cholesterol grabbed the headlines when reported by Express Scripts. The fact that this decrease was more than offset by increased spending on specialty products was relegated to the smaller print in subsequent paragraphs. This latter trend, however, is likely to continue to drive total pharmaceutical spending higher and is less susceptible to long term price decreases from generic competition.

Those who latch on to the highlight of the report as an indication that increasing the use of generics is the way to impact rising health care costs significantly should realize that three factors will make this a desirable, but ultimately insufficient measure to cure what ails run-away spending in the US and more importantly, it puts the focus on the wrong side of the value equation.

First, pharmaceuticals account for a mere ten percent of the total healthcare spend and have been at that level or below consistently since the 1960s. While it is true that spending on drugs has increased along with other sectors, any reduction - no matter how desirable or achievable - in pharmaceutical spend will have a limited impact on the overall cost of healthcare.

Second, in the near term, there are fewer big selling small molecule drugs coming off patent in the next few years than there have been in recent years when multi-billion drugs like Lipitor and Paxil faced generic competition for the first time. The past few years have seen a huge growth in generics as a wave of patents expired. Drugs coming off patent after about ten years of sales represent one of the few cost reductions extant in the health care system.

Third, the area of largest growth in the pharmaceutical industry -- specialty products in general and biologics more specifically -- presents the greatest challenge to generics manufacturers. It will be difficult for generic manufacturers to achieve the same price differential that makes generic versions of small molecules so attractive. There are a few key reasons:

• The reduced margin associated with biologics - even with higher unit prices - limits potential price reduction.

• In addition, the cost of manufacturing biologics is far greater than for small molecules. The capital investment required serves as a deterrent to competitors producing and supplying copycat products.

• The complexity of the manufacturing process will also serve to limit the number of producers with the technical capability to meet the high standards needed to ensure both bio-equivalence and avoid the potential safety issues inherent in creating a biologic.

• Regulatory agencies may require clinical trials to demonstrate safety and efficacy. These trials are associated with additional added cost and new capabilities.

• Finally, there are those who advocate that regulators should restrict generic substitution without a physician's approval which would likely necessitate some level of detailing for biosimilars eroding the margins and/or price differential even more.

Although the exact approval pathway for biosimilars in the US is still uncertain, we believe that eventually there will be generic competition and that these new products will be somewhat cheaper than the original. There will be fewer manufacturers -- ironically current manufacturers of branded products may be the best positioned to produce biosimilars due to the capital and technical investments needed -- and the degree of price reduction will be lower than for small molecules.

While any reduction in spending on pharmaceuticals -- provided it does not adversely impact outcomes -- is welcome, we should not be distracted by the prospects for generics pharmaceuticals from the need to seek lower costs in the other 90% of the healthcare industry.

That said, the focus on cost reduction, the elimination of waste, unnecessary procedures, fraud and abuse is only part of the picture. There must be accelerated movement to a market based approach to healthcare, reflecting increased transparency and accountability for outcomes. . . tying together payments and outcomes.

And while we are on the subject, we should shine the spotlight on innovation and cures. Focusing on cost fails to recognize that new discovery has led to significant productivity gains as patients with serious medical conditions (high blood pressure and cholesterol for example) live longer, productive lives ultimately adding to the tax base! Imagine the productivity gains if we really did find a cure for Alzheimer's. Pharma is the only sector that can take this on. These companies must have the ability to invest in risky R&D and generate fair rate-of-return for in-market products that add value. The alternative is pretty bleak. We can't save our way to prosperity.

Health Care Reform 2.0

From RealClearPolicy.com 2-20-13, By Paul Howard and Yevgeniy Feyman

Three years have passed since President Obama's signature domestic achievement - Obamacare - was signed into law. The law passed with critical support from moderate Democrats in the House and Senate, who were convinced by the president's argument that "the system we have right now is unsustainable and hugely inefficient and uncompetitive," and that Obamacare would go a long way toward fixing our health care system.

The reality, however, is far different: Obamacare will likely do very little to reduce health care spending, and in fact, will probably increase it. But its central feature - means-tested subsidies on competitive health insurance exchanges - could still be the vehicle for the health reform we need. Call it health reform 2.0. Even now, the full cost of the law - in terms of government spending and broader national health-care spending - remains unclear, because implementation of its key components will only begin next year. What we do know is that we are slated to spend $1.8 trillion over the next 11 years on new government subsidies for the poor and middle-class uninsured to purchase health insurance and to expand Medicaid. Left unchecked, by 2050, the costs of Medicare, Medicaid, new insurance subsidies, and Social Security could consume every dollar of federal revenues.

Independent analysts have painted a murky picture of the law's impact on U.S. health care spending. The non-partisan Congressional Budget Office (CBO) has repeatedly scored the law as reducing the deficit. That sounds encouraging, but there's less here than meets the eye. All the CBO score means is that, after accounting for new revenue (around $1.9 trillion in new taxes, fees, penalties, and double-counted Medicare savings) and increased spending, the government's checkbook comes out slightly ahead. But all that new revenue only shifts money from other priorities and industries into the health care sector, an industry that both Democrats and Republicans recognize is deeply dysfunctional.

The fiscal picture also worsens considerably when you understand that it is current policy - like repeatedly postponing the reduced reimbursements for Medicare physicians - rather than current law that is dictating spending trends. For instance (as Medicare's actuaries have repeatedly pointed out), the structure of the Medicare cuts in the law are probably unworkable and Congress will have to walk them back at some point.


One of the factors often blamed for escalating healthcare costs is the provision of unnecessary tests and procedures. Much has been written about the practice of defensive medicine by physicians - providing medical services that are not expected to benefit the patient but that are undertaken to minimize the risk of a subsequent lawsuit.

In a study of residents across specialties, 81 percent said that they view every patient as a potential lawsuit. This protective, fear-of-lawsuit attitude incentivizes physicians to adopt behaviors that increase healthcare costs. Estimates of how much defensive medicine costs vary greatly from 5% to 34% of medical expenditures. This has not been a concern to physicians as the cost was passed on to the payer or patient. They were motivated by the desire to avoid a lawsuit.

Likewise, a fee for service environment with little control or guidance as to what is appropriate, creates an incentive for unnecessary procedures to maximize revenue to the hospital and/or physician. As an example, 400 patients are suing St. Joseph Hospital in London, Kentucky and 11 cardiologists associated with the hospital for performing medically unnecessary cardiac catheterizations and other invasive cardiac procedures. The hospital was cited by Medicare and Medicaid for failing to review the medical necessity of 3,367 cardiac catheterizations performed in 2010.

Until there are more specific guidelines and care paths defining what is optimal for a given condition, the practice of defensive medicine won't change. Physicians who follow clinical guidelines could be given safe harbor in the event of a subsequent lawsuit. Guidelines can also provide a rationale to convince patients that some of the "latest and greatest" tests or procedures they are demanding are unnecessary. Otherwise physicians lack the motivation to argue with their patients as they don't have supporting evidence backing them. Physicians will often accede to these requests in order to make the patient happy and keep to their schedule. And, happy patients are less likely to sue!

Additionally, guidelines and care paths would give consumers a framework upon which to compare physicians' performance. Greater transparency of practices and outcomes will enable patients to rely on evidence to compare performance across providers. The process will increase accountability of physicians and healthcare systems to explain why their practice of medicine differs from those competitors down the street or a thousand miles away -- either in terms of costs or the quality they provide. When that happens we will have taken a major leap forward towards a market-based model of healthcare.


A few days ago, the National Commission on Physician Payment Reform issued a slew of recommendations for reducing national health care spending, based on one core principle:

Our nation cannot control runaway medical spending without fundamentally changing how physicians are paid.

This approach has its merits - physician services make up somewhere around 20 percent of national health spending - around $540 billion annually. But more importantly, the authors of the report make an under-appreciated point: that physicians have significant input on the course of care long after the initial office visit. So if we think that we spend too much on health care, it makes sense to start at the initial point-of-contact with the health care system.

Just as Stephen Brill's recent opus illustrated the tangled web of our health care system's "non-price" approach, this report does a terrific job at identifying the broad, structural problems in our health care payment system.

The report identifies several factors driving growing health care spending: fee for service reimbursement, reliance on technology over care management, a disproportionate reliance on specialists over primary care physicians, and a payment scheme that favors hospitals over other outpatient settings.

While the commission recommends these changes to the health care system as a whole, these reforms are particularly well suited to Medicare reform.

Fee For Service

A fee for service system pays a physician for a procedure/office visit/surgery etc. by volume. In a direct-payer system, without insurance companies and government subsidies, this wouldn't be inherently problematic. When you spend your own money you tend to be frugal, and your physicians - in their own self-interest - have to make sure that the care they give is effective enough to keep you from dying but is affordable enough that they keep you as a patient. It's easy to see how this leads to problems in a third-party payer system - when an insurance company or the government is paying your bills, you become less price-sensitive and physicians have the freedom to charge more and provide more services (some of which may be unnecessary), while discriminating based on who is paying (charging Medicare less than private insurance for instance, because of Medicare's monopsonistic bargaining position).

With fixed budgets and profit-motives, private insurers already have some incentive to insure that medicine is evidence-based and that the cost is worth the expected outcomes. The private sector has already recognized the need to mix some outcome-based measures into standard fee-for-service reimbursements - Wellpoint recently announced an effort to reward evidence-based medicine, and even earlier decided to boost primary care physician fees by 10% if they meet certain outcome metrics.

But on the public side, the lack of a fixed budget and tremendous bargaining power makes the powers that be more resistant to "quality-oriented" payment reforms. The fear is that this may lead to lower quality care for those who truly need it. Quality-focused payments generally consist of attempts at managed care - where care for a particular individual is coordinated through a tight network of providers to best determine the most appropriate, long term treatment route that maximizes quality while minimizing cost. The evidence on managed care, however, is mixed. One the one hand, some studies indicate that Medicare Advantage managed care plans tend to reduce racial and ethnic disparities in primary care quality and reduce preventable hospitalization more than FFS Medicare. Yet other studies studies have found little benefit from Medicaid Managed Care Organizations (MCOs) or pay-for-performance approaches. These disparate results may indicate that Medicaid pays providers too little relative to Medicare; they may also point to differences in the underlying structure of different managed care programs; moreover, there may (and likely are) systematic differences between Medicaid and Medicare populations beyond simply age. The point is, given certain conditions - managed care can work to improve quality while cutting costs.

Technology Over Care Management & Reliance on Specialists

These two points logically go hand-in-hand it would appear. In general, this isn't a problem for the private sector - private insurers must generally be more prudent about what they pay for and how much they pay. The profit motive seems to work well here.

Medicare, on the other hand, skews its payment system to favor high-technology, specialist-focused care over primary and evaluative care. The underlying problem here is the relative value unit (RVU) system that values the work of a specialist at a much higher rate than the work of a general practitioner. While cardiac surgery is certainly a complicated, labor-and-technology-intensive procedure that warrants high compensation, a 15-minute, mostly automated cataract extraction isn't, and doesn't. While it may sound simple, a routine office visit requires the GP to consider a variety of possible conditions, across a very broad spectrum of specialties - not an easy task. Yet the ophthalmologist performing the cataract extraction will receive much higher reimbursement from Medicare because his education, specialization, and time are arbitrarily valued more.

The first recommendation here from the commission is simple - increase payments for evaluation and management services that are provided not only by GPs but also by cardiologists, neurologists, and others. This would provide incentive for more focus on evaluation over expensive, often unnecessary treatment (particularly in Medicare). The second set of changes, again is rather simple (and relatively uncontroversial) - don't just use the RVU (set by the Relative Value Scale Update Committee, which is made up mostly of specialists) to set reimbursement rates; and end the SGR (which can be funded largely by eliminating excessive administrative costs, unnecessary services, and fighting fraud) that annually is slated to cut physician reimbursements. Combined, these three recommendations could drastically change the Medicare landscape - perhaps changing it from a high-risk, high-fraud program into one that is more affordable and genuinely seeks to improve patient outcomes.

Setting-Neutrality

The last point here should really be a no-brainer. It shouldn't matter whether you get an EKG in a hospital or in a lab - the amount paid should be the same. Once again, this is a major issue for Medicare. Part A (hospital insurance), tends to pay more for the same service performed in a hospital than what Part B, outpatient insurance, pays if the service is performed in a doctor's office. The Medicare Payment Advisory Commission, in a report to Congress noted: Medicare pays 80 percent more for a 15-minute office visit in an OPD than in a freestanding physician office.

There is simply no good reason for such a disparity in payments based on location. Doing so encourages consolidation of providers - this drives up prices with little indication that it improves quality of care.

The exact process for mitigating this discrepancy can take several forms: a global inpatient-outpatient reimbursement rate would statutorily close the gap for instance. Switching FFS Medicare (by shifting beneficiaries to Medicare Advantage plans, for instance) would likely also eliminate this problem through capitated payments.

The commission's report should be welcomed by both sides of the health care debate - the left for its encouragement of quality-based care and the right for its acknowledgment that Medicare has serious, systemic flaws. It offers a unique perspective on the American health care system - one that looks at it holistically rather than as a set of silos. And the focus on payment reform is long overdue. With luck, some of the commission's proposals can find bipartisan support before it's too late to fix our health care problem.


A paper (BPA.pdf) published in the March issue of The Journal of Allergy and Clinical Immunology about the association between bisphenol A (BPA) and childhood asthma is nothing short of mind-boggling. Possibly enough so to create a new acronym of data interpretation-- GIMBIO--garbage in, mind-blowing idiocy out.

The authors set out to demonstrate that exposure to bisphenol A (BPA) -- a perennial favorite of anti-chemical, anti-everything groups, which has been portrayed as being responsible for everything from enlarged male breasts (undesirable, at least in my book) to the kidnapping of the Lindberg baby -- has something to do with childhood asthma. Despite the authors' attempt to establish a link between the two, they have actually succeeded in doing just the opposite.

There are so many things wrong here that I need to restrain myself, lest I crash the Internet singlehandedly. But the following should suffice.

Of the entire 13-page article, one paragraph on the first page (results) is more than sufficient to relegate the entire paper to the compost bin. I still can't figure out how they even wrote this with a straight face, let alone got it published.

The paper may be filled with meaningless data, but at least they put in a lot of it. The authors talk about animal models of asthma, analytical methods to detect BPA in urine, the percentage of Dominicans in the study, what antigens contribute to human allergy, nitric oxide, the presence of nicotine metabolites in blood, cytokines and cytomegalovirus. I didn't see the Yankee's spring training lineup in there, but then again, I did not request the supplemental information.

And all of it is meaningless. Which was patently obvious by simply examining one finding at the very beginning: the presence of BPA can either exacerbate, or prevent asthma, depending on age. Children whose mothers had higher levels of BPA in their urine while pregnant had less asthma at age five, but five-year olds with higher BPA in their urine had more asthma. Please.

To make matters worse, although we are all chronically exposed to BPA in minute quantities because of its ubiquitous use (mostly in canned food as a sealant) the levels of children aged three and five didn't even correlate with levels of children at age seven. So, which do you believe? How about neither?

And if this smells fishy, it gets worse. The incidence of asthma was determined by a questionnaire--a notoriously unreliable method of data gathering, along with one examination by a doctor per child at ages that ranged from ages five through twelve.

When a paper is filled with statistics that are supposed to support a hypothesis and the authors have to resort to ridiculous speculation to explain away obvious inconsistencies, the answer is almost always the same--garbage numbers. Which is what I strongly suspect is the sum total of this paper.

Yet this did not stop them from concluding: Asthma prevalence has increased dramatically over the past 30 years, which suggests that some as-yet-undiscovered environmental exposures may be implicated... Our study indicates that one such exposure may be BPA.

Uh, no it doesn't.

For this to be true, we need to accept that BPA, which has the ability to either increase or decrease asthma (which itself was measured in an unreliable manner) and has been in routine use for 60 years, is responsible for rising asthma rates over the past 30 years--depending on how old you are.

Given an impossible concoction of gyrations necessary to justify the paper's conclusions, or common sense telling me that the data are all nonsense, I will cheerfully pick the latter.

Publications like this do cumulative harm in the pursuit of legitimate science-based policy, as they make flashy headlines that contribute to the anti-chemical feeding frenzy, while at the same time obscuring the real message of the study.

Perhaps The Journal of Allergy and Clinical Immunology ought to reexamine its publication standards.


Researchers have reported what appears to be only the second case of a functional cure for HIV/AIDS. (The first case was a Berlin man - the "Berlin patient" - who was cured of HIV after a bone marrow transplant.)

While mother-to-infant transmission of HIV is rare in the U.S., thanks to near universal testing of pregnant women and aggressive treatment of those who are HIV-positive to prevent transmission of the virus to the infant, it still happens in rare cases - in this instance because the woman in question didn't have an HIV test until she was in the delivery room.

Thankfully, a quick thinking physician started aggressive HIV antiretroviral therapy shortly after delivery:

In this case, researchers believe that a doctor's decision to start an aggressive antiretroviral treatment within 31 hours of the infant's birth led to the cure. They theorize that the drugs prevented the formation of so-called viral reservoirs that harbor the virus. These reservoirs have been the key stumbling block to a cure because even though AIDS drugs stop HIV from replicating, the virus lurks in the reservoirs, ready to come surging back when treatment is stopped.

In this case, "the child got therapy and then went off therapy, and now there's no detectable virus," said Deborah Persaud, a pediatrician and AIDS researcher at Johns Hopkins Children's Center in Baltimore and lead author of a study reporting the cure. "That's really unheard of. If people go off therapy, most of them rebound...within a few weeks."

While antiretroviral drugs have been the standard of care for HIV treatment since the mid-1990s, researchers are still discovering new uses for the drugs. In 2011, for instance, researchers found that patients started on HIV therapy early in the course of the disease could prevent sexual transmission of virus - offering a tool to help halt infections in poor nations where the disease is closer to an epidemic.

If this case turns out to be an effective treatment option for infected children, the real benefits may accrue to patients in the developing world, where an estimated 500,000 children are infected with the disease every year. And a functional cure early on could spare the children from having to continue on drug cocktails for the rest of their lives.

For critics of the industry, this is what might be called a teaching-learning moment. This is a technology that is nearly twenty years old, and many HIV combinations are either generic or are made available at cost in poor countries. But enormous health gains from the medicines wouldn't be available without the large up-front investments - and yes, higher prices - that wealthier nations pay to companies developing new HIV treatments.

After HIV antivirals lose patent protection, of course they are cheap permanently, meaning that a relatively few years of high prices leads to enormous social gains down the road that aren't captured by the manufacturers. Indeed, in a 2005 NBER paper researchers at the University of Chicago estimated that manufacturers only capture about 5 percent of the social value of HIV medicines. The rest goes to patients, current and future, who benefit from the medicines.

The authors of the study, Philipson and Jena, also advance an interesting argument:

Despite the high prices of these drugs to patients and health plans, the low share of social surplus going to innovators raises concerns about advocating cost-effectiveness criteria that would further reduce this share, and hence further reduce incentives for innovation. In particular, popular technology assessment criteria in healthcare going under the rubric of "cost-effectiveness" often implicitly maximize consumer surplus, which is consistent with maximizing static efficiency after an innovation has been developed. Dynamic efficiency, however, aligns the social costs and benefits of R&D and is therefore determined by how much of the social surplus from a new technology is appropriated by producers.

In short, policymakers who advocate plans to lower drug prices now - through price controls or other strategies - ignore the dynamic effects of drug pricing on future innovations, and the enormous gains to future patients that accrue from innovation. Price controls assume a static stock of innovations, and push costs much closer to the actual marginal cost - the cost to manufacture each pill - of producing those medicines today.

Such policies are pennywise, but pound foolish. As today's announcement shows, gains from HIV antiretrovirals continue to accrue to patients decades after the original discovery. Medical innovation is dynamic, and as economists know well, very responsive to pricing signals. Price controls would diminish the number of future innovations, leaving us with fewer new medicines - and more lost lives.


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