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Selected news articles which highlight important policy issues.

News: Weekly Archives

News for the week of 12-29-2006

Health Care Gold Mines: Middlemen Strike it Rich
Wall Street Journal, 12-29-06

Editor's Notes:

New York Times columnist Paul Krugman often argues that Medicare and other government health programs are more efficient than private providers because they have lower administrative costs—i.e., they cut out advertising and the need for "middlemen" to monitor costs.

This article, from the Wall Street Journal takes up the issue of cutting administrative costs and makes some interesting observations:

A lot of the money that goes to health–care middlemen is well spent. It allows employers to combine their purchasing power for leverage with hospitals and drug makers. It harvests data to uncover which new procedures are valuable and which aren't. Middlemen offer health–care expertise to employers who don't have it and don't want to hire it.

But a lot of the money goes more toward fattening middlemen's bottom lines than toward improving the quality or efficiency of American health care. "At the end of the day, the only reasonable conclusion is that we waste a huge amount of money on the most nuttily cumbersome administrative system in the world," says Henry Aaron, a Brookings Institution economist.

While the middleman business booms, health–care costs keep rising, the ranks of the uninsured grow, and paperwork expands as each party in the system tries to enlarge its slice of the pie. "There's more money to be made by monitoring cash flow than monitoring patients," says David Cutler, a prominent Harvard University health economist.

Middlemen aren't unique to health care. Banks serve as middlemen between saver and lender. In the age of Orbitz and airline Web sites, some people still find travel agencies worth the fees. Distributors and wholesalers remain a vital cog in much of U.S. manufacturing.

But while the Internet, deregulation and relentless corporate cost–cutting have squeezed middlemen elsewhere, the health–care middlemen are prospering. The three largest pharmaceutical benefit managers, for instance, had net income of $1.9 billion last year, a sum that exceeds the annual operating budget of New York's Memorial Sloan–Kettering Cancer Center. In corners of the system such as Medicaid managed care and nursing–home drugs, little–known intermediaries rack up tens or hundreds of millions of dollars in profit.

With health–care spending now at 16.5% of the nation's economy and climbing, an urgent question is how to squeeze out the waste connected with middlemen—without squeezing the valuable services they can provide. Some say the only solution is a top–to–bottom overhaul of the American health–care system. But that's far from a universally held view and is politically impractical.

As the article notes, many middlemen—like PBM's who offer companies drug coverage—do offer valuable services. And public programs like Medicare engage in cost shifting, passing along administrative costs to private providers, much like the way the IRS passes administrative costs to taxpayers by making them annually struggle through a blizzard of tax forms. Government run health care systems in Canada and the U.K. are also notorious for under–investing in health care—hence the long waiting lines for many services, and health care rationing. These are costs to the system too, but Krugman and others tend to downplay them to make single–payer health systems look rosier than they really are.

So why are there so many middle men, and so many administrative costs in both public and private health care programs? Third–party payers (i.e. employer provided health insurance, and programs like Medicare and Medicaid) create a moral hazard for both patients and doctors to game the system to their advantage. If you want fewer middlemen, and lower administrative costs, put more power and responsibility directly in the hands of consumers.

[permanent link]

Millions save money on Medicare Program
Associated Press Newswires, 1-1-07

Editor's Notes:

The Democrats, as part of their "100 hours" agenda, have promised to pass a bill requiring the Secretary of Health and Human Services to negotiate with manufacturers for the Part D drug benefit. While it is not clear how these negotiations would be conducted, especially in the absence of a Medicare approved drug formulary, the Democrats seem determined to pass the bill and it may have the votes to reach the President's desk.

In the meantime, it is well worth remembering that the drug benefit routinely scores highly in surveys of seniors, with approval rates hovering in the 75–80% range. The AP weighs in with another article showing that, warts and all, the program appears to be working well:

"I would say I'm very impressed with the whole thing. I have no complaints," said Goundry, a resident of Chesapeake Beach, Md. "It's meant a tremendous savings. I know other people who are saved by it. I mean that. They don't hardly pay anything." Goundry is like millions of seniors who say they are happy with the benefit, which cost the federal government about $30 billion in 2006. But the program affects seniors and the disabled differently, depending upon their income and health. There are many people who believe the program could be improved. Just down the street, at the Chesapeake Care Pharmacy, Wesley Copeland is not so impressed.

In August, he began picking up all the cost of his medicine—about $300 a month. Plus, he had to continue paying his monthly premium of $38. That gap in coverage is called the doughnut hole. "We've got a lot of people in my neighborhood who are seniors like me on retirement. We have to stretch pennies, so when it gets to that doughnut hole, we have to scramble like hell to keep going," Copeland said.

Goundry and Copeland represent the millions of stories surrounding the addition of a drug benefit to Medicare this past year. The drug coverage has often been described as the biggest change in Medicare in the program' 40 years. Under the program, seniors and the disabled enroll in a private plan. They pay a monthly premium to the plan. The government also pays the plan.

The Bush administration estimates that the coverage saves the average beneficiary about $1,200. But many in Washington, particularly Democratic lawmakers, say the savings could be greater if the government were allowed to negotiate with drug manufacturers concerning the cost of medicine rather than leaving that chore to the plans.

Having a debate about prices in a vacuum seems a bit absurd. The government can certainly limit the prices it pays for any goods and services but those limits will, in turn, impact the availability of those items, i.e. create shortages.

The better question, it would seem, is one of value. And here seniors have voted "with their feet" to join Part D and seem very happy with its structure (tweaks notwithstanding). In a less partisan world, Congress would be working on expanding the market-based success of Part D rather than dismantling it.

[permanent link]



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