Corporate Research Group’s Weblog

Of the $634 billion Obama wants to put aside as a “down payment” on healthcare reform, about half ($316 billion) is expected to come from spending cuts and other savings, the rest from tax increases.  Here are the bullet points for Obama’s budget that lays out where the funding will come from over the next 10 years.

• “Reducing Medicare Overpayments to Private Insurers Through Competitive Payments. Under current law, Medicare overpays Medicare Advantage plans by 14 percent more on average than what Medicare spends for beneficiaries enrolled in the traditional fee-for-service program. The Administration believes it’s time to stop this waste and will replace the current mechanism to establish payments with a competitive system in which payments would be based upon an average of plans’ bids submitted to Medicare. This would allow the market, not Medicare, to set the reimbursement limits, and save taxpayers more than $175 billion over 10 years, as well as reduce Part B premiums.

• “Reducing Drug Prices. Prescription drug costs are high and rising, causing too many Americans to skip doses, split pills, or not take needed medication altogether. The Administration will accelerate access to make affordable generic biologic drugs available through the establishment of a workable regulatory, scientific, and legal pathway for generic versions of biologic drugs. In order to retain incentives for research and development for the innovation of breakthrough products, a period of exclusivity would be guaranteed for the original innovator product, which is generally consistent with the principles in the Hatch-Waxman law for traditional products. Additionally, brand biologic manufacturers would be prohibited from reformulating existing products into new products to restart the exclusivity process, a process known as “ever-greening.” The Administration will prevent drug companies from blocking generic drugs from consumers by prohibiting anticompetitive agreements and collusion between brand name and generic drug manufacturers intended to keep generic drugs off the market. Finally, the Budget will bring down the drug costs of Medicaid by increasing the Medicaid drug rebate for brand-name drugs from 15.1 percent to 22.1 percent of the Average Manufacturer Price, apply the additional rebate to new drug formulations, and allow States to collect rebates on drugs provided through Medicaid managed care organizations. All the savings would be devoted to the health care reserve fund.

• “Improving Medicare and Medicaid Payment Accuracy. The Government Accountability Office (GAO) has labeled Medicare as “highrisk” due to billions of dollars lost to overpayments and fraud each year. The Centers for Medicare and Medicaid Services (CMS) will address vulnerabilities presented by Medicare and Medicaid, including Medicare Advantage and the prescription drug benefit (Part D). CMS will be able to respond more rapidly to emerging program integrity vulnerabilities across these programs through an increased capacity to identify excessive payments and new processes for identifying and correcting problems.

• “Improving Care after Hospitalizations and Reduce Hospital Readmission Rates. Nearly 18 percent of hospitalization of Medicare beneficiaries resulted in the readmission of patients who had been discharged in the hospital within the last 30 days. Sometimes the readmission could not have been prevented, but many of these readmissions are avoidable. To improve this situation, hospitals will receive bundled payments that cover not just the hospitalization, but care from certain post-acute providers the 30 days after the hospitalization, and hospitals with high rates of readmission will be paid less if patients are re-admitted to the hospital within the same 30-day period. This combination of incentives and penalties should lead to better care after a hospital stay and result in fewer readmissions—saving roughly $26 billion of wasted money over 10 years. The money saved will also be contributed to the reserve fund for health care reform.

• “Expanding the Hospital Quality Improvement Program. The health care system tends to pay for quantity of services not quality. Experts have recommended that hospitals and doctors be paid based on delivering high quality care, or what is called “pay for performance.” The President’s Budget will link a portion of Medicare payments for acute in-patient hospital services to hospitals’ performance on specific quality measures. This program will improve the quality of care delivered to Medicare beneficiaries, and the higher quality will save over $12 billion over 10 years. Again, the money saved will be contributed to the reserve Fund for health care reform.

• “Reforming the Physician Payment System to Improve Quality and Efficiency. The Administration believes that the current physician payment system, while it has served to limit spending to a degree, needs to be reformed to give physicians incentives to improve quality and efficiency. Thus, while the baseline reflects our best estimate of what the Congress has done in recent years, we are not suggesting that should be the future policy. As part of health care reform, the Administration would support comprehensive, but fiscally responsible, reforms to the payment formula. The Administration believes Medicare and the country need to move toward a system in which doctors face better incentives for high-quality care rather than simply more care.

• “Reducing Itemized Deduction Rate for Families With Incomes Over $250,000. Lowering health care costs and expanding health insurance coverage will require additional revenue. In the health reform policy discussions that have taken place over the past few years, a wide range of revenue options have been discussed—and these options are all worthy of serious discussion as the Administration works with the Congress to enact health care reform. The Administration’s Budget includes a proposal to limit the tax rate at which high-income taxpayers can take itemized deductions to 28 percent—and the initial reserve fund would be funded in part through this provision. This provision would raise $318 billion over 10 years.”

For some healthcare reformers and industry observers, the key paragraph in Obama’s budget proposal was the following: “Aim for universality: The plan must put the United States on a clear path to cover all Americans.”  If you had any doubts that universal healthcare is what Obama always wanted (I didn’t), there it is in black and white.  Whether we will actually get there is another story, but we’re in the soup now.

In his speech last night before a joint session of Congress (transcript here), President Obama said healthcare reform can’t wait but offered little that was new regarding his reform package.  But that’s all right.  He’s offered more than enough specifics on what he wants to do.  Hell, the guy he wanted to run the show wrote a book on the subject; if only Daschle had paid his taxes he’d probably have the job.  So I was surprised to hear Alexis Glick  on Fox Business (here) suggest Obama has been short on specifics and that “he sort of hinted at universal healthcare.” Actually, he’s specifically called for universal healthcare.  Anything short of that would be a failure for him and frankly for the nation.  I’d argue that for Obama, it’s a failure if he doesn’t push through his proposal of a new public health plan similar to what’s offered to federal employees.  As I’ve said before, his plan isn’t ideal, but it’s a step in the right direction.

Addition (Feb. 26, 2009): O.K., my apologies to Ms. Glick.  Obama’s call for “affordable, accessible health care for all Americans” may not actually be a call for universal coverage.  It just sounds like one to me.

I missed this video of WellPoint CEO Angela Braly speaking about healthcare reform on Feb. 12 with CNBC’s Trish Regan and Larry Kudlow.  Braly seems to start out on automatic pilot, but she gets stronger as the segment progresses.  Click here to view the video via CNBC.com.

We want to have access to all cutting age medical therapies but are reluctant to pay for their full value.  We take for granted the many choices we have in selecting physicians and hospitals, but would rather not pay for these.  We want to be seen, examined, diagnosed and treated right away, and hate to wait for the delivery of our healthcare.  We want cheap drugs, but fail to understand that driving prices down (by regulations) will no doubt reduce the incentive for drug companies to bring new drugs to the market.  Most Americans with terminal illnesses would fight vigorously to prolong life, at a very large cost to benefit ratio. 

Well, many of us have the kind of healthcare we want (to a considerable degree) but the cost is literally bankrupting many of our companies and helping derail our economy. Is there any way we can continue to have all that, as well as add tens of millions people who are currently uninsured, at a much lower cost?   

This is the $64 billion question, and while people from all political persuasions have their pet answers, the simple truth is that we have to choose between cutting cost and cutting privileges.  What should we do? There are logical answers, and there are emotional answers.  There are harsh answers and there are compassionate answers.  There are sweeping changes and there is tinkering at the edges.

In our strong capitalistic system, the need to maximize profit is ill suited to deal with healthcare challenges.  Furthermore, in the healthcare system, where outcomes are probably the least predictable of all human endeavor (on an individual basis) and expectations for perfection are the highest, where an ideal customer (for insurers) is one who is doing well throughout her long life and then dies suddenly, economic models borrowed from other disciplines are untenable and new ones need to be formulated. This tension between profit seeking entities (leading to high costs of drugs, surgeries, procedures, hospital stays) and the universal need for the services (unlike for any other item or service) makes it impossible for the “market” to work effectively.  

The argument for or against a single-payer system for the U.S., like the ones that most western countries have, is raging now. Before such a system could work here, a major transformation (or at least recalibration) of our hard capitalistic principles will need to take place—an unlikely event despite the popularity of the current President and his Congress. Then again, not many of us would have predicted that banks might be nationalized.

What is the single most important thing we can do to reduce health care cost?

Well, we can ration care, by setting age limits for expensive procedures, but this is hardly fair and compassionate. We can make particularly high co-pays for certain very expensive, cutting age procedures (like multiple organ transplants), but again, anything that favors the wealthy can and will be viewed as unfair by the current powers that be. (Incidentally, to come up with a system where wealthy people DON’T have all the advantage is impossible). We can force drug companies to reduce costs, or ask for comparative studies (a $1.1 billion provision for “comparative effectiveness research” was at some point in the stimulus package—not sure if it made it to final version to be signed this week) but this may force the drug companies to invest entirely in the more risky, innovative drugs. Incidentally, it is not often that easy to figure out whether drug A is better than drug B—in cases where the differences are relatively small, very large studies need to be conducted, and then who is going to decide if the slightly better safety profile of drug A outweighs the better efficacy of drug B. It can be done, but it’s not easy and it doesn’t always lead to a definitive conclusion.

One thing that can be done right away is to institute prevention clinics and programs. There is no doubt that many chronic diseases are practically self-inflicted, and behavior modification is sometimes all it takes to delay their onset. Prevention can be done either on the individual level or population-based. Both involve relatively simple instructions, for example:
Eat less; eat less fat; eat less salt; eat healthy foods like vegetables, fish, nuts, fruits (like berries); avoid hydrogenated fats; avoid saturated fats (fatty meats, certain pastry). So the health professional can deliver these (and other) advices either one-on-one, or to groups of individuals (like schools) or to large segments of the populations via mass media. The President and the surgeon general can be very effective advocates and voices for this approach—just by talking about it from their bully pulpit. (Assuming the President will have stopped smoking by then…).

There are many reasons why this information has been slow to trickle down to everyone, and certainly it is slow to be implemented. Deeply ingrained cultural culinary habits and the huge industries anchoring them, plus the higher cost of many healthy foods won’t be easy to overcome, but if prevention becomes the buzz word for good health it will be embraced fully.

I know that many people resent this kind of interference by a “nanny” state, claiming that it’s nobody’s business what a person does for her health. This would be true if the insurance status of the population were not so intertwined. In any event the solution is simple: people who attend prevention clinics and follow those sensible guidelines will get a lower insurance rate. Also, prevention clinics will need to be subsidized (by government, who else) initially to guarantee their sustainability.

Finally, healthier foods need to be made more affordable to everybody, and again, in the context of the current stimulus plan could be done by government. I’m against intrusive government programs, but by establishing a prevention culture (and thousands of prevention centers run by private entrepreneurs) we will get the most bang for our healthcare buck.