Monday, March 31, 2008

Brian Klepper's recent post, "What Walgreens Surely Sees" got Health Beat's Maggie Mahar thinking and the result is one of her usually insightful comments. While Brian sees the for-profit model as a useful tool in making the primary care system more effective and vibrant, Maggie sees things differently.

Their discussion represents the classic difference between those who believe the market needs to be at the core of our health policy solution and those who don't---presented by two people at the top of their game and with great respect for one-another.

To Brian Klepper: On Corporate Medicine
by Maggie Mahar

Brian, I agree with 90 percent of what you say—particularly when you write so eloquently about what has happened to primary care. I believe that we need to make primary care far more attractive to doctors. One way to do it would be to forgive all med school loans for students who choose to go into primary care (or become family doctors, pediatricians or gerontologists), especially if they agree to work, for a few years, in areas where they are most needed..

But when you suggest that corporate medicine is the answer, I have to disagree. In the early 1980s, Paul Starr published his Pulitzer-prize-winning book The Social Transformation of American Medicine. At the end of that book, he predicted the “The Coming of the Corporation” :

“Those who talked about health care ‘planning’ in the 1970s now talk about health care ‘marketing’ . . . . “ Starr wrote. “Everywhere, one sees the growth of a kind of marketing mentality in health care. And indeed, business school graduates are displacing graduates of public health schools, hospital administrators and even doctors at the top echelons of medical care organizations. The organizational culture of medicine used to be dominated by the ideals of professionalism and voluntarism, which softened the underlying acquisitive activity. The restraint exercised by those ideals now grows weaker. The ‘health center’ of one era is the ‘profit center’ of the next.”

Starr went on to explain that because the U.S. had failed at national health care reform , “The failure to rationalize medical services under public control meant that, sooner or later, they would be rationalized by private control. Instead of public regulation, there will be private regulation and instead of public planning, there will be corporate planning.”

The goal driving that planning, Starr suggested, would no longer be better health, but rather “the rate of return on investment.”

So when you tell us that: “Wecare clinic was found to produce a 3.1:1 hard return on investment,” I have a question. Where did that return go? Was it plowed back into our health care system, in order to provide access to high quality care for Americans who cannot afford care? Or did it go to shareholders?

I have no objection to investors making money. I, myself, am an investor. But there are some sectors of our society where I wouldn’t try to turn a profit. (I don’t invest in war, cigarettes, or the healthcare industry—in the latter case, because I know far too much about the industry.) Given the fact that our health care system is in shambles—and that we cannot afford to provide decent care for millions of Americans-- I do not think that this is the time to try to figure out how make a profit on the sick and dying. Any savings that can be achieved by providing more efficient, more effective care should go back into the system so that we can provide better care for more people.

Like many others, I believe this is the time to find a public solution to a pubic problem. We have had enough of private-sector health care planning, with drug-makers deciding what drugs should be developed—and how much we should know about them. We have had enough of for-profit insurers deciding who should be covered, and who should be left by the side of the road. We have had enough of unscrupulous surgeons taking kick-backs from device-makers who tell them which devices to implant in our bodies. Meanwhile, the same device-makers conceal information about defects in those devices, leading to many deaths. They are sued, but they view the cost of the lawsuit as simply “part of the cost of doing business.” The profits they have made on their over-priced products more than cover the expense.

Since the 1980s, we have experimented with “corporate medicine, ”and discovered that Starr was right. The goal driving for-profit medicine is always “the rate of return on investment”—not better health. The history of our for-profit hospitals is a long, sordid tale of corporate crime. Time and again, the most successful investor-owned hospitals have bilked taxpayers, bribed doctors and gulled investors. In the most harrowing cases, for-profit hospital resorted to performing hundreds of unnecessary heart operations while another kidnapped patients. (I devoted an entire chapter of Money-Driven Medicine to the history of for-profit hospitals)

This is why so many of us want to see evidence-based guidelines drawn up by panels of physicians and researchers who have absolutely no financial interest in the outcomes. Health care is a public good, and as such, should be overseen by non-profit organizations overseen by a government organization that reviews quality and is accountable only to the public.

We have tried experimenting with for-profit medicine, for-profit public schools and for-profit prisons. In each case we have failed.

Why? Because when a for-profit corporation tries to deliver a public service, inevitably, there is a conflict of interest. By law, a corporation’s first obligation is to make a profit for its shareholders. Its customers come second. It is not supposed to lie to its customers—but caveat emptor (buyer beware) always applies.

As economist Rashie Fein once said, “We live in a society, not just in an economy”.
Corporations, on the other hand, live only in the economy. And properly so: that is their mandate.

Sometimes corporations tells us that they want to play a role in shaping society. (So Enron built a football stadium, Philip Morris gave scholarships to Hispanic women; Pfizer would have us believe that it is a philanthropist) When they do that, it’s time to take a close look at the corporation. Chances are they are hiding something. (I spent nearly 20 years of my life covering Wall Street, mainly for Barron’s, and so I know, all too well, that you can never be too cynical about the motives of a publicly traded corporation.)

Now, of course, some will argue that private-sector corporations are always more efficient than non-profits or government. As you put it: “No flying by the seat of your pants if you’re a corporation.” And you go on to suggest that this is why we should believe that corporate medicine will always use the newest, best medical evidence available when establishing
guidelines for care.

If corporations are that intelligent then how does one explain the entire U.S. auto industry? (Forget about the cost of health benefits. The industry seems incapable of designing a competitive car—incapable even of forecasting the oil crisis, and the need for smaller, more efficient cars.)

If corporations never “fly by the seat of their pants” how, then, does one explain an operation like Enron, that made up the rules for its business as it went along. Or WorldCom? Or Merrill Lynch? Think of the waste and fraud in corporate America that begins with obscene executive compensation and ends with insiders selling their shares just months before a stock tanks.

Then there is Walgreens. Its CEO earns $9.780,000-- substantially more than most primary care doctors , though I would venture to suggest that his job is no more difficult than that of a busy family practitioner. Most of his compensation comes in the form of stock and stock options. So when a primary care operation produces a hefty return on investment in Walgreen’s clinics, the doctors who provide the care are helping to boost Rein’s salary. I would suggest that there are be better ways to invest those savings in our health care system—perhaps by funding SCHIP so that all children in the U.S. have access to health care.

Further, Business Week reveals that Rein has a connection to 10 members of the Walgreens board. Long, hard experience has taught us that when the CEO of a company has close ties to board members that CEO (along with the board members) are likely to be over-compensated. The CEO’s power goes unchecked, and too often, absolute power corrupts.

Meanwhile, Walgreen’s stock is not doing well—down 20 percent for the year. No doubt management is concerned about this. I wonder how they will use their clinics in order to try to boost their share price?

Then, there are complaints from shareholders about how the company is being run. This from comments to the Wall Street Journal’s health blog: “At Walgreen’s pace of new store openings, it will blow away its goal of 7000 stores by 2010 (by about 400 stores)…I say GREAT, but at what cost for its investors and the company??? We just had a “heart attack” in the stock price.. EASE UP ON THE NEW STORE CONSTRUCTION… the marketplace can’t handle it yet. When a new store opens and it takes away form existing Walgreen’s stores, but does NOTHING for the district’s income, what does that tell you??? Hmm, maybe due diligence (read as: better market studies) should have been done BEFORE that money was spent. I figure it takes about $6million per new store opening, I wonder what would happen if you add a billion or two to the bottom line…”

The Wall Street Journal reports that as generics replace prescription drugs, Walgreens is having a hard time making money on generics-- in large part because Wal-Mart keeps prices low. Is Walgreens a desperate company that has set out on an ill-fated building boom while simultaneously branching out into a business that it knows nothing about—primary care? I don’t know enough about the company or the stock to know. But it certainly seems a possibility. (Reins, btw, is a relatively new CEO—came on board a year or two ago.)

Finally, Brian, I very much like the idea of work-site clinics. And I’m sure the clinics you are personally involved with are doing their best to deliver rational, evidence-based medicine. But even so, to avoid conflict of interest these clinics must be not-for-profit. As a society, we can’t afford to try to make a profit on a health care system that is going broke.

But I would add that work-site clinics do little to address one of the biggest problems in our health care systemlack of access to care. Most of the people who are uninsured don’t work for corporations that are wealthy enough to set up a work-site clinic.

We need neighborhood clinics—in inner-city neighborhoods, and in desperately poor rural areas. There is, of course, no profit to be made on these clinics. And this is why we don’t have them.

Brian responds:


Thanks, as always, for your thoughtful response to my post. All the issues you raise are important. Let me try to address them.

First, and most importantly, I believe that if you'll re-read my column carefully, you will find that I do not advocate for further corporatization in health care, but simply argue that it is irresistible and will occur. If you inventory my writings over the past decade, you will discover that, like yours, I have focused a great deal on the corrosive effects of financial conflict. I am acutely aware of the corrupting influence of special interests in health care, and have publicly stated that we won't fix health care in America until we first fix America by eliminating the ability of special interests to shape policy to their own ends by buying control of Congress and the legislatures.

When I closed down the Center for Practical Health Reform early in 2007, it was because I realized that, under the current system, it is impossible to effect meaningful policy change. In 2006, 16% of the $2.5 billion in lobbying dollars spent on Congress (>$55 million per Congressional representative) were from the health care industry, and almost half of that was from the supply chain sector. Health care is the largest part of the economy - one dollar in seven and one job in eleven - and it has translated that strength into an ability to shape policy. Until the non-health care business sector, the one group with more heft than health care, recognizes that it is in its interests to galvanize and drive policies that are also in the common interest, it will be impossible to change American health care policy in ways that re-establish stability and sustainability.

While I absolutely agree that corporations are built to act in their own interests, the reality is that America is built on markets and the drive for profits. I believe it is important to face that this is how the system works, and then deal with that. With the possible exception of certain areas of public health - like local public health units - virtually all American health care is now either for-profit or intricately wrapped up in for-profit ventures. To my mind, there are two main problems here. The first is not that they're for-profit, but that American policy makers have abrogated any sense of a common covenant that requires profit-driven organizations to behave in socially-responsible ways - through transparency, accountability and appropriate contributions to the general welfare - in exchange for the maintenance of a stable environment that allows the pursuit of commerce. The second is that, in our zeal for and attention to markets, we have given short shrift to critical societal functions that are not profitable, at least in the short term. You mention the access issue, true, but the problem extends much further, to our management of public health generally as well as to education, housing, and most other areas relating to social welfare.

Please also acknowledge that financial conflict is not limited to for-profit corporations, but to any group with power it seeks to retain and enhance. As I recently described, the AMA, which formally represents fewer than 30% of American physicians, has effectively "enabled" - I mean that word in the clinical as well as operational sense - the dominance of a cottage industry and kept both efficiency and quality at bay through its cozy relationship with the US government. Nor is it clear that, for example, the not-for-profit Blue Cross and Blue Shield plans, have operated any more in the public interest than their for-profit counterparts at United, Aetna and CIGNA.

On the positive side, the market is now driving many important structural changes that should disrupt the power dynamics of the current paradigm and dramatically improve the way care is delivered and managed. The reconfiguration of primary care is one area, of course, but another is the accelerating influence of data sharing, analytics and data-driven decision support, which all come under the heading of Health 2.0. Justice Brandeis' comment that "Sunshine is the best disinfectant" is keenly relevant today, because the real value of Health 2.0 will come through unprecedented levels of transparency, performance identification and accountability that have never been available before in American health care. These new paradigms will be the real sources of transformation in health care and hopefully, will have more far-reaching influence into the ways that we allow ourselves to be governed.

The 3.1:1 clinic ROI I mentioned was retained by the client, the City of Port St. Lucie. We encourage our clients to be self-funded for their health plans, because the savings resulting from their investments in the clinic accrue directly back to them, rather than to the insurance company. In this sense, we are advocates and fiduciaries for the patient and the purchaser, and we do not benefit if health care costs more. Our value proposition is linked to initial savings and long term performance that has significantly better outcomes and lower costs than other approaches. Ours is a traditional market play. We hope to succeed by delivering terrific value that is based on a better mouse trap.

Its worth mentioning that, as I described it, the worksite clinic model is really just a medical home that uses the full range of contemporary tools - electronic medical records, claims and encounter data analytics to identify patients with risk and high performance providers, face-to-face condition management, information therapy - to more effectively the full range of health and financial risk. It is well-suited to mid-sized and large employers and coalitions, but would work just as effectively in public health settings or when bundled with insurance products. To be clear, where the clinic is located is a lot less important than how the medical care process is structured and managed.

The problems that we face in health care will require two kinds of fixes. The cost control issues can and will be addressed by the marketplace, where there are financial incentives to create value by improving quality and driving down cost, As you know as well as anyone, most reasons for exploding health care cost are directly traceable to structural anomalies that have been perpetrated by special interests. Over time, the problems they have created have become vacuums, waiting to be filled by new solutions. This is the classical dynamic interplay described by Thomas Kuhn in The Structure of Scientific Revolutions.

But the access issues must be addressed through policy. To my knowledge, America has not made a policy decision based on social-justice in more than 40 years. The last was Medicare, in 1964, when my parents' generation, who had weathered the Great Depression and World War II, and who had a more generous sensibility than my generation, were entering middle age. I do not know whether, with a change in Administrations and the emerging influence of a younger generation, we can rediscover the more responsible, open-hearted spirit that I used to think of as the source of American greatness. I certainly hope so.

I share your concern, Maggie, that health care and, for that matter, America, has been compromised by unbridled capitalism. Still, I side with George Soros that the problem is not capitalism, but a failure of societies to develop an aware, disciplined regulatory environment that keeps it in check and requires its interests to also remain aligned with the common interest.

This is one of two big challenges. I believe that the market is responding to many of health care's issues with new approaches that will help re-establish a healthier national health system. The other large question is whether we, as a people, will mature enough to make health care more readily available to everyone within our borders.

I hope this is helpful.


Friday, March 28, 2008

What Worksite and Retail Clinics Mean for the Primary Care Crisis

Today, Brian Klepper returns with one of the more intriguing posts we have seen from him.

This time he looks at a relatively unnoticed acquisition of two worksite clinic firms in the broader context of the challenge primary care faces in out health care system.

What Walgreens Surely Sees

by Brian Klepper

Though it probably went mostly unnoticed in the cacophony of health care stories, last week's news that Walgreens had bought the two largest and most well-established worksite clinic firms, iTrax and Whole Health Management, was a harbinger of very big changes in health care. Walgreens, the ubiquitous drugstore company that, with Wal-Mart and CVS, has already leveraged its pharmacy platform to establish a strong footprint in retail clinics, undoubtedly startled many health care observers with its announcement. After all, isn't the company doctor a relic?

Actually, no. The worksite clinic - and by way of disclosure for the better part of the last year I have worked closely with a small, very innovative, Orlando-based startup worksite clinic firm, WeCare TLC - has been reinvented and refitted with 21st century tools, and offers the promise of nothing less than a paradigm shift toward dramatically better care at significantly lower cost. Understanding how these structures work and how they differ from both old-fashioned medical practices and retail clinics provides clues into what Walgreens likely sees and why that matters to American health care.

There are several parts to this puzzle, but one is the abject failure of America's primary care community to establish a strong base of power by leveraging its ownership of the referral process. Last December I pointed out that primary care faces a labor shortage crisis because, for many years, the AMA has worked hand-in-glove with CMS to create financial rewards for specialists at the expense of primary care physicians (PCPs). This act of sabotage has been abetted by the health plans, who have blindly followed CMS's lead on reimbursement, and who likely have their own reasons for disempowering primary care. As Benjamin Brewer MD argues compellingly in yesterday's Wall Street Journal online edition, the resulting financial pressure on primary care physicians has made their practices increasingly untenable. Reform is a pipedream, he says, unless health care's foundation, primary care, is re-established. The current issue of Medscape Family Medicine has a point-counterpoint discussion that chews on how practicing docs or policy-makers might respond to this problem. Robert Centor MD argues that physicians could develop smaller concierge practices, while Charles Vegas MD calls for a single payer system that would reimburse primary care physicians at levels that are more sustainable.

To me, though, these discussions miss the deeper and more practical point. Part of the reason that primary care is failing is that, as a discipline and like the rest of medicine, it has remained a cottage industry. Its practitioners lack unity and the strength that organized collaboration conveys, mostly working in little businesses that, on the whole, have not seen the need for or been able to afford investment in management tools and practices that have become available to them.

Even though many internists, family physicians and pediatricians view primary care in terms of its "comprehensiveness" and its "diagnostic and management puzzles," to use Dr. Centor's terms, over time the downstream medical specialists and the health plans have defined primary care in terms of quick handling of the simple and routine. Embroiled in the day-to-day struggle to care for patients and keep their practices afloat, dependent on health plan reimbursements that have been tethered to a narrow definition of their roles, they have suffered from a failure to imagine what the broader needs of their patients and purchasers might involve, what opportunities might exist and what those opportunities might mean.

One unhealthy byproduct of these circumstances has been a disconnect between PCPs and the specialists they refer to. Patients and purchasers (i.e., the patient, the employer, or the government) have been the pawns of this lack of continuity. Encouraged by health plans alternately chanting the "choice" and "managed care" mantras, health care has become dominated by two models. In the gatekeeper model, the PCP makes the decision to provide care or to refer. In the independent patient model, the patient refers himself. (In Medicare-heavy markets, like Miami, specialists like cardiologists and endocrinologists have become primary care physicians to the elderly, poor management of resources but comfortable for patients and lucrative for the specialists, if expensive to the rest of us.) Once the patient leaves the primary care office, the PCP typically has little involvement in the services - appropriate or inappropriate - delivered by the specialist. Each physician's office is its own silo and, even though we know that most wasted services and cost occur downstream of primary care, nearly all health care reimbursement discourages primary care physicians from participating as expert patient/purchaser advocates in the management of the full continuum of care. It's a curiously corrosive policy that is re-enforced by the niceties of professional courtesy: "Don't mess with the care I give to my patients."

There is dawning awareness that this is a core, resolvable problem in health care, though, and some change is afoot. The Patient-Centered Primary Care Collaborative, a coalition of large employers and professional groups, has been advocating for changes in reimbursement and the roles of primary care physicians. Longtime progressive health care heavyweights like IBM's Paul Grundy MD, Bridges To Excellence's Francois de Brantes and NCQA's Peggy O'Kane are doing a great job articulating a new vision of primary care, but whether their campaigning can get traction with mainstream health plans and provision of care is another matter.

Markets, like nature, abhor vacuums. As Scott MacStravic noted a few days ago, over the years various efforts have taken stabs at what we now know as retail clinics. Catering to convenience, the uninsured, the underinsured, and those who aren't interested in a regular primary care physician relationship, this is catch-as-catch-can medicine, mostly provided by nurse practitioners and physician assistants, under the notable sponsorship of Wal-Mart, Walgreens and CVS, which co-incidentally, stand to gain through cross-selling in their pharmacies and other departments as well.

Many physicians and their associations are apoplectic over the apparent success and staying power of the retail clinics, arguing that these operations may deliver sub-standard care and that they lack a real connection to the full continuum. I wonder whether all the fuss makes sense, and whether this is really a good expenditure of their energies. Retail clinics are corporations, after all, and unlike most physicians, who practice what they've managed to keep up with, these corporate clinicians access continuously updated information tools and practice based on evidence-based guidelines. No room in corporations for flying by the seat of your pants. And, in a sense, this is their strength. It seems very unlikely that organized medicine will win the battle against the retail clinics. They seem to be thriving.

Even so, there's no question that retail clinics, for all their positive attributes, are NOT medical homes. At this point, anyway, their clinicians and patients probably don't generally develop deep, trusting relationships, and the professional medical capabilities at play only go so far.

Let's also not forget that the great majority of American's still do get their coverage, however tattered and iffy, through their workplace. Which brings us back to a fascinating phenomenon: the re-emergence of worksite clinics.

Unlike retail clinics, worksite clinics ARE medical homes. Although most early worksite clinic ventures have focused on jumbo employers, properly configured they work even for small employers. (The group I'm working with has operated an onsite clinic for their 60 employees and their families for three years. It operates 5 hours a week, has created tremendous savings, and the employees are very happy with it.) The clinicians eat lunch every day with the employees, and develop a bond that matters when managing care.

These aren't our parents' doctors' offices. Peggy O'Kane said it well. “It’s much more proactive than the old model of just thinking about you when you show up for an office visit. It’s creating an ongoing relationship with the patient.”

Because they're built from scratch, these clinics can take advantage of incentives, IT, analytics and care management programs that in turn help the practice identify and manage health problems and costs. In the WeCare clinics, employees and their family members come to the clinic for free, without co-pays and without paying for drugs and labs. This approach brings in low income employees and their families who often don't see doctors because they might have to pay something for the visit or for their prescriptions, and it dramatically reduces the costs of care that is needed when people avoid primary care.

All WeCare physicians use Electronic Medical Records (EMRs) that can receive or transmit patient information to other systems. Soon we should have embedded best practice guidelines that alert physicians to potential care gaps, and help them avoid exacerbated care and costs. All patients are encouraged to receive Health Risk Appraisals, and those evaluations are validated through claims analysis that help identify chronic patients and those who might, on the basis of historical information, potentially have an acute event in the near future. Identified patients are paired with clinicians for further evaluation and management, to try to impact or head off the problems.

When data on the network is available, the high performing specialists (in terms of quality and cost) within each specialty are identified and referrals are steered to them. And when the patient is referred, ideally the primary physician connects with the specialist, and urges that he/she be consulted prior to any significant care. In other words, the primary care physician becomes an expert guide and advocate as the patient navigates through the system, working on behalf of both the patient and the purchaser, and helping to hold the other players in the system accountable.

At this point, employers, more than health plans, see the sense in this model. While the health plan benefit structure can be tweaked to optimize use of the clinic, the clinic itself is distinct from and sits in front of the health plan. The employer invests up front in the clinic to generate immediate, substantial savings in the plan.

And those savings can be VERY substantial. In a report by the City of Port St. Lucie on the WeCare clinic's performance during its first 6 months of operation, the clinic was found to produce a 3.1:1 hard return on investment, with dramatic savings in primary care visits, drugs, laboratory, sick hours and employee out-of-pocket savings. There were also soft savings that they know exist but that haven't been quantified yet in HR testing (like drug screens and Department of Transportation testing), in the full range of lost productivity costs, and in workers' compensation savings.

Nothing but inertia prevents conventional primary care practices from reconfiguring in this way, but it takes a concerted focus on managing population- and systems-level information as well as individual patients' conditions. It's an expansion of the traditional primary care physician's role, and so far, there don't seem to be a lot of PCP's with the leadership and business focus to drive these models from the base of a conventional practice.

And that has created an opportunity for, first, the worksite clinic vendors, and second, behemoth corporations like Walgreens who see the potential to capture primary care, and with its control of referrals, the possibility of controlling all health care. Because worksite clinics are focused directly on employers, they work around the health plans, and so become a disruptive innovation that the health plans must learn to accommodate. By realigning the incentives, by using tools, data and programs to identify and manage risk at the level of primary care, and by enforcing downstream accountability from the primary care base, these models have the potential to reinvigorate primary care, and to drive tremendous new improvements in quality and efficiency, and to help re-establish health care stability and sustainability.

Over the long slog of the last several decades, the health care's various sectors have become increasingly inward-focused, unaware that their roles are within a larger system, and insensitive to the larger well-being of both the patient and the purchaser. Primary care has been compromised. There is rampant excess in the specialties. Health plans have often abrogated cost and quality management in favor of simply bundling, financing and marketing health care services. And employers have become frustrated with unrelenting, rampant cost growth.

These dynamics have created an opportunity for vendors who can establish systems that identify and manage health/financial risk directly on behalf of employers and others who own that risk. Walgreen's - and undoubtedly other big organizations will follow suit here - surely sees the vacuum and, through its purchases, has placed a bet squarely on the transformative power of worksite clinics. That step could be more meaningful than anything occurring in state and national health policy reform. If nothing else, if the physician community remains scattered and dis-united, it could spell the end of medicine as a cottage industry, and the next big phase of true corporate medicine in America.

Brian Klepper ( is a health care analyst based in Atlantic Beach, FL.

Wednesday, March 12, 2008

Democrats Ask GAO to Study the Individual Health Insurance Market--They Are Really Trying to Set Up McCain and Cast Doubt on His Health Reform Plan

There is an old salesman's axiom, "Don't ever ask a question you don't already know the answer to."

Key House Democrats have asked the Government Accountability Office (GAO) to take a look at the current state of the individual health insurance market. They also want the GAO to review the operation of the state high risk pools designed to provide a safety net for those who can't get coverage in the private market.

Democratic House Committee Chairmen Dingell, Waxman, and Pallone told the GAO, "The individual market for health insurance coverage is seriously flawed. Many people who need insurance and apply for it are denied coverage in the individual market or are offered insurance coverage that turns out to be inadequate or it is too expensive or both."

What's really going on here is that John McCain is offering a standard Republican prescription for health care reform--which includes the rebuilding of the health insurance market on an individual platform that would emphasize personal responsibility, consumer choice, individual ownership and portability of coverage. In short, McCain and the Republicans want to revitalize the individual health insurance market--often by deregulating it.

The Democratic response to that will be that McCain and the Republicans just want to throw you to the market wolves--an individual health insurance market that gives the best prices to the young and healthy and sends the sick off to government-run risk pools that fall way short of giving people decent coverage.

The problem for McCain is that is in fact how the individual health insurance market works today. The Republican nominee is going to have to tell the voters how his reinvigorated individual health insurance market will work better than that. So, far he is short on the details.

The Democrats are about to get themselves a report that will condemn the operation of the individual market and give the Democratic candidate for President a lot of ammunition against McCain.

Senator McCain would do well to close the loop on his proposal and tell us how the sicker and older will get a good health insurance policy in his new system.

Tuesday, March 11, 2008

Today's HMO Carnage on Wall Street

Maybe times have been just too good for so long that people have forgotten just what a challenging business this can be.

After easy profits for the industry during a multi-year period when trend rates fell, today Wellpoint let us know nothing can be taken for granted.

When the trend rate is steadily falling a monkey can make money. If an employer sees their claims go up by 9% the year before, it's pretty easy to sell them a 9% rate increase even though actual trend maybe 8%--thereby creating a one point windfall. That had been the case for five years--up until 2007. That's why earnings reports at Wellpoint, and other HMOs, had been full of comments referring to their being able to renew business at levels higher than actual claim costs and to be able to take down even more profits from "favorable development" in prior periods.

The last year or so, we have hit a sort of health care trend bottom. Trend hasn't been rising but it hasn't been falling either. Unlike the prior years, you actually have to hit your numbers. The result has been medical cost ratios (adjusted for business mix) by all of the companies that have been clustered close together varying by no more than the usual margin for error in pricing.

With a small margin for error, missing your numbers can cause problems--especially when analysts watch every nuance and don't like to be embarrassed when you miss that margin for error as Wellpoint said today it is going to do. The analysts aren't about to tell investors they don't really understand this business and its risks so they end up putting all the blame on management and the punishment is, and will be, harsh.

The analysts were surprised to today.

Anyone who has been in this business for a while was not surprised.

The wheels are not coming off and fixing this type of problem is really pretty easy. Management can clearly see the pricing errors and respond over the next renewal cycle. In 18 months, someone at Wellpoint will be the new darling of Wall Street for turning it around. (The easiest job in this business is inheriting an operation already in the dumpster--the hardest job is keeping it out of one.)

Welcome to the health insurance business at a time when you can't count on windfalls!

The Higher the Price the Better It Works--Placebo Drugs That Cost More Found to "Work Better"

That was the somewhat humorous--but nonetheless valuable--conclusion from a study sponsored by MIT and led by a Duke behavioral economist.

It seems that researchers told one group that a medication cost $2.50 per pill and told another group that it cost ten cents per pill. Both were identical placebos.

85% of those who took the "$2.50 pill" reported pain relief.

61% of those who took the "10 cent pill" reported pain relief.

I guess we have always known that when it comes to health care a good name and a higher price has always counted for something in the absence of hard data to the contrary.

Yesterday, in a post reporting a 7.4% increase in brand-name prescription drugs during 2007, I asked why it was necessary for these prices to rise by two-and-a-half times the rate of overall inflation.

Maybe the pharmaceutical industry knows that lots of advertising and higher prices actually help them!

Monday, March 10, 2008

Drug Prices Rise 7% For Drugs Most Commonly Prescribed For Seniors--Two-and-A-Half Times the Rate of Overall Inflation

Many health care experts point to the creation of Medicare as the time that the American health care system's costs began to explode at an unsustainable rate. Simply, they believe that a huge infusion of government money drove both the supply and the demand for services setting the stage for today's cost problems.

That has made many wonder what impact the new Medicare Part D drug benefit, which began in 2006, would have on drug prices.

That's why last week's news that drug prices for the brand-name medications most often prescribed for seniors increased by an average of 7.4% in 2007--two-and-a-half times the rate of basic inflation--caught my eye.

In the study, the senior group, AARP, tracked the wholesale drug prices for 220 different drugs. The prices increased for all but four.

In the four years prior to the advent of Part D, wholesale drug prices increased between 5.3% and 6.6% annually.

The pharmaceutical industry countered that overall drug prices have only increased by 3.7% since 2000. But that number includes the price of generic drugs that make up about half of all drug purchases.

While prices didn't spike much past prior trends, the 7.4% increase is disconcerting.

Will Part D have the kind of inflationary effect on drug prices that Medicare has been thought to have on overall health care costs?

Why did name-brand drug prices rise by a multiple of two-and-a half-times the rate of inflation in the first place?


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