This is my third article on Health Care in America, this time looking at how the system is rorted for corporate profits.
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Welcome to Health Care In America 101! This is a primer.
This is a continuation of a four part series looking at a pictorial guide to health care in the U.S. You can find the previous blogs here:
Health Care in America 101: Part 1- Why is it F#cked Up?
Health Care in America 101: Part 2- Who is Pulling The Strings?
This is Part Three of a Four Part series looking at American Health Care. Part One looked at defining the problem; the problem in a nutshell is we pay too much and get too little. Part Two looked at who are the players. In this article, Part Three will try and work out what tactics the players use that keep us health care costs. Finally, in Part Four I will offer potential solutions.
We saw in Part Two that the main players driving up the cost of health care in the U.S. are drug companies, payers and hospitals. The coronavirus pandemic will probably make drug companies richer and has greatly helped payers. Hospitals have been hurt by the slow down in surgeries.. Physicians are probably not the culprits, gradually having real salaries eroded and being slowly disempowered and muzzled through hospital employment.
I tried to make it a little fun, less words, more pictures. Click on any picture or graphic if you want more information.
Let’s look at some of the strategies used that add to the burden of health care costs in the U.S.
1. Pharma controls Pricing:
Drug pricing is high in the US. We all agree:
What’s interesting is that there are no real controls of what drug companies can charge. They can charge whatever they like!
We’ve seen the situation with ‘orphan’ drugs where prices have been pushed through the roof. These are for rare diseases where no alternative exists:
Epipens and Insulin- A Tale of Two Drugs
The price of the Epipen is a good example of companies setting whatever price they like:
The story of insulin is sad reality and heartbreaking.
Insulin was discovered in 1923 by Frederick Banting who refused to put his name on the patent. He sold the patent for $1 to the University of Toronto so all could benefit. Initially animal derived insulin was used. Recombinant technologies allowed changes from the patient. The price has skyrocketed:
Here are some interesting facts about insulin:
- Three companies control 90% of the global insulin market
- prices from these three have risen at the same rate which sounds like collusion.
- There is no generic insulin
- Federal bills like the Affordable Drug Manufacturing Act to try and cap prices went no where.
- A ‘Pay for delay’ agreement is a patent dispute settlement in which a generic (in the case of insulin, a biosimilar) manufacturer acknowledges the original patent of a pharmaceutical company and agrees to refrain from marketing its product for a specific period of time. In return, the company receives a payment from the patent-holder. This means it is actually legal for one insulin producer to pay another one not to enter the market. A few years ago the company Merck announced plans to sell a biosimilar version of Sanofi’s Lantus. Sanofi sued, and eventually Merck announced that it was no longer pursuing it’s biosimilar, presumably due to payments from Sanofi to stay away.
- Even though the original patent expired companies “evergreen” around the original patent. For example, Sanofi has filed 74 patent applications on Lantus alone, that means Sanofi has created the potential for a competition-free monopoly for 37 years.
It’s worth reading The Human Cost of Insulin in America– depressing and maddening.
Various arguments are made by the multibillion dollar drug companies to justify prices including the high cost in terms of research and development of getting drugs to market, regulatory costs and the need to offset cheaper medications in poorer nations. Regardless, drug prices in America are high and it’s a huge business. Look at the figures below:
Drug companies have high operating profit margins compared to other industries. Crazy to think it’s higher than Disney or Coca Cola!!:
Yet the amounts devoted to drug marketing outweigh that spent on research and development:
Drug manufacturers dictate pricing to CMS. As discussed in Part Two, the Federal Government, unlike the VA cannot negotiate drug prices. Drug companies can set any price they think the market will bear:
There is no doubt that drug companies will do very well with the Coronavirus vaccine:
In short drug companies, set whatever price the market can bear, use loopholes in patent law and legislation to avoid generic medications far longer than traditional patent expiry dates, spend more on marketing than research and development, spend the most on lobbyists, don’t let their biggest customer (The Federal Government) bargain or negotiate and enjoy a greater profit margin than a company that sells just bottled water, sugar and flavoring (Coca Cola).
Pharmacy Benefit managers (PBMs) are the middle managers in the delivery of prescription drugs in the U.S. As discussed in Part Two, PBMs are part of the complicated pathway of drug delivery and often taken the biggest margins.
The three largest PBMS, CVS, Express Scripts and UnitedHealth own 70% of the PBM market and now control more than half the $138 billion market for specialty drug prescriptions. PBMs are able to upcharge the price of generics. Own the supply chain. Make it complex. Make it indecipherable. Charge what you like:
This is what trump said about PBMs: “the dishonest double-dealing that allows the middleman to pocket rebates and discounts that should be passed on to consumers and patients.”
Oh, and guess what- the payers know how much money PBMs make and want a piece of them:
3. Payer Tactics
This had been discussed ad nauseum. Payers make record profits and as publicly-traded companies have fiduciary duties to increase share prices for shareholders. This mean profits:
Payers are using vertical integration (see 6) in order to limit and control supply and delivery and reduce interference in their primary goal of making large amounts of money
Payers also use creative coding in order to maximize the payments they get from the Federal government:
As discussed in our 2nd blog on healthcare, payers have increased premiums, made denials for care more common and made record profits. This has only gotten worse with the Coronavirus pandemic as elective surgeries were delayed:
4. Hospitals: “Not-For-Profit” (NFP) Status and Billing Practices
We touched on this in Part Two. Rural hospitals often have less commercial payers, a complex patient population and difficulty recruiting speciality physicians who are revenue earners for the hospitals. Large hospital systems don’t have the same issues necessarily and this affects the bottom line.
A lot of large hospital systems are doing very well (until COVID hit!):
In 2018, the American Hospital Association lobbying arm donated $23,937,842 in political contributions.
We also touched in Part Two that there is a mismatch for many NFP hospitals with the tax deductions that they receive and the charitable contributions they make for their local community:
More and more we are realizing the tax concessions obtained by NFP hospitals is not balanced by care they provide the community that is poorly reimbursed or not reimbursed.
“The irony is most hospitals are “nonprofit,” a status that makes them tax exempt. Many (but not all) do enough charity work to justify tax benefits, yet it’s clear nonprofit hospitals are very profitable. They funnel much of the profits into cushy salaries, shiny equipment, new buildings, and, of course, lobbying. In 2018, hospitals and nursing homes spent over $100 million on lobbying activities. And they spent about $30 million on campaign contributions. Health industries have also been funneling hefty sums into dark money groups. But their political power isn’t just the result of lobbying or electioneering. Hospitals are often the biggest employers in states and cities across America.”
“Health care reformers direct much of their ire at the nation’s health insurance companies. Perhaps they’re the easiest targets because they’re faceless paper-pushers, located outside their districts or states, who are often the only entity in the system controlling costs. Studies suggest insurance administration and profits do contribute to wasteful health care spending, but they’re just one contributor to a bloated system. Hospitals, which often escape criticism, are a significant part of the problem”
Finally, hospitals are often ruthless in chasing monies owned which runs against the charitable care they should provide as a NFP institution:
How often does it happen? Who knows if hospitals are not transparent about debt collection practices?No wonder medical bills are the number one cause of bankruptcy in America.
More and more we are seeing the actions of nonprofit hospitals, buying up practices to reduce competition, wasteful spending on marketing etc etc being scrutinized as the community benefits are not seen. Below is a recently published article that covers many of these issues. It’s worth a read.
5. Hospital “Facility Fees”
Getting the same procedure done outside a hospital setting and in a hospital setting can mean thousands of dollars difference. if a physician provides a service to a patient in a location that is considered a part of a hospital, the hospital can submit to medicare a claim for provider-based facility charges. These are legal but controversial. Sometimes the facility fee is higher than the cost of the physician’s actual services and may surpass the cost of providing the same service in a private practice setting. As more and more hospitals employ their owned physicians and require employed physician to only refer to other employed doctors, and to order tests only through hospital-owned facilities, facility fees add up.
According to Alan Sager, a professor of health policy and management at the Boston University School of Public Health, facility fees are “a tax on sick people” and reflect the “financial anarchy that pervades health care in the U.S.”.”They are the latest gimmick to generate additional revenue for hospitals,” whose profit margins have sagged in the past two years as the economy has nosedived, Sager said.
Read this experience:
6. Vertical Integration
Vertical integration in healthcare has been touted as the solution to create transparency and develop partnerships that create a more effective and efficient health care system. There has been a flurry of mergers of companies across the health care value chain, such as CVS and Aetna, United HealthCare and Optum, and Cigna and Express Scripts.
In this case, the purchase of PBMs should help the insurers cut out the middle man in the pharmaceuticals and reduce costs to the payer. However, the PBMs generate more revenue and profits than the insurers that they have been purchased by. Anthem’s development of the IngenioRX raised their earnings per share above Wall Street estimates and 20% of the $4B in savings that Anthem expects in savings from the PBM will be reported as profit. As profit driven entities, it is unlikely that insurers would forgo these profits but would rather combine the business strategies and cost reductions will be forgotten.
The PBM market was valued at $368B and expected to expand at a compound annual growth rate of 9.2% through 2026. This can be attributed to high healthcare expenditures, the increase in chronic conditions and the growth of vertical integration.
The big five insurers now each own their own PBMs and process medical and pharmaceutical bills for millions of people across both private and public insurance plans. In addition to processing claims, these major insurers own surgery centers, doctor’s offices, consulting firms, retail pharmacies, in-store clinics and data-analyzing services.
Ultimately, the healthcare sector has profited significantly in 2019, with Americans spending $3.6 trillion on health care last year, and will continue to do so in the future. Healthcare is not affected by trade wars and there doesn’t appear to be any governmental cost containment in the near future. The ACA’s tax on health insurance appears that it will continue to be put on hold, allowing insurers to reap the benefits in their overall profitability.
7. Lack of Transparency
This is a big one. The big players do not want to reveal their agreements and charges. Despite the Trump government legislation on hospitals revealing prices, the penalties are not large and data presented sloppy and hard for the consumer to interpret. Pricing shopping becomes difficult for the average consumer.
The news is rife with reports of entities not wanting to support transparency:
From the above article:
“The burden of compliance with the rule is enormous, and way out of line with any projected benefits associated with the rule,” according to the suit. Bear in mind the cost to hospital is estimated to be about $40 million, a drop in the bucket for the system.
White House officials have said that a lack of cooperation from hospitals on the regulation indicates they are prioritizing themselves over consumers.“Hospitals should be ashamed that they aren’t willing to provide American patients the cost of a service before they purchase it,” HHS spokeswoman Caitlin Oakley said.
Articles like the one below make you wonder what don’t we know?
8. Lobbying/Collusion/Maintaining Status Quo
We know there is a problem. We all feel it, yet nothing changes. Why? Again, those with the deepest pockets have the most to lose and want to maintain status quo. Hospitals say it’s not them and aid and abet the actions of payers and drug companies.
If you want to see what hospitals spend on lobbying look at the article below:
We saw in Part Two how much money Mayo Clinic made last year. Guess which hospital system is in the top four in terms of dollars spent on lobbying:
Lobbying in health care is a huge business. The numbers to make sure things don’t change for those doing well are staggering:
9. Administrative Overload
The Government and CMS/Medicare is at least partially responsible for the administrative burden of U.S. Health Care. Initiatives such as Meaningful Use and moving towards Pay for Performance have greatly increased the administrative load. As this article attests, up to 40% of US Health costs may be related to administrative costs.
We are number one in administrative costs in the world– blame the Government.CMS, Payers and Hospital systems.
“The average American is paying more than $2,000 a year for useless bureaucracy”
“More than a third of healthcare costs goto bureaucracy”
10. “Surprise” Billing
This practice is rampant in health care. Consumers have a service and are sent a bill for services they did not know was out of network and expected to pay or sent to collections.
There are many players:
This has been done by unscrupulous doctors:
Air Ambulance/Helicopter services:
Most medical helicopter services are owned by a single private equity owned firm who refuses to sign contracts with payers and then sends surprise bills to patients who then pressure payers to pay some or all of the bill.
Surprise billing is a hot topic and currently being reviewed by Congress. With the pandemic, this may be coming to an end:
11. Physicians: Controlled and Muzzled
We discussed in Part Two that physicians are mostly employed in the U.S. now and effectively muzzled. They have poor lobbyists but are the only advocates of these stakeholders for patients. This has become worse since the pandemic.
Control the physicians and you control dissent.
Articles showing hospital systems retaliating against physicians are becoming more common:
What does all this mean? It means the main players who do well from health care, payers, hospitals and drug companies have mechanisms in place to maintain the status quo, extract maximal profits and use CMS and middle America as an ATM for profits. Hospitals have been hurt by the pandemic, payers thrived and drug companies may thrive. Keep in complex. Keep it opaque. Mystery is a margin.
n this blog and upcoming blogs we will cover the following:
Health Care in America 101: Part 1- Why is it F#cked Up?
Health Care in America 101: Part 2- Who Pulls the Strings?
Health Care in America 101: Part 3- How Are We Ripped Off?
Health Care in America 101: Part 4- This is the Way
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