Sunday, May 27, 2007

Four Myths About US Healthcare

Nazi propagandist Joseph Goebbels (1897-1945) famously said that a lie repeated often enough becomes the truth.

Healthcare myths are often nurtured by industry players benefiting from them, though some are helped by our predispositions. For example, people comparing items tend to think that the higher priced one is better.

Here are the four biggest myths about US healthcare:

Myth: A major reason for high US hospital prices is cross-subsidy for the uninsured, non-paying patients.

Reality: Only 8% of hospital patients are uninsured and some charges are recovered from even this group. Hospital figures of 12% of un-recovered dues are based on the vastly inflated “list” prices that they bill uninsured patients.

Myth: The extra revenues from the high prices that drug companies charge US patients are ploughed back into research that leads to new, vital and innovative treatments.

Reality: Little of that extra money goes into truly innovative (as opposed to "me too") drugs. And to maximize their returns, drug companies on average spend over 30% of their revenues on marketing (even more so in the US), versus 13% for R&D. (See more in the first post and an incisive article by two Harvard academics.)

Myth: You get what you pay for. Pricey US healthcare is the best in the world.

Reality: Some “five star” foreign hospitals provide better quality in terms of outcomes (lower mortality and complication rates) and patient experience, at a fraction of US prices. Many of them are JCI accredited, with US/UK trained doctors. (See more in an earlier post.)

Myth: US healthcare provides a malpractice safety net / jackpot if things go wrong.

Reality: As many as 95% of US medical negligence cases including 90% of deaths from negligence do not result in a claim, often because the victim and their families don’t know or can’t prove that negligence occurred. Of cases that ARE filed, two thirds fail to secure any compensation. So the malpractice game is like a lottery with less than 3% of the payments going into prize money. And even the lucky winners have to fight an average of five years to collect their proceeds.


kenrod said...

Regarding your first myth: While only 8% may be uninsured they must account for a larger amount of the claims. This is because these patients don't have insurance and therefore only enter the hospital during an emergency. The claims must be heart attacks rather than broken fingernails. Besides, they are likely to use the emergency room rather than regular admission, which means the cost to treat a condition is very high. So a flu patient would cost $2000 in the emergency room rather than $150 at the doctor's office. So just comparing the number of claims is misleading.

Sandip Madan said...

Kenrod, a good hypothesis. But the figures tell otherwise (and even intuitively, many uninsured can only get treatment by visiting emergency rooms, even for minor problems.) As I said, the national average for unpaid hospitals dues at list prices is 12% of revenues and this translates to write-offs at the more realistic negotiated rates of only about 6% of revenues. In toher words this can justify a 6% increase in prices to cross-subsidize indigents, not US prices being double those in Europe.
(I've expanded on my initial more cryptic deleted comment.)

kenrod said...

Regarding Myth #2: The extra high revenue that US patients are charged may partly go to research, but it should mainly go to the shareholders. I have invested in many companies that have lost money because the FDA hasn't approved a drug. I have to be compensated for my risk taking. After all the amazing fact is that new drugs come mainly from small biotech companies rather than the big pharmas. And certainly the govt never innovates.

But what has to be done is the patent laws need to be revamped if costs are to come down. Right now if drugs are going off patent, the company can file small frivilous changes and get a new lease on life. Generics should be able to bring the costs down sooner.

In the last few years the US drug industry has fallen behind their European counterparts mainly because of fear of lawsuits like Vioxx. But innovation still remains the domain of small companies in the US and over the world.

Another reform is that drug companies should not be allowed to advertise a drug on TV. That kind of publicity creates an artificial demand and pressures doctors to pander to their patients, especially in lifestyle types of drugs like Viagra. Doctors should be banned from accepting any gifts from salespeople, and the IRS rules of gifting should be applied.

Sandip Madan said...

Kenrod, don't be too hard on the government - the cited article by Harvard academics shows how most breakthrough drug research has come about with government or public funding.

But you've made some great suggestions and observations -thanks.

kenrod said...

I think the new concept that could help control costs is Consumer Driven Health Plans(CDHP). I think you'll be seeing more of these in the future just like you saw a proliferation of HMO's in the 80's. This is where consumers are allowed to take their health care dollars to who ever is the best and lowest cost for their situation. So a consumer is given $1000 a year and then they can shop. Right now people don't care because the insurance company or govt pays the bills. Let's see....

Sandip Madan said...

CDHPs certainly have some uses, e.g., the Health Savings Accounts (HSAs) that allow for tax-sheltered "roll-over" accounts, that help the relatively well-off who pay taxes, and those who are well below the maximum out of pocket caps.

But individuals may have less bargaining clout with providers than large collectives, and the incentive to economize disappears if/when a member hits the maximum out of pocket expense allowed (about $5.5K per individual or $11K per family) after which insurance pays 100%.

Also, these don't solve the problems of the uninsured much, except for the so-called Mini-Med plans that charge low premiums and pay out just enough to allow treatment as medical tourists if major surgery / treatment is needed. But what if it's an emergency situation and/or the patient cannot travel abroad? Then the plan just says - tough. :-)

kenrod said...

Those are good points, Sandip. Incentives do disappear after the max-out-of-pocket has been reached. But the idea is to train the consumer to shop wiser because right now they spend like drunken sailors knowing that the insurance companies pick up the tab. It's the same idea that children that are given allowances learn to manage their budgets throughout their lives. Children that just shout, "Mommy, I want this or that..." have difficulty with their budgets no matter how much they earn. But first the insurance companies have to get "critical mass" and enough people to subscribe to these plans before the premiums can come down on them.

When that happens medical tourism will become a reality.

kenrod said...

How can you not be cynical of the govt.? The post office has a monpoly for centuries and upstarts like Fedex and UPS overtake them in a few years.

The English govt took over the healthcare after WW II, and now my friends and relatives there have to buy private insurance to avoid the bureacracy. My friend in Canada lost his eye waiting years for the govt to operate on his glaucoma. The Canadian govt has promised free healthcare for years, and now the Supreme court has approved private health insurance because people are sick of waiting. The biggest US hospitals are along the Canadian border because the snow birds need to come to the States to get first class care. So goverments tend to be lethargic, and should just run the military and the courts.

About the only thing they should do in medicine is sponsor drugs for diseases that have only have a small constituency. Something that only say, 10k to 50k people suffer from which large pharmaceutical companies cannot make a profit. When govt try to pick winners they simply create white elephants. The govt should be the referee in the form of the FDA and let the marketplace determine the winners. When the referee wants to play in the game, that when we got a problem.

Sandip Madan said...

Kenrod, there are many articles including columns by Paul Krugman in the NYT (access restricted to subscribers, sadly) about why a governmental system avoids the waste and duplication of private insurance, and has a high value as a safety net. But here's a short answer:

If all that governments do is inherently less efficient (the naive Republican view) and the answer lies in least government, then our cavemen and hunter-gatherer ancestors would have been the most successful.

Germany and France both have universal coverage and a government-run system, and both rate very well. Even Canada and UK do better than the US on OECD tracked metrics, except for the heavily rationed care leading to abnormal wait times. That's something that can be fixed (like in France, and they spend half as much as the US.)

Where Canada errs is in disallowing private hospitals to take in patients outside the waiting lists even if they are willing to pay out of pocket, or to allow private health insurance. That's why you have US hospitals serving the very rich Canadians. No one is advocating that kind of single tier system (unique to Canada which disallows private competition/insurance) for the US.

kenrod said...

What the article in the New Republic doesn't address sufficiently is tort reform. I agree that recently the pharmas have not been as innovative like they were in the 80's and 90's. But with lawsuits like Vioxx hanging over them how can you introduce a drug without huge precaution. I saw the lawyer who represented the plaintiffs on TV, and he vowed to put Merck out of business.

Now I realize that Vioxx should have been marketed differently. I know some people who claimed to have been damaged by it. But my neighbor swears by it and was buying it by the dozens before it was going to be banned. If Merck had erred it certainly didn't deserve to be put out of business. This is what happened to American Home Products. A massive billion dollar company put out because of perceived missteps. Tort lawyers and Texas juries have to realize that all medications have side effects.

And there has to be reform in patent law where a drug can only be exclusive for 17 years. Right now companies can tinker with slight changes and be given additional years from generic protection.

Sandip, with regard to your argument about universal coverage in Germany and France, I think it works well under certain conditions. First, there is a certain homogenity and small size of the population. It works well in Sweden and Hong Kong for example. But with a large 300 million population, a one-size-fits-all is hard to come by. Another consideration is cultural. People in Hong Kong easily accept government mandates. Hence they have a universal card for social security, medical, etc. The US is far more libertarian, and I have 20 different cards to identify me. Culturally we have gotten our healthcare from the companies we work for. Changing the culture is tough.

Sandip Madan said...

Kenrod, I absolutely agree with you about the need for tort reform, malpractice caps and punitive damage caps, and also patent law corrections. The initial Vioxx and Celebrex marketing blitz shows how drug companies a) splurge resources and compromise themselves by advertizing directly to the consumer (who often is not paying beyond the deductible); and b) focus on incremental mass market drugs instead of breakthrough achievements.

Incidentally, 90% of people do not suffer stomach irritation from using cheap generic old NSAIDs like ibuprufen, and for them COX 2 inhibitors like Vioxx and Celebrex which are 50-100 times the price offer no advantage whatsoever (except that ibuprufen dosage is thrice daily versus once a day for Vioxx or Celebrex.)

US "culture" should not be the reason to oppose universal healthcare or to have Americans be suckered into paying twice as much as Europeans. In any case this is the floor or safety net system like extended Medicaid or Medicaid, and anyone wanting anything better will be free to buy better private healthcare and/or health insurance. And aren't Americans supposed to owe their success and prosperity to being adaptable and not tethered to set beliefs like their old world counterparts? :-)

Also, this "culture" does not seem to be much of an issue here: two thirds of Americans want universal healthcare. See:

kenrod said...

If universal coverage is the objective then the solution is simple. Mandate that everyone has to show proof of coverage. In many states you cannot renew your car licence without showing proof of insurance. The same can be done for medical insurance. Gov. Mitt Romney has done that for his state of Mass.

The hurdles are:
1. Costs
2. Pre-existing conditions

With regard to pre-ex conditions the solution was put forward by the insurance companies but was rejected by politicians in many states. The solution is to have riders on pre-ex conditions. So if an person had a knee injury at the time of purchase of a policy, he would be precluded from receiving benefits for 6 months. Politicians rejected that saying the ins. companies had to accept or reject the applicant. Well, what has happened is a vast amount of cherry picking of only health young people.

What insurance companies want to prevent is people buying coverage after their auto accident, or after their house burns down. So if you want to achieve universal coverage you'd have to allow policies to be issued with riders or waiting periods.

kenrod said...

Sandip, What do you think of Giuliani's health plan? What he is saying is that we currently have an employer based health plan, where most people receive it from the place if work. And the companies in turn get a tax deduction. Giuliani says it should be individually based and the indiv should get the deduction. I like it because more and more people are going self employed and independent contractors. Hillary still favors employer based and mandates, and soak- the- rich drug companies approach. Obama has no mandates but still employer based.

Sandip Madan said...

Kenrod, this slightly corrects the situation for the self-employed, but like most Republican solutions it misses the larger point. Even if you're rich you get a tax break of $31 for every $100 you spend on your healthcare. But where do you get the remaining $69? The "savings" for the poor who pay less taxes (and can least afford healthcare) is even less. It's a kind of a "why can't they eat cake?" pitch.

Hillary talks about bringing the outsized pricing of drug companies to heel and using those savings to (partly) fund universal coverage because (in my opinion) it is the right approach. Of course she hasn't yet come out with her detailed plan. So far, the Edwards plan is the best.

kenrod said...

Sandip, The question is what is the definition of universal coverage. If it means everyone has access to healthcare than we have it already. Anyone can go to a county hospital though the waiting time may be 4 hours to see a doctor. Anyone can get on Medi Cal if they have low income. Anyone can get on Medicare if they are disabled, even if they are under 65.

The question is do we want an egalitarian plan like Canada where the govt pays it all? Everyone doesn't drive the same car, not wear the same suits. Why should everyone have the same medical plan? It's not "let them eat cake" approach because there is bread available in the form of govt programs. And for the 45 million uninsured tell them to apply. But most would rather buy their BMW's etc.

You have to reform the system slightly. First, allow the insurance cos to issue plans with waiting periods for pre-existing conditions. Second, give individuals the chance to take their plans with them when they leave an employer. Third, give everyone a tax deduction, not just employers. Fourth, expand HSA's and CDHP's. Fifth, expand vaccinations for children and youth. We're spending most of the healthcare dollars on the people on the later stages of life than on the young.

Sandip Madan said...

Universal coverage is free or near free care to everyone irrespective of income level, though those wanting better care can get it by paying extra. The US is almost unique in NOT having this coverage Medicaid is only for the very poor, so if you extended it for everyone then that would be universal coverage. We don't have "government programs" for a family earning say $50K a year - that's what the whole debate is about.

Canada has a "single-tier system" (i.e. better treatment through private insurance or private pay is not allowed) which is not to be confused with a "single-payer system" that prevails in places like Germany and France where private insurance is allowed. As I said before, no one is saying the US should go the Canada single tier route.

Your suggestions are all better than the current system (btw, no one stops private health insurers from covering pre-existing conditions even now.) But they still don't match up to the safety net of universal coverage.

kenrod said...

While it is true that insurance cos do cover for pre-ex conditions they do not have to take the applicant. Thus if someone does have a heart condition, the insurance co can reject the person. And if they make too much money for Medi-Cal he remains uninsured. So he either remains a time bomb or is forced to work for a company that provides insurance.

What I am proposing is that all insurance cos must take all applicants. If he has a heart condition he will be accepted but with a 6 month waiting period for heart conditions because he did not have prior coverage. But if he broke his ankle he is covered.
Currently, it's a take it or leave it in most states. So what ends up happening is they only take the healthy ones because they cannot issue policies with riders, or waiting periods in most states. I don't know if anyone has toyed with the idea of extending Medicare to everyone.

Sandip Madan said...

In its simplest form universal coverage IS like extending Medicare (or Medicaid) to everyone. Most of the pussy-footing around is on the question of whether and how much to make those who have/make more money pay for it in premiums, etc.

kenrod said...

Sandip, one of the problem with extending Medicare to all is that it establishes a Federal standard for all. And currently that is below the standards set by most insurance cos. For example, I have an acquaintence that was on a Blue Cross plan at work. He had a heart condition whereby 70% of his blood vessels were occulded. Insurance company approved treatment. When he reached Medicare age, the treatment was denied because they required 85% occulusion before treatment would be approved.

I don't know if you've studied the healthplans of the prez candidates. To me the structure of society is to be studied before we implement. Hillary and Obama want an employer sponsored plan. But society has evolved. Our forefathers worked for one company like GM or IBM for 40 years, got a gold watch and retired with Medicare. Today, your children may work as a journalist for a few years, migrate into law, and start a business when they are 50. People are going to change careers on average, 4 times in their life. So to have an employer based plan is obsolete.

What Giuliani is proposing is keeping keeping it with the individual. There is portablility but a few issues remain. How do we get the insurers to take pre-ex conditions. And should we mandate that everyone carry a plan. In my opinion, mandates never work. Besides the costs escalates dramatically.

And we're an individualistic society anyway. Now, we should all carry our medical records on a credit card. Every doctors visit, every prescription... will be recorded on it. Billing will become transparent when the patient sees what has been charged. Every hospital will know what the patient is allergic to instead of waiting for a fax from the doctor.

If you were prez how would you design a plan?

Sandip Madan said...

Isn't that what we'd want? A federal minimum standard that's a safety net? We don't have one at present. And private plans SHOULD be better, so that those who can afford them pay extra and have them.

I'm all for EMRs or EHRs but they're just one part of the solution. And any "portable" health plans are a hoax if all they do is give tax breaks, as elaborated in my earlier comment.