Solving Health Care

The health care crisis is curable.

It doesn’t require a government takeover. Most of the next year’s debates over health care will talk around the problem. They’ll be the same-old tired arguments over public vs. private control.

In the end it doesn’t matter. You can’t have an unlimited draw from a limited pool of funds. Make that the key to policy and you can develop sound policy. You don’t have a choice about buying health care. You don’t even have much choice on who you buy it from.

The solution has three parts.

Managed care. Bargain for drugs. Guarantee competition.

Let’s start with managed care.

The great gift of Obamacare has been to push the insurance industry away from fee for service, toward managed care. With fee for service, insurers get cash based on risk and pay out like they would an auto claim. In managed care, insurers get cash for each patient and try to keep that patient alive for less than the cash that came in.

Centene is the name to know. Centene makes money serving Medicare and Medicaid patients. These are high risk people. Private insurers say they can’t cover them. Centene takes what money the government provides, and if it can deliver a year’s care it makes money.

A decade ago, everyone in the insurance industry was complaining that Medicare and Medicaid weren’t paying enough. But Centene made $1.35 billion in profit over the last year, on revenue of over $72 billion. The company is worth over $21 billion.

How do they do it?

First, they own the facilities. They own the clinics and imaging centers. They employ the front-line doctors. This means no padded bills, and no unnecessary tests, which are the problem when income doesn’t control outgo.

Second, Centene focuses on keeping people well, and keeping sick people out of hospitals. This means you see a doctor regularly, whether you’re sick or not. If you have diabetes, heart disease, or kidney disease, the three chronic conditions that represent over 75% of the nation’s health care bill, they manage that. They get you on the right medicine. They help you with diet and exercise. They do dialysis. It’s when people go into the hospital that costs rise exponentially.

Third, Centene has best practices. They don’t give you the most expensive drugs, they give you the cost-effective ones. They go “by the book,” because that’s where their financial incentives lie.

Managed care has been a big winner on the Obamacare exchanges. Prices on the exchanges are down 4% this year, despite every effort made by the Trump Administration to kill it, discouraging participation and suing to overturn the law.

Others have taken notice. CVS Health bought Aetna to convert to managed care. They can do front-line care at pharmacies, using registered nurses and physicians’ assistants. They got into this business with contracts to serve foreign nationals visiting here from places like Paraguay. They moved slowly until, with the Aetna deal, they moved quickly.

CVS Health now has the financial heft to go after the long-time industry leader, United Health. United Health has responded with the Signature Harmony Network.  It waited until it owned enough hospitals to control acute care costs, but United has been making money right along. The company is worth $238 billion, on about that level of sales, and had net income last year of $13.3 billion.

The key to United Health is Optum. This started as its Electronic Health Record arm. They got a lot of that sweet, sweet stimulus cash from the HITECH Act, part of the 2009 stimulus. Then they added a Pharmacy Benefit Manager, Catamaran, and profits have doubled.

This brings us to the second part of the solution, bargaining for drugs.

Pharmacy Benefit Managers, or PBMs, offer a partial solution, because they buy in bulk and Catamaran (or CVS’ Caremark) can direct patients toward cost-effective solutions. But it’s only a partial solution, thanks to a provision in the Food and Drug Act placed there by drug companies. It says doctors can prescribe any drug approved by the Food and Drug Administration, and that insurers – including Medicare – must pay.

This is the problem. Drug companies advertise to consumers. They spent $3.7 billion on TV alone last year, telling you to “see your doctor” and specify the drug you want. Then they jacked up the price of that drug. There have been all sorts of scams this decade based on this law. The guy on the right, former Valeant CEO Michael Pearson, ran one of the most egregious. Specialty pharmacists, created to assure compliance by making sure drugs are taken as directed, were turned into sales mills, used to force insurers to buy expensive drugs owned by the pharmacies’ parent. They compounded this by then moving the companies out of the country, to Canada and Ireland, to escape U.S. tax law.

Then there’s the off-patent problem. I suffered personally from this one. Drug companies find a compliant doctor who will prescribe a drug for a condition other than the one it was approved for. Johnson & Johnson was recently ordered to pay $8 billion for one case where Risperdal, an anti-psychotic some idiot prescribed for weight loss, caused a teenage boy to grow breasts.  Risperdal has also been prescribed for things like ADHD.

Drug companies feel they can charge anything for drugs that save lives or even prolong them. One such drug, called Zolgensma, will cost $2.1 million, because it helps with a rare form of spinal muscular atrophy. There are now a host of drugs priced, not on their cost to research, produce or market, but on the expected lifetime value of the patient. This is an obscenity.

The industry knows the jig is up, and it’s already advertising like mad, claiming that we must pay what it wants for the cures we need. Americans are subsidizing the entire world’s drug industry.

The cure here isn’t to nationalize anything, but to do what Europe does. Create standard formularies. Don’t approve drugs for general use unless they’re cost-effective. Don’t prescribe off-patent, unless as part of a certified research study. This is what the drug industry will be fighting against, but it’s a very reasonable request.

Third, guarantee competition.

Drug patents assure the owners a 17-year monopoly, which usually turns into 20 after litigation. Drug companies can extend patent rights by making small tweaks and getting new patents. In the most egregious case, Mylan got new patent rights on generic adrenaline by making slight changes to the plunger.

But the bigger problem here is hospitals. Since the passage of the Affordable Care Act, hospitals have been merging to create local monopolies. You don’t notice this because it’s local. Towns with just one hospital, or regions dominated by a single hospital owner, charge much more than areas where there’s competition. When my front-line doctor’s practice was bought by a big hospital group recently, I found the cost of routine tests doubled.

This requires a simple enforcement of anti-trust laws. We know what things should cost. We know what they should cost even with a reasonable profit. Don’t pay more. Send patients elsewhere. This is not a pure market. You don’t get to refuse the services of an ambulance that arrives after a heart attack. They have what Seth Godin calls “intravenous permission” to sell you goods and services. Those prices must be reasonable.

In the end it doesn’t really matter who pays for health care. What matters is that someone has the power to say no to high costs. You either empower someone in the private sector to do it, knowing their profits are on the line, or you let government do it.