The underlying cash market has disappeared in health care. If you try to just pay for service, you face the ridiculous sticker prices. Everyone needs to go through some sort of middleman. We have, collectively, fallen for the fallacy that "negotiation" can lower everyone's price, rather than (try to) lower my price by raising yours. It is widely recognized that catastrophic insurance plus health savings plans are a much better structure than current pay for everything structures. But you can't do that if people showing up on their own to buy things are faced with fictitious "list prices."
These thoughts come to mind reading an excellent explanation of the price of insulin posted by Novo Nordisk via Charles Sauer in the Washington Examiner (and thanks to a correspondent who sent the link)
".. the drug pricing system, .. is incredibly complex and has resulted in a lot of confusion around what patients pay for medicines...."
"As the manufacturer, we do set the “list price” ... However, after we set the list price, we negotiate with the companies that actually pay for the medicines, which we call payers. This is necessary in order for our medicines to stay on their preferred drug list or formulary. The price or profit we receive after rebates, fees and other price concessions we provide to the payer is the “net price.”... "
Notice also the graph. If you think it's been getting a lot worse in a short time, you're right.
Right out in the open, and clear as a bell:
...those price increases were our response to changes in the healthcare system, including a greater focus on cost savings, and trying to keep up with inflation. PBMs and payers have been asking for greater savings – as they should. However, as the rebates, discounts and price concessions got steeper, we were losing considerable revenue... So, we would continue to increase the list in an attempt to offset the increased rebates, discounts and price concessions to maintain a profitable and sustainable business. ...
Right. We all can't negotiate a better deal than average. We soon run out of other people's money. (The state of California just discovered that too -- trying to make PG&E "pay for" wildfire damages, it discovered that in the end all the money comes from customers in the end.)
As Sauer distills it
Let’s assume you have a new product you want to sell. You were planning on selling it for $10, but the government is going to force you to discount the product 50 percent. Do you go ahead and sell it for $10, or do you charge $20?
Of course, you charge $20, and if you had to think about that, you probably shouldn’t sell a product yourself.This is the state of the pharmaceutical industry
Novartis writes clearly on the death of the cash market, and its effects:
For patients, the reality is that many of the insured may benefit from the net prices payers negotiate (on average, insured patients pay a co-pay for Novo Nordisk insulins between $1 - $1.40 per day) while others may not. Uninsured patients or those in certain insurance plans may be subject to list price.And in particular,
For instance, there are a growing number of people enrolling in high-deductible health plans that are facing higher costs at the pharmacy counter. In our view, high-deductible health plans are becoming a greater part of the affordability issue requiring attention.But just what kind of attention? Here, the otherwise crystal clear prose slips in to waffling.
We currently offer several options for eligible patients including a Patient Assistance Program and co-pay cards to defray costs.Our own system of price discrimination via insane complexity.
As a leader in diabetes care, we recognize patients need more... We need a partnership approach involving PBMs, insurance companies, employers, patient organizations and policy makers – to help find sustainable solutions.Isn't a "partnership approach" exactly what got us in to this immense mess?
we also need to work together to improve the system and create more transparency.Well, that would surely be nice! Sauer has a better idea:
Check out the market for candy bars. There is a markup above the manufacturer, but the end user bears 100 percent of the cost; and therefore the candy bar market is very lean. Healthcare markets can work in a similar fashion.
Forgive my ignorance, but I still don't understand how moving to a cash market solves the rising costs issue. There are still huge asymmetries in information, demand is still inelastic, the medicines are still patented, and on and on and on. I do see how removing all the complexity of the market would likely level the prices the non-insured vs insured pay, but all of the other insanity is still there.
ReplyDeleteInsulin use varies according to diet and blood sugar, which can be monitored. Gorging at the party is a choice for all of us, then we get to the gym, lower our intake for some days to compensate, as do diabetics, have choices, not as good as the rest of us. The new pumps and detectors are accurate, and blood sugar responds well enough for many diabetics.
DeleteIt is a myth that medicine is inelastic, a talking point on some dogma somewhere, thnk it through.
Especially consider home medicine, the ability to handle many illnesses at home using well established home medicine. That makes the emergency room use very elastic, though we are stuck with some dogmatic talking point.
"In our view, high-deductible health plans are becoming a greater part of the affordability issue requiring attention."
ReplyDeleteThis is strange to me given the other arguments quoted. If more people are paying the "list" price for the drug than wouldn't that cause the price to fall eventually as the "net" price rises with those dollars above the list price make-up the negotiated prices.
I would think that more HDHPs would help to bring list prices closer to marginal costs. As John mentioned, it seems like "waffling" or, more precisely an unwillingness to admit (or maybe a misunderstanding) that customers should bear the full cost. Although he mentions it in the candy bar example.
The craziest part is that healthcare markets in most of the world already successfully work in similar fashion.
ReplyDeleteName some of those markets please. I'm unaware of any health care system that I would call successful, perhaps with the exception of Switzerland.
DeleteSpeed, quality, price. Pick any two.
LOL What a dumb comment! Plenty of great, successful healthcare systems out there beyond Switzerland.
DeleteThis is near and dear to me because I'm Type I.
ReplyDeleteWhen I was on Kaiser, my monthly premium was 400/mo. My deductible in 2014 for 6 bottles of Novolog was 90. At 2014 retail prices, that's 6 x 350 = 2100. So I paid 4.29% based on retail prices. Did that 4 times a year so my deductible cost was $360/yr or roughly 1 buck a day. (8400 retail cost per year If using retail pricing)
But you add in premium costs:
4800/yr + 360 (not including Lantus, which was another 360) = 5160. So some of the drug cost was being paid for by my premium. Regular doctor visits cost 20. Just on 5160, 5160/365 = 14 bucks a day roughly to be diabetic just on Novolog.
So this:
"Uninsured patients or those in certain insurance plans may be subject to list price."
Yeah, and that really sucks for those people, especially in states that didn't expand Medicare. Or there's the terrible deductible plan with ACA CSR's.
With Medi-Cal, diabetics pay zero for all insulin...wow, right?
But like Dr. Cochrane says:
"We soon run out of other people's money."
Yep. That's obviously bad for a lot of reasons.
Bottom line, we can't tell people what they should charge, but it's painfully clear that certain players act differently in the presence of insurance.
It's not fun having a chronic condition and having to pay through the nose for it. If I was independently wealthy, sure, I'd pay for my drugs all on my own.
What is interesting about this admission is how it frames the misplaced vitriol direct at Mylan and Pfizer for the epipen market. They were responding directly to the incentives created by the federal government and were rewarded for it, in the case of Mylan, by paying a $500M settlement.
ReplyDeleteThis aged well. Pfizer is again receiving contracts for COVID vaccine production from multiple governments, and they are being paid generously for it.
Delete
ReplyDeletedirectpaypain.com, go to "Fee Schedule".
Pain management procedures done in the office for cash: 1/3 the cost of hospital outpatient and 1/2 the cost of an ambulatory surgery center.
Question for class: Why is there such a cost differential? Same doctor, same patient, same procedure.
Why aren't more pain docs offering this? Because they own shares in hospitals and surgery centers. I divested last year but my 3% ownership of the hospital paid over 6 figures in distributions pretty much every year.
The docs who aren't in this game are probably working for the hospital and have to take all their patients there. Some people won't refer you [patients if you don't take them to their facility for procedures.
Doctors have piggy-backed on the more successful lobbies. They own compounding pharmacies (insurance loopholes allow them to collect perhaps $2,000/month for compounded creams that have no proven value and cost less than $10 to make), urine drug screening labs (hundreds, maybe thousands per screen), sell back braces and TENS units. I've seen patients charged $350 for a TENS unit that you can buy on Amazon for under $100. I never got into the cream business, having tried them on patients back around 2000 without much success. I did invest in a urine drug testing lab (divested several years ago) and the ROI was amazing.
If I could do it all over again I would just build hospitals and surgery centers.
RE: Question for class: Why is there such a cost differential? Same doctor, same patient, same procedure.
DeleteReason: Anytime you inject a profit motive into any exchange of goods/ services, elements in the "supply chain" will, by human nature, do slightly different things/ make slight changes in procedures or terminology even, to make more profit. It's the American way of business. In my neanderthal view, all medical procedures and processes should be standardized so as to allow for standard cost examination and controls. Did we have that here after the war - you betcha! The only problem with that was that many, many people did not like it because it puts a crimp in making profits along the way. So what did we do? Stand by and watch the whole health system get so complicated and varied that no one person/ persons can figure it out precisely. We all know the US system of healthcare is ridiculously bloated. How do we know that? Because very smart people go to other advanced countries where the cost of procedures are vastly less. And why are the costs for similar procedures less than here? Lesser expertise and quality? No. Worse outcomes? No, actually better outcomes! Answer: Those countries have kept control of costs by closely examining and standardizing and documenting procedures and keeping an eye on costs. When the same thing is tried here the first noises you hear from the gallery is cries of "communism."
Anonymous indeed; a premise in your claim about human nature (profit motive) is that something immoral is happening also because this important, "needed," service is exchanged in a market (by non-slaves). Would a zero price work better if the non-slaves are all government employees?
DeleteI don't think so.
You are proposing a criticism of "human nature" that says the only outcome has to be corruption of some sort.
Mr. Cobb gets it. It's immoral. If you look at the power of the lobbies it's hospital > ASC > doctors.
DeleteThere is no reason in the world why an office procedure should cost more at a facility unless the patient is high risk and needs that environment. Usually the higher-priced facility brings nothing to the table.
If you have a physical done at a hospital it will cost more than at a freestanding medical office.
I have heard the argument that hospitals should get more because they have higher overhead. That's called cost-shifting. Why should my patients undergoing spine injections subsidize the hospital's losses somewhere else?
See also: goodrx.com and similar sites for shopping cash drug prices.
ReplyDeleteI'm now on Medicare but before that I had a Bronze HMO (no PPOs offered to individuals in my county) with a $6,000 deductible. In other words I had catastrophic coverage for $950/month. Medicare A,B, and D cost me half that and the deductible is $183.
All I really had before Medicare was the negotiated contractual prices of my HMO. I had blood work done and the tab was $500 - $50 after contractual write-offs. With a $6,000 deductible I ate the $50 cost.
The hospital bill for my wife's surgery was $19,000 - $2,000 after contractual write-offs.
If you have no insurance or bad insurance like I had, ask if they offer a cash price. Cash prices are often less expensive than the contracted rate. I might send a patient for an MRI and the patient calls to complain that the facility wants $1100 and they haven't met their deductible. I tell them to ask for the cash price, which at that particular facility is about $400.
In my office we check benefits online and then using that info we can usually provide the patient with an estimate of their out of pocket cost before we schedule their procedure but only if it's done in the office. I can't predict what the hospital or ASC will charge if we go there. If you call the facility day before your procedure for an estimate they don't have any idea but when you check in the next morning they tell what you owe and you pay before they let you go into the preop area. By then you have a lot of sunk cost: your day off, the person who will drive you home, etc, so you grit your teeth and take it.
Make sure that everyone at the facility is in-network. An in-network facility with an out-of-network anesthesiology group is going to incur very high anesthesia bills.
These are just a few examples of how difficult it is to have price transparency. Unless you live and work in this system, there's no way you're going find the rip-offs or the discounts in those hidden nooks and crannies.
You don't get elected, or re-elected, by telling people they should pay 100%, or even the majority, of something many view as a "right", not as a market good or service. Combine that with the pharmaceutical and insurance lobbies and well...good luck.
ReplyDeleteAmen. How can you tell the population they shouldn’t have free/subsided healthcare when Congress mostly gets free to heavily subsided healthcare for life https://www.snopes.com/fact-check/members-congress-health-care . The Government is generally an inefficient provider of services. Just look at the Defense Department. Crony capitalism.
DeleteWhat happened to : 1. Competition for insurance products by allowing patients to shop across state lines; 2. An Annual Published price list for all entities selling , providing service, medicine, health care, and DMG et al.? In 2008 these proposals were out in the 'Open' to squeeze cost out of the system before the first son of Communist parents on a short fling of bigamy, a Muslim childhood, got to try his Alinsky organizing skills, with a Chicago chaser to slap, lie and take away CHOICE CALLING IT AFFORDABLE CARE with no consequences for his outright deceit and failure of his ACA. 3. INSURANCE sold ala carte without unwanted coverages is the third leg of the program. These three steps flatten the costs and allow the public to choose and buy what they need and want like any other transaction without the state and federal government allowing lobbyists and staff to write a bill, for reelection money and interfere with the Marketplace. The excuse for healthcare CHANGE was HOPE for coverage for millions who were not covered. They still today have no coverage under ACA O YEA , because they don't want it or can't buy it. Justice Roberts decided to let this fallacious bill be law for the saboteurs that will tax everything to destroy the United States of America's freedom to choose.
ReplyDeleteSad commentary on first and second order affects/effects of gov run healthcare. There is a model that puts patient and physician together without a middleman. In our small North Georgia community, there are no less than 10 veterinary clinics within a ten mile radius of our home. Our vet takes no insurance and posts prices for his and competitors services. I've never waited more than 10 minutes to see him and my dog is happy about that. As for discounts, I mentioned I served in the military and he discounted my bill by 15%. Ironic our pets and large animals get better pricing than humans because there is a cash market. Somehow a 40 billion dollar industry has figured this out.
ReplyDeleteI tell my patients if they want fast efficient health care go to the vet. You'll be seen right away, have all or most tests done before you leave, get the medication, and off you go.
DeleteBut you pay right then and there. No insurance pre-authorization. Even if you have insurance like a PAWS plan they discount it on the spot.
I have a cash plan in my practice and I love it. No third party interfering with the doctor-patient relationship, no retroactive denials of payment, no fights to get paid, no waiting for pre-authorization.
I'm marketing it heavily. It reduces my overhead and what we call the "hassle factor". Patients with no insurance or lousy insurance love the low prices that the ease and lower overhead allow me to pass along.
I have reduced my office head count from 7 to 4. Typically it takes about 7 staff to support one doctor if you do in-house billing.
One thing that helps keep vet costs down is that malpractice damages are usually limited to the value of the dog. Certain surgical specialties can incur premiums up to $150,000/yr.
https://www.capson.com/medical-malpractice-insurance-by-specialty/
The way you solve this problem is simple: single payer, Medicare for All. Why? Price controls. If you are over 65 and on Medicare the Govermnent will only pay so much. If it works for people over 65, it is guaranteed to work for everybody. Why? Because younger folks don't get sick so often and if they do, most of the time it is less serious. If x is less than 10, it is guaranteed to be less than 20. We do not need health insurance. Average person will incure a certain amount of medical costs during her lifetime. We simply need to pay the cost in advance, in installments, just like we pay a house loan.
ReplyDeleteAs a Canadian friend of mine put it when explaining to me why he and his brothers had to fork out $200,000 to the Mayo Clinic for saving their father's life (he had stomach cancer but had been put on a waiting list in Ontario...for TESTS!): 'They [Canada's politicians/bureaucrats] tell you it's free. But, you know what, you get what you pay for.'
DeleteSo the worst doctor gets paid the same as the best one. How about this: a basic rate like medicare but doctors can charge above that rate. If the market perceives you as providing better care, you can charge more.
DeleteAnd when have price controls ever made things better overall?
I throw in the towel.
ReplyDeleteThe VA provides free healthcare to 20 million veterans, via federally owned hospitals, facilities and federal employee doctors, nurses and administrators. It is pure distilled communism. It is the preferred system (even among right-wingers) for former federal employees of the armed services.
Even while in the armed services, employees get their healthcare from federal facilities and federal employees, such as found at Walter Reed.
No is suggesting privatizing Walter Reed, or the VA. I guess they work okay.
So....set healthcare outlays at 15% of GDP and federalize everything everywhere, under the condition that users submit all disputes to binding arbitration, and that people will not be kept alive past their expiration dates.
If you want private care, or voodoo, pay for it.
I have worked at VA hospitals during my training. I would never have care rendered at the VA. It's a standing joke in medical circles.
DeleteLove your white smock coat. Did you ever work at Walter Reed?
DeleteWalter Reed is highly regarded despite being a communist facility.
https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.rand.org/news/press/2018/04/26.html&ved=2ahUKEwimzJTRsp7gAhUTknAKHUZACUwQFjAAegQIBRAB&usg=AOvVaw19wqLBM8G2QjLYQGPyALNH
DeleteVA Health System Generally Delivers Higher-Quality Care Than Other Health Providers | RAND - RAND Corporation
https://www.rand.org › press › 2018/04
The above study, from Rand, finds that the VA provides better care than most other facilities.
Who knows? Maybe the communists know how to deliver healthcare better than capitalists.
Here is a modest proposal. Start with obstetrics. Phase out all government obstetric support programs, no mandated coverage. This is not insurance it is wealth redistribution. With seven billion plus we do not need more babies. Make it a cash market. Costs would plummet. Plan ahead if you want a child. There would be fewer subprime children who become a weight on the system. Economic well-being is enhanced by fewer children (China). It is win-win-win.
ReplyDeleteYou could just have some private layaway programs. Move from there to other specialties.
Due to EMTALA you can't refuse emergency treatment such as a woman in labor. Hospitals eat a lot of losses because they can't turn these women away and they often don't pay their bills. Medical bills on a credit report mean very little. .
ReplyDeleteIf an uninsured 14 year old delivers a baby the hospital social worker sees them the next day and signs them up for Medicaid.
The deterrent value of your proposal is close to nil.
As to not needing more babies it's a matter of whose babies and where they are. Italy has such a low birth rate that they couldn't survive without immigrants, which ironically they don't want. Entire towns are being abandoned. I have friends in a little town in southern Italy. We had lunch one day and the priest was invited. He was from Africa. Yet Italy doesn't want African immigrants in general. Romanians seem to be ok since they will do manual labor like construction.
I recall the Zero Population Growth movement from my teens. Well, now much of the West has that and everyone is worried about not enough young people to pay for the entitlements promised to the old people.
"Just the right amount of me, but too many of you."
The third phase of demographic transition has the potential to crush advanced economies. They're in a way victims of their own success. The BR goes down along with the DR and you end up with an older population that's dependent on a labor force that's shrinking in overall size. Greenspan pointed out that without significant productivity gains, advanced economies (like the US) will get smashed under debt obligations. But net migration can help soften the blow of a falling BR. Factor mobility can be a good thing -- but politically and culturally, norms differ, which of course we see here in the US right now.
DeleteWhat is the basis for the claim that auto repair markets clear? Busse et al 2012 find a great deal of price discrimination, indicating asymmetric info.
ReplyDeleteIt appears that you have worked backward from a conclusion to evidence.
And in other news...
ReplyDeletehttps://www.bloomberg.com/news/articles/2019-01-31/trump-to-curb-protections-for-drug-rebates-blamed-for-high-costs
Nothing is free. Canadians pay for their care in advance, in installments. However, those who make less, pay less. If you want to compare Canadian health care system to what we have in the U.S. check the following: life expectancy at birth, infant mortality, and maternal mortality. Your example is a single case. Nobody claims that the Canadian health care system leads to a better outcome in every individual case.
ReplyDeleteHow about an index like an APR (Annual Percentage Rate), for health care providers called MPI, Medical Price Index? An average of the most common CPT codes and what they charge published so consumers can shop in advance? I talk about this in my blog post- http://www.jacobmayne.com/health-care-costs/
ReplyDeleteThe banks had to do it in 1982 for loan costs that were confusing. . Why not health care providers? -Jake
Way OT, but John Cochrane will find this report very interesting.
ReplyDeletehttps://www.fitchratings.com/site/pr/10061418
Open-end bond funds could have a run, just like the old bank runs....
If I'm reading this correctly, Novo's position is:
ReplyDeletea) the actual cost of their drugs for most insured patients has stayed relatively flat
b) uninsured and those with certain types of insurance are hurt by the dramatic increase in list price
c) not explicitly stated, but with regards to the cost of delivering healthcare generally, even though the net price has stayed flat, they imply that the addition of a glut of middlemen to the marketplace helps to obscure traditional price discovery mechanisms, and that whatever fees/profits the middlemen are making are adding to the overall cost.
In the Novo piece, they claim that "we’ve simply tried maintaining a profit margin that has been dropping significantly since health policy changed in the US." I don't know Novo's reputation for innovation and reinvestment into R&D vs investments in marketing / keeping competitor drugs off the shelves, etc, but they have enjoyed a net margin of ~30 - 40% over the last several years, which seems pretty comfortable. I think the average for pharma is ~12 or 15% (not entirely sure about that). I realize this is borderline moralizing about "high" profits, but to make the claim that rising healthcare costs are mostly a function of a parasitic ecosystem of middlemen seems to obscure part of the complete picture. What am I missing (aside from Novo being entirely rational in focusing "blame" elsewhere)?
The Wall Street Journal today reports on the new BLS news:
Delete"The medical care index rose 0.2 percent in January, with its component indexes mixed. The physicians’ services index rose 0.4 percent, while the index for prescription drugs was unchanged and the hospital services index declined 0.3 percent."
I am wondering how the BLS can gather market prices for physicians' services, or prescription drugs - and I want to laugh and choke that it pretends hospitals charge anything other than a perfectly discriminating price to patients.
Any ideas? Did the BLS make up the prices, on the basis of "imputed" information? Is there a black market? At least with textbook price controls, you get a black market.
Dear Professor Cochrane:
ReplyDeleteA food fight has broken out amongst economists. Paul Krugman and the "Modern Monetary Theorists" are the participants. Krugman wrote a column last week: "Running on MMT (Wonkish): Trying to get this debate beyond Calvinball."
https://www.nytimes.com/2019/02/25/opinion/running-on-mmt-wonkish.html
Can you explain to those of us whose formal economics education ended in a previous millennium what this is all about? It is not that I don't trust Krugman, but he has a highly colored view of the world.
"Opinion: Modern Monetary Theory is smoke and mirrors nonsense" by Kenneth Rogoff • Published: Mar 5, 2019
ReplyDeletehttps://www.marketwatch.com/story/modern-monetary-theory-is-nonsense-just-more-voodoo-economics-2019-03-04