Drug Makers Try to Justify Prescription Prices to Senators at Hearing

By Robert Pear, The New York Times, February 26th, 2019.

WASHINGTON — Pharmaceutical executives, testifying before Congress, could not readily explain on Tuesday why the prices for many brand-name prescription drugs were much higher in the United States than in other developed countries.

“It is almost as if the taxpayer has ‘stupid’ written on their face,” Senator Bill Cassidy, Republican of Louisiana, told the seven executives, who faced a barrage of questions and criticism at a three-hour hearing of the Senate Finance Committee.

Mr. Cassidy joined two other Republican senators, Charles E. Grassley of Iowa and John Cornyn of Texas, and all the Democrats on the panel in expressing deep concern about constituents who could not afford the drugs they needed to survive.

Senator Robert Menendez, Democrat of New Jersey, the home to many drug and biotechnology companies, offered what he described as “a friendly warning” to the witnesses. “If you don’t take meaningful action to reduce prescription drug prices,” he said, “policymakers are going to do it for you.”

The hearing was political theater, but could also be a first step toward legislation to provide some relief to consumers, as lawmakers of both parties and President Trump have vowed to slow the relentless rise of drug prices.

It was also clear from the hearing that senators had a lot to learn about drug pricing and that pharmaceutical executives did not fully appreciate the explosive political potential of the issue.

“I feel like I need a Ph.D. in prescription drug pricing to understand how the heck this industry works,” said Senator Maggie Hassan, Democrat of New Hampshire.

Richard A. Gonzalez, the chairman and chief executive of AbbVie, the maker of the best-selling arthritis drug Humira, told the committee that his company made profits in countries like Germany and France where prices of brand-name drugs were often much lower than in the United States.

“The U.S. has some of the highest prices in the world,” Mr. Gonzalez said.

Senator Ron Wyden of Oregon, the senior Democrat on the committee, asked, “How is that not gouging American consumers with high prices?”

“You’re willing to sit by and hose the American consumer while giving price breaks to consumers overseas,” Mr. Wyden said. Drug makers’ attempts to justify their prices, when so many patients cannot afford them, are “morally repugnant,” he said.

The drug makers vehemently opposed Mr. Trump’s proposal for Medicare to pay for certain prescription drugs based on the prices paid in other developed countries.

The Trump administration has said Medicare is paying 80 percent more than the amount other advanced industrial countries do for some of the most costly physician-administered drugs. Under its proposal, Medicare would still pay 26 percent more.

But the drug company executives bristled at the idea. Under such proposals, they said, the United States would be importing price controls from other countries where coverage of costly new drugs is sometimes delayed or denied.

“American patients have access to cancer medicines about two years earlier than patients in other countries, including Germany, France and the United Kingdom,” said Pascal Soriot, the chief executive of AstraZeneca. As a result, he suggested, American patients have generally seen greater improvements in cancer survival rates.

Kenneth C. Frazier, the chief executive of Merck, said his company could not just walk away from European markets where health officials set lower drug prices. It would be “immoral to leave the patients behind,” he said.

Mr. Cornyn said AbbVie had tried to block competition for Humira by surrounding it with a thicket of patents. In response to questions, Mr. Gonzalez, the chief executive, said AbbVie had 136 patents on Humira, with different patents protecting its use to treat different conditions.

“I support drug companies’ recovering a profit based on their research and development of innovative drugs,” Mr. Cornyn said. “But at some point that patent has to end, that exclusivity has to end, so that patients get access to those drugs at a much cheaper cost.”

Mr. Cassidy expressed interest in an idea that has been embraced by many Democrats but few Republicans: that Medicare should, in some cases, be able to negotiate prices with drug manufacturers.

“Right now,” Mr. Cassidy said, “Medicare has a very limited ability to negotiate” prices based on the relative value of a therapy. Medicare’s prescription drug plans, offered by private insurers, hire pharmacy benefit managers to negotiate, but they are not always effective, he said.

Senator Sherrod Brown, Democrat of Ohio, said taxpayers subsidized pharmaceutical research, through the National Institutes of Health, and advertising, through tax deductions for business expenses. But, he noted, many drugs cost more than the median income of Medicare beneficiaries, about $26,000 a year.

“We can’t afford to gave Big Pharma the blank check that you’ve had,” Mr. Brown told the executives.

Mr. Grassley, the committee chairman, set the tone for the hearing when he said that practices of the pharmaceutical industry “thwart the laws and regulations designed to promote competition” and the use of lower-cost generic drugs.

Several themes ran through the testimony of the drug company executives, who were clearly playing defense. The main problem, they said, is not the high list prices set by drug manufacturers, but the high out-of-pocket costs paid by patients.

Several drug company executives suggested establishing a monthly or annual limit on a Medicare patient’s out-of-pocket costs for prescription drugs.

Several chief executives, including Mr. Frazier of Merck and Olivier Brandicourt of Sanofi, said they could also support legislation that speeds the development of generic medications by requiring brand-name manufacturers to provide samples to generic drug companies. Generic drug developers need samples to show that a generic copy is equivalent to the original, but they have often had difficulty getting them.

Ronny Gal, a securities analyst who follows the drug industry for Sanford C. Bernstein & Company, said he doubted that drug companies would change their pricing practices because of the hearing.

“This is a $460 billion industry,” Mr. Gal said. “You think three hours of an orchestrated show before Congress will lead to different behavior? I don’t think so.”

Pharmaceutical executives do “want to be at the table for whatever comes next,” Mr. Gal said, and that could eventually include discussions and negotiations on legislation.

Mr. Gonzalez, of AbbVie, said drug prices were a problem for some patients because their out-of-pocket costs were often a percentage of a drug’s list price.

Mr. Soriot said the list prices of drugs did not reflect the true cost because AstraZeneca and other companies provided rebates and discounts to many health insurance plans and the middlemen known as pharmacy benefit managers. On average, he said, the rebates — intended to secure a favored position on a health plan’s list of covered drugs — are “nearly 50 percent of our gross revenues in the United States.”

AbbVie, AstraZeneca and several other companies said they would reduce prices for consumers if Congress outlawed the rebates that drug makers pay to insurers and middlemen to promote the use of their drugs in Medicare and commercial insurance.

Democratic senators wanted a firmer commitment. They asked the drug company executives to put it in writing.

Albert Bourla, the chief executive of Pfizer, said he supported efforts to eliminate rebates paid to health plans and middlemen. Patients, he said, should get the benefit of such price concessions at the pharmacy counter.

“None of the close to $12 billion of rebates that Pfizer paid in 2018 found their way to American patients,” Mr. Bourla said.

He also said drug makers should be paid in proportion to the value of their medicines. Pfizer, he said, could be “paid based on the number of strokes we prevent or the number of cancer patients who go into full remission, rather than the number of pills we sell.”

With the proliferation of high-deductible health plans, Mr. Bourla said, patients are paying a larger share of prescription drug costs.

“Patients are made to pay on average 14 percent of the cost of their medicines, but only 3 percent of the costs associated with hospital stays,” he said.

Patients, doctors and members of Congress have cited rising insulin prices as an example of what is wrong with drug prices in America, and Mr. Brandicourt, the Sanofi chief executive, defended the company’s record.

“The net price of our insulin product Lantus has fallen over 30 percent since 2012,” Mr. Brandicourt said. “Yet over this same period, average out-of-pocket costs for patients with commercial insurance and Medicare — before the benefit of any Sanofi financial assistance program — has risen 60 percent.”

A version of this article appears in print on , on Page B6 of the New York edition with the headline: Drug Makers Try to Justify Higher Costs at Hearing.


Trumpcare: Fiction and Fact

The Republican health-care plan isn’t about health care at all

By Catherine Rampell, The Washington Post Opinions Column, March 9, 2017

Let’s abandon the pretense.

Republicans’ “health care” bill is not really about health care. It’s not about improving access to health insurance, or reducing premiums, or making sure you get to keep your doctor if you like your doctor. And it’s certainly not about preventing people from dying in the streets.  Instead, it’s about hundreds of billions of dollars in tax cuts — tax cuts that will quietly pave the way for more, and far larger, tax cuts.

The American Health Care Act, which has been opposed by nearly every possible stakeholder of nearly every ideological orientation, is being rushed through Congress with non-extreme vetting. In fact, it passed out of one committee in the middle of the night, overseen by a committee chairman who just a day earlier criticized Obamacare for being “written in the dark of night.”

From the bill text, we can tell the directionality of some of the changes Republicans are proposing — i.e., tax revenue will fall, lots of people will lose health coverage and the Medicare trust fund will be exhausted sooner. But we still don’t know the magnitude of these changes — i.e., how much, how many or when, respectively.

We don’t know the answers to these questions yet, because Republicans don’t want us to know them. Part of the reason they have rushed the bill through committees is to front-run an (inevitably unflattering) analysis from the nonpartisan Congressional Budget Office.

In the meantime, other experts and government bodies have scrambled to compile their own estimates for the bill’s effects.

The ratings and analytics firm S&P Global has ballparked the number of people who would lose their insurance at 6 million to 10 million; others have offered figures as high as 15 million and 20 million. Meanwhile, a group of health researchers calculated that the bill would increase costs for enrollees on the individual insurance market by, on average, more than $1,500 per year when it would take effect, and by more than $2,400 per year by 2020.

Oh, and the Medicare trust fund would be exhausted by 2024, according to Brookings Institution researchers.  For those keeping score, that means fewer people would have insurance, those who get insurance on the exchanges would pay a higher price for it and Medicare’s solvency would be jeopardized as a bonus.

Hard to see how this achieves any of President Trump’s stated goals to “lower costs, expand choices, increase competition and ensure health-care access for all Americans.”

On the other hand, it’s quite easy to see how another well-established Republican goal would be achieved: tax cuts. Specifically, $600 billion of them, predominantly benefiting the rich.

The Joint Committee on Taxation has released a series of estimates showing what some of the tax-related provisions of Trumpcare would do.

Among the biggest are repeals of two ACA surtaxes on the highest-earning Americans: a 0.9 percent payroll tax add-on and a 3.8 percent tax on net investment income for couples whose incomes exceed $250,000 ($200,000 for individuals).

Repealing these would cost $275 billion over the next decade.

The law also axes other taxes, such as the tanning tax (once nicknamed the Snooki Tax, but now apparently a symbol of patriarchal oppression), and excise taxes on insurers; drug manufacturers and importers; and medical-device manufacturers and importers.

Based on what the Joint Committee has scored so far — and it has not analyzed every revenue loser in the bill — these tax cuts come to about $600 billion.

Why? Under normal circumstances, Democrats would almost certainly filibuster the coming tax overhaul, preventing it from ever getting to a vote. But Republicans can take the filibuster option away by using the “reconciliation” process, which is an option if, and only if, the tax bill doesn’t increase government deficits in the long term, relative to existing law.

How do you keep tax cuts from increasing deficits relative to existing law? One useful tool is to change existing law — that is, to move the goalposts. Cutting taxes in the Obamacare repeal bill today lowers the revenue baseline against which a tax overhaul plan will be judged tomorrow.

So for those who have been scratching their heads about why Republican leadership is standing by a “health care” bill that does nothing to improve access to health care, remember: When you hear hoof beats, think tax cuts.

Catherine Rampell is an opinion columnist at The Washington Post.

Don’t Try to Fix Obamacare. Abolish It.

As Republicans in Washington grapple with altering the Affordable Care Act, they have proceeded in a direction that will do little to curb the cost of health care in America.

Instead, they are pushing a bill that, according to the Congressional Budget Office, might save the government money, but will end coverage for 24 million people (though several million of those would be willingly giving up coverage the law now requires them to have). If it passes, Republicans will not only own the nation’s health care problems for years, but they will also have violated more than six years of promises.

Since 2010, Republicans have pledged to repeal — not fix, not tinker with, but abolish — Obamacare. In 2016, that was a centerpiece of Donald Trump’s campaign. Republicans ran advertisements noting they had voted 70 or more times to repeal the Affordable Care Act, and they would do it as soon as they had control of Congress and the White House.

Voters gave them just that. And now Republicans, who had used the word “repeal” like a meditation chant, act like the proverbial dog that caught the car. The plan they all liked in 2015 — one that would have ended the law’s mandates, subsidies and Medicaid expansion — would not pass today. Yes, Republicans, you really did once author a plan to credibly repeal Obamacare, unlike what you are considering now.

Of course, Republicans are acting this way in large part because of President Trump’s voters. Despite all the hard talk about repealing Obamacare, Mr. Trump’s voters supported a man who promised a government-run health care plan that would provide universal coverage. In other words, he promised more than Obamacare. For that matter, Mr. Trump promised more government involvement in health care than Hillary Clinton did. It is not hard to see why Republicans think they can get away with breaking their promises. Their own party’s presidential nominee promised more than what President Obama offered and claimed he could pay for it all without raising taxes.

Mr. Trump’s voters want Obamacare, but they want Mr. Trump’s gold-plated branding on it. They claim to hate Obamacare, but data show a good number of Mr. Trump’s voters are actually using the Affordable Care Act. Just don’t tell them that the Affordable Care Act is Obamacare. They like the former and hate the latter.

The 2016 election was, though it pains me to say, a defeat for conservatism. Both parties were willing to gravitate toward candidates who promised a strong federal government that could deliver a panacea without worrying about costs. Mr. Trump promised to be a strong man stamping out waste, fraud and abuse while putting Americans first. His voters are smart enough to understand that his programs will cost money. They just do not seem any more concerned than Republican leaders in Washington about budget costs. They all make a great show of caring in public, but it is just show.

So Democrats and Republicans are fighting over who gets to expand government for which voters and by how much. The Republicans, who claim to be the party of fiscal discipline, want to spend money, but at a slower pace than the Democrats and without raising taxes. It did not have to be this way. The Republicans did not have to embrace the Democrats’ presuppositions in creating Obamacare.

Despite the name “Affordable Care Act,” the Democrats were far more focused on expanding coverage and ensuring every American could get insurance than they were on making coverage affordable. When Republicans decided to amend Obamacare, they too focused on the numbers covered.

Instead, they should focus on cost.

If Republicans stopped worrying about how many people had access to a government-managed health care program and started focusing on reducing costs, they could potentially increase the number of people covered. Doing so would necessitate scaling back the government’s involvement in health care, reducing insurance mandates, unleashing free-market competition among insurance providers and allowing consumer choice in selecting plans.

Increasing competition and choice would lower prices for all kinds of insurance. Lower prices would free up corporate dollars for other things like innovation and jobs. Lower prices would also make it far more affordable for Americans to buy their own insurance than wait for government to subsidize it.

For conservatives like me, however, it appears the train has left the station. Democrats and many Republicans are invested in the idea of involving government in our basic health care choices. The Republicans are even keeping President Obama’s individual mandate, though in repackaged form.

Americans are increasingly cynical about politics. Watching Republicans campaign for years on repealing Obamacare only to see the effort collapse will just increase that cynicism. But the reverse is true, too. Watching many Americans demand repeal, while voting for a man who promised a government-run, universal coverage solution, only increases politicians’ cynicism about the American voter. The voters know the politicians will break their promises once elected. The politicians know the voters will let them get away with it as long as the spoils of victory are divvied up.

Paying the bill will be a problem for some other day.

Erick-Woods Erickson is the editor of the website The Resurgent and a talk-show host on the radio station WSB.

American Health Care Act Cost Estimate

The Concurrent Resolution on the Budget for Fiscal Year 2017 directed the House Committees on Ways and Means and Energy and Commerce to develop legislation to reduce the deficit. The Congressional Budget Office and the staff of the Joint Committee on Taxation (JCT) have produced an estimate of the budgetary effects of the American Health Care Act, which combines the pieces of legislation approved by the two committees pursuant to that resolution. In consultation with the budget committees, CBO used its March 2016 baseline with adjustments for subsequently enacted legislation, which underlies the resolution, as the benchmark to measure the cost of the legislation.

Effects on the Federal Budget

CBO and JCT estimate that enacting the legislation would reduce federal deficits by $337 billion over the 2017-2026 period. That total consists of $323 billion in on-budget savings and $13 billion in off-budget savings. Outlays would be reduced by $1.2 trillion over the period, and revenues would be reduced by $0.9 trillion.

The largest savings would come from reductions in outlays for Medicaid and from the elimination of the Affordable Care Act’s (ACA’s) subsidies for nongroup health insurance. The largest costs would come from repealing many of the changes the ACA made to the Internal Revenue Code—including an increase in the Hospital Insurance payroll tax rate for high-income taxpayers, a surtax on those taxpayers’ net investment income, and annual fees imposed on health insurers—and from the establishment of a new tax credit for health insurance.

Pay-as-you-go procedures apply because enacting the legislation would affect direct spending and revenues. CBO and JCT estimate that enacting the legislation would not increase net direct spending or on-budget deficits by more than $5 billion in any of the four consecutive 10-year periods beginning in 2027.

Effects on Health Insurance Coverage

To estimate the budgetary effects, CBO and JCT projected how the legislation would change the number of people who obtain federally subsidized health insurance through Medicaid, the nongroup market, and the employment-based market, as well as many other factors.

CBO and JCT estimate that, in 2018, 14 million more people would be uninsured under the legislation than under current law. Most of that increase would stem from repealing the penalties associated with the individual mandate. Some of those people would choose not to have insurance because they chose to be covered by insurance under current law only to avoid paying the penalties, and some people would forgo insurance in response to higher premiums.

Later, following additional changes to subsidies for insurance purchased in the nongroup market and to the Medicaid program, the increase in the number of uninsured people relative to the number under current law would rise to 21 million in 2020 and then to 24 million in 2026. The reductions in insurance coverage between 2018 and 2026 would stem in large part from changes in Medicaid enrollment—because some states would discontinue their expansion of eligibility, some states that would have expanded eligibility in the future would choose not to do so, and per-enrollee spending in the program would be capped. In 2026, an estimated 52 million people would be uninsured, compared with 28 million who would lack insurance that year under current law.

Stability of the Health Insurance Market

Decisions about offering and purchasing health insurance depend on the stability of the health insurance market—that is, on having insurers participating in most areas of the country and on the likelihood of premiums’ not rising in an unsustainable spiral. The market for insurance purchased individually (that is, nongroup coverage) would be unstable, for example, if the people who wanted to buy coverage at any offered price would have average health care expenditures so high that offering the insurance would be unprofitable. In CBO and JCT’s assessment, however, the nongroup market would probably be stable in most areas under either current law or the legislation.

Under current law, most subsidized enrollees purchasing health insurance coverage in the nongroup market are largely insulated from increases in premiums because their out-of-pocket payments for premiums are based on a percentage of their income; the government pays the difference. The subsidies to purchase coverage combined with the penalties paid by uninsured people stemming from the individual mandate are anticipated to cause sufficient demand for insurance by people with low health care expenditures for the market to be stable.

Under the legislation, in the agencies’ view, key factors bringing about market stability include subsidies to purchase insurance, which would maintain sufficient demand for insurance by people with low health care expenditures, and grants to states from the Patient and State Stability Fund, which would reduce the costs to insurers of people with high health care expenditures. Even though the new tax credits would be structured differently from the current subsidies and would generally be less generous for those receiving subsidies under current law, the other changes would, in the agencies’ view, lower average premiums enough to attract a sufficient number of relatively healthy people to stabilize the market.

Effects on Premiums

The legislation would tend to increase average premiums in the nongroup market prior to 2020 and lower average premiums thereafter, relative to projections under current law. In 2018 and 2019, according to CBO and JCT’s estimates, average premiums for single policyholders in the nongroup market would be 15 percent to 20 percent higher than under current law, mainly because the individual mandate penalties would be eliminated, inducing fewer comparatively healthy people to sign up.

Starting in 2020, the increase in average premiums from repealing the individual mandate penalties would be more than offset by the combination of several factors that would decrease those premiums: grants to states from the Patient and State Stability Fund (which CBO and JCT expect to largely be used by states to limit the costs to insurers of enrollees with very high claims); the elimination of the requirement for insurers to offer plans covering certain percentages of the cost of covered benefits; and a younger mix of enrollees. By 2026, average premiums for single policyholders in the nongroup market under the legislation would be roughly 10 percent lower than under current law, CBO and JCT estimate.

Although average premiums would increase prior to 2020 and decrease starting in 2020, CBO and JCT estimate that changes in premiums relative to those under current law would differ significantly for people of different ages because of a change in age-rating rules. Under the legislation, insurers would be allowed to generally charge five times more for older enrollees than younger ones rather than three times more as under current law, substantially reducing premiums for young adults and substantially raising premiums for older people.

Uncertainty Surrounding the Estimates

The ways in which federal agencies, states, insurers, employers, individuals, doctors, hospitals, and other affected parties would respond to the changes made by the legislation are all difficult to predict, so the estimates in this report are uncertain. But CBO and JCT have endeavored to develop estimates that are in the middle of the distribution of potential outcomes.

Macroeconomic Effects

Because of the magnitude of its budgetary effects, this legislation is “major legislation,” as defined in the rules of the House of Representatives. Hence, it triggers the requirement that the cost estimate, to the greatest extent practicable, include the budgetary impact of its macroeconomic effects. However, because of the very short time available to prepare this cost estimate, quantifying and incorporating those macroeconomic effects have not been practicable.

Intergovernmental and Private-Sector Mandates

JCT and CBO have reviewed the provisions of the legislation and determined that they would impose no intergovernmental mandates as defined in the Unfunded Mandates Reform Act (UMRA).

JCT and CBO have determined that the legislation would impose private-sector mandates as defined in UMRA. On the basis of information from JCT, CBO estimates the aggregate cost of the mandates would exceed the annual threshold established in UMRA for private-sector mandates ($156 million in 2017, adjusted annually for inflation).

Limited Choice

by Regina Herzlinger,  National Review, July 9 2009

Can you get what you need in a government-run health-insurance market?

Virtually all current health-care-reform plans feature a monopoly health-insurance store, operated by federal or state governments, for those who lack employer- or government-sponsored insurance and want to qualify for government subsidies. Advocates claim these monopoly markets will control costs through their purchasing power and enhance price competition by simplifying comparison shopping. When insurers are forced to compete on price, they will prod health-service providers for increased efficiency.
It’s true that retailing innovations can enhance productivity. The retailing sector is credited for 34 percent of the 1995–1999 surge in U.S. labor productivity and continuing growth through 2002; retailers achieved these results through innovations such as convenient web outlets (eBay, Amazon, Netflix); inexpensive, stylish goods (IKEA, Target); and widening ranges of products that enhanced competition, a trend that produced more than 170,000 book titles, 211 car models, and countless custom-designed PCs.

But before we get swept away, let us remember that these health-insurance markets would be monopolies run by government, two characteristics that normally do not enhance consumer welfare. Picture the efficiency of your Division of Motor Vehicles, for example.

Also consider government-run monopoly liquor stores. Despite their ability as the single payer to extract better volume discounts from wholesalers than private liquor chains can, their prices are not lower than private stores’. Additionally, they slight consumers through shorter operating hours, inconvenient locations, limited brand availability, and inadequate advertising. By forcing consumers to adjust their shopping habits, they raise prices through loss of time. Although some advocates hope that these features limit liquor consumption, this is not the case.
The results attained by government-run health-insurance markets in Massachusetts and the Netherlands provide equally cautionary evidence: Such markets limit competition, do not control costs, discourage entrepreneurial efforts, and thus cause consumer dissatisfaction.
Government health-insurance markets limit choice, through plans with standardized benefits packages — insurance speak for “you can have it in any color as long as it is black.” Massachusetts’s government-designed insurance policies require enrollees to purchase 52 benefits, some of them very costly. In vitro fertilization, for example, raises the price of insurance by up to 5 percent by itself. We all should empathize with families needing in vitro fertilization, but is this the kind of medical care for which insurance is designed, and if not, is it fair to raise everybody’s family insurance prices by as much as $900 (at 2009 insurance rates) to pay for it?
Most likely, many consumers would not buy all of these government-required benefits if they had freedom of choice. For example, Swiss consumers — who are required to buy their own health insurance — are demonstrably price sensitive. There’s no reason to believe that Americans are any different, and researchers at a recent event at the American Enterprise Institute claimed that 12 million uninsured would find affordable insurance if they could shop for plans that required fewer benefits. Monopoly markets run by the national or state government obviate that possibility.
Massachusetts’s government also prohibits some plan features, such as very high deductibles. Surely some consumers would find lower-priced, high-deductible insurance better than none. But the 57,000 Massachusetts tax filers who are uninsured and cannot afford to buy insurance will not find this option in the government store. (These policies also control costs. The concern that high deductibles diminish health status was dispelled by a massive RAND Corporation study and more recent results for middle- or more income earners.)
Why do government-controlled markets require insurance plans that people may not want and prohibit others they may want? The reason is simple: Legislatures that run government markets respond to lobbyists financed by providers and insurers. These interests prefer to sell expensive policies rather than cheap ones; and no one lobbies for consumers. Also, the politics of empathy play a role: People with uncovered conditions often lobby, through the government and media, to force insurance companies to cover their maladies.
Government-run markets pose additional dangers. By “crowding out” employer-sponsored insurance, the government’s regulatory power enables the market to become a complete monopoly. In Massachusetts, for example, subsidies available only to the non-insured (for example, families of four earning up to $66,000) and relatively low penalties for employers who do not offer health insurance have already caused enrollment in employer-sponsored health insurance to slip from 85 percent in 2003 to 78 percent in 2007. Similarly, employer contributions for the payment of policies declined from 82 percent in 2001 to 75 percent, compared to 85 percent nationally, in 2007.
A monopoly government-run market can limit the entrance of innovative insurance plans. Consider the decade-long results achieved by an entrepreneurial South African insurer that financially rewarded joining gyms, screening for chronic diseases, and smoking cessation. Highly engaged members (up to 38 percent) achieved significant cost reductions, most notably in chronic diseases, which account for the bulk of health care costs — 7.2 percent lower for cardiovascular disease, 15.1 percent for cancers, and 21.4 percent for endocrine and metabolic diseases.
Government markets can also limit innovation through price setting. In the Netherlands, for example, the government controlled all the prices paid to suppliers. When it permitted hospitals and insurers to negotiate freely for a limited number of procedures, prices dropped, some hospitals offered warranties for their services, and insurers offered innovative policies, such as paying enrollees’ deductibles if they used lower-priced hospitals.
Rather than entrepreneurialism, government-controlled markets encourage consolidation. In anticipation of the government market “reform,” for example, Dutch insurers consolidated to control 80 percent of the market. The providers consolidated, too, so they could bargain effectively with these oligopolistic insurers. In the U.S., the economies of scale that such mergers allegedly achieve have not occurred. To the contrary, U.S. hospital and insurance mergers have increased prices and at times diminished quality.
Competition, however, lowers costs. Switzerland has 84 private-sector insurers, and they’ve lowered their general and administrative expenses to 5 percent of their total costs, a percentage equal to, and likely better than, the administrative costs of the monopolistic government Medicare program.
Limited choice, little price differentiation, consolidated insurers and providers, lack of entrepreneurs — this deadly brew causes price inflation.
In the Netherlands, while total health-care-cost increases declined two years before the national market reforms, total costs rose by 4.4 percent and 5.1 percent, respectively, in the two years after the reforms were put into place. Individual health-insurance premiums rose about 8 to 10 percent in 2006–2007 and even more in 2008. Not surprisingly, the Dutch are unhappy with their insurance plans and the perceived quality of their health care.
Some contend the American public needs a centralized market offering a limited choice of plans with standardized features because it is essentially too stupid to wend its way through a thicket of insurance plans. But, in the rest of the U.S. economy, Americans have driven down the price and improved the quality of complex purchases such as personal computers and cars. Automobile prices, for example, have inflated by only 35 percent since 1982–1984, while the CPI index more than doubled. And Americans wend their way through 43,000 items carried by the average food retailer to get what they want.
When it comes to health insurance, the appropriate role of government is to help subsidize those who cannot afford health insurance; to enable transparency so that people can shop intelligently; and to prosecute fraud, abuse, and anti-competitive behavior. It’s not the government’s job to run markets.
Regina Herzlinger, the Nancy R. McPherson professor of business administration chair at the Harvard Business School and fellow at the Manhattan Institute, is author of Who Killed Health Care: America’s $2 Trillion Problem — and the Consumer-Driven Cure.

Health Economics 101

By Paul Krugman, The New York Times, November 2005

Several readers have asked me a good question: we rely on free markets to deliver most goods and services, so why shouldn’t we do the same thing for health care? Some correspondents were belligerent, others honestly curious. Either way, they deserve an answer.

It comes down to three things: risk, selection and social justice.

First, about risk: in any given year, a small fraction of the population accounts for the bulk of medical expenses. In 2002 a mere 5 percent of Americans incurred almost half of U.S. medical costs. If you find yourself one of the unlucky 5 percent, your medical expenses will be crushing, unless you’re very wealthy — or you have good insurance.

But good insurance is hard to come by, because private markets for health insurance suffer from a severe case of the economic problem known as ”adverse selection,” in which bad risks drive out good.

To understand adverse selection, imagine what would happen if there were only one health insurance company, and everyone was required to buy the same insurance policy. In that case, the insurance company could charge a price reflecting the medical costs of the average American, plus a small extra charge for administrative expenses.

But in the real insurance market, a company that offered such a policy to anyone who wanted it would lose money hand over fist. Healthy people, who don’t expect to face high medical bills, would go elsewhere, or go without insurance. Meanwhile, those who bought the policy would be a self-selected group of people likely to have high medical costs. And if the company responded to this selection bias by charging a higher price for insurance, it would drive away even more healthy people.

That’s why insurance companies don’t offer a standard health insurance policy, available to anyone willing to buy it. Instead, they devote a lot of effort and money to screening applicants, selling insurance only to those considered unlikely to have high costs, while rejecting those with pre-existing conditions or other indicators of high future expenses.

This screening process is the main reason private health insurers spend a much higher share of their revenue on administrative costs than do government insurance programs like Medicare, which doesn’t try to screen anyone out. That is, private insurance companies spend large sums not on providing medical care, but on denying insurance to those who need it most.

What happens to those denied coverage? Citizens of advanced countries — the United States included — don’t believe that their fellow citizens should be denied essential health care because they can’t afford it. And this belief in social justice gets translated into action, however imperfectly. Some of those unable to get private health insurance are covered by Medicaid. Others receive ”uncompensated” treatment, which ends up being paid for either by the government or by higher medical bills for the insured. So we have a huge private health care bureaucracy whose main purpose is, in effect, to pass the buck to taxpayers.

At this point some readers may object that I’m painting too dark a picture. After all, most Americans too young to receive Medicare do have private health insurance. So does the free market work better than I’ve suggested? No: to the extent that we do have a working system of private health insurance, it’s the result of huge though hidden subsidies.

Private health insurance in America comes almost entirely in the form of employment-based coverage: insurance provided by corporations as part of their pay packages. The key to this coverage is the fact that compensation in the form of health benefits, as opposed to wages, isn’t taxed. One recent study suggests that this tax subsidy may be as large as $190 billion per year. And even with this subsidy, employment-based coverage is in rapid decline.

I’m not an opponent of markets. On the contrary, I’ve spent a lot of my career defending their virtues. But the fact is that the free market doesn’t work for health insurance, and never did. All we ever had was a patchwork, semiprivate system supported by large government subsidies.

That system is now failing. And a rigid belief that markets are always superior to government programs — a belief that ignores basic economics as well as experience — stands in the way of rational thinking about what should replace it.