Tag Archive bilateral oligopoly

Trumpcare Needs Milton Friedman

Lawrence Abrams No Comments

Trumpcare has focused exclusively on eliminating mandates, reducing tax credits, and rolling back Medicaid expansion to the working poor. But, the consequences of this are an estimated 24 Million people dropping coverage and huge increases in premiums for those who wish to remain covered.

Trumpcare is up for a vote in the House of Representatives and its passage very much in doubt despite a 24 vote majority held by Republicans. Even it passes the House, its chances of passage in the Senate are deemed slim seemingly by design.

To appeal to moderates, Trumpcare needs to preserve Obamacare’s affordability, keep the Medicaid expansion, while at the same find a way to reduce overall budget costs in the order of 20%. To appeal to conservatives, Trumpcare must reduce overall costs in the order of 20% plus eliminate mandates which was a source of affordability by providing cross subsidies between health-risk cohorts.

The only way we see out of this conundrum is a move to consumer-directed healthcare espoused by the late economist Milton Friedman.

While Friedman is probably better known for his voucher plan for schools, he had similar ideas espoused in a paper written in 2001 called “How to Cure Healthcare.” A condensed version has been made available online by the conservative think tank The Hoover Institute.

Friedman’s big idea in 2001 was this:

“Two simple observations are key to explaining both the high level of spending on medical care and the dissatisfaction with that spending. The first is that most payments to physicians or hospitals or other caregivers for medical care are made not by the patient but by a third party — an insurance company or employer or governmental body. The second is that nobody spends somebody else’s money as wisely or as frugally as he spends his own.”

Friedman was no knee-jerk conservative. He made it clear that Federal subsidies to the uninsured was a fairness issue and not some handout. This is because of the unfairness of the current system of giving tax exemptions only to employer-provided medical insurance.

When Friedman wrote his healthcare piece in 2001, the estimate of this tax shelter was $100 Billion. Today, The Brookings Institute estimates this selective subsidy at $261 Billion.

When Friedman wrote this piece in 2001, consumer-directed healthcare with payments made from a Health Savings Account (HSA) was a new idea. He envisioned HSAs eventually as centerpiece of both Medicare and Medicaid through a combination of Federal contributions deposited in HSAs to cover normal expenses supplemented by Federal government single payer, high-deductible catastrophic insurance.

There have been three trends since Friedman’s 2001 article that have made consumer-directed health care so much more a viable option today. Trumpcare should take advantage of these trends.

The first trend — a negative one — is the dearth of Federal Trade Commission challenges to anti-competitive mergers among healthcare insurers and pharmacy benefit managers (PBMs). It is ludicrous today to think that insurance companies and PBMs compete for customers today by working hard to hold down healthcare costs and associated premiums. We have written extensively about the bilateral oligopolies in the drug supply chain and the misaligned PBM business model.

The second trend — a positive one — is the extent to which the Internet, payments technology, and mobile phones have lowered transactions costs — price discovery, evaluation of treatment options, patient advocacy, and payments — associated with the purchase of healthcare. This includes the substitution of the costly paperwork that used to plague HSAs with HSA-linked debit and credit cards programmed to pay only for SKUs certified as reimbursable healthcare costs.

Interestingly, it was Friedman’s colleague at the University of Chicago, the late Ronald Coase, that had the big idea that transactions costs could have profound effects on markets and institutions.

Notice, we said nothing about the need for government mandates for healthcare price transparency similar to the recent bipartisan legislation introduced in Congress.

We have no doubt, as would have Friedman, that consumer-directed healthcare would create such an explosion in provider price transparency as to make regulation unnecessary.

Recently, the U.S. House Oversight Committee Chairman Jason Chaffetz admonished people who complained about increased premiums under Trumpcare. He said they should get their priorities straight and cut back on luxuries like iPhones.

If Trumpcare were consumer-directed, this admonishment would be ironic because smartphones would pay for themselves by helping consumers hold down costs. For example, it is a sure thing that there would be app-based patient advocate services you could summon on a moment’s notice upon being admitted to a hospital. All bills would be run through the service. Consultants would be available 24/7 to review proposed treatments.

Indeed, we would argue that under consumer-directed healthcare, a portion of a smartphone’s expense should be a deductible.

The third trend — a positive one — is the exponential growth in venture-capital funded startups focused on healthcare price discovery, cash-only drop-in clinics, lab tests for early detection of cancer, low cost step-therapies, etc. All of these services are in a symbiotic relation with consumer-directed healthcare.

We would like to mention just two of the many healthcare startups out there with services focused on enhancing consumer-directed healthcare. Both would thrive if Trumpcare were based on Milton Friedman’s ideas.

One is a basic healthcare clinic just starting up in San Francisco called Forward. The innovation here is an out-of-pocket only subscription business model of $1,800 a year billed annually. They do not accept insurance. This type of clinic is made-to-order for consumer-directed healthcare.

The other startup we want to mention is the crowd-sourced price discovery website Clear Health Costs. Here is just one screenshot to give you some idea of its value to consumer-directed healthcare.

Screenshot from Clear Health Costs Website

Again these are just two of the hundreds of healthcare startups that would make consumer-directed healthcare a viable alternative to Trumpcare as initially designed.

We conclude below with a table outlining how Obamacare, Trumpcare, and Trumpcare + Milton Friedman would address major issues:

Trumpcare + Milton Friedman

Prop 61: Which Tony Soprano Bargaining Agent Do You Want?

Lawrence Abrams No Comments

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Summary:   A YES vote  is a vote for an honest, but a narrow-minded Tony Soprano style of bargaining. A NO vote is for a dishonest, but open-minded Tony Soprano style bargaining.

California Proposition 61 — a.k.a. The Drug Price Initiative  —  forces managers of  government employee prescription drug plans to get more rebates from drug manufacturers.   YES ads feature Bernie Sanders and his anti-big business mantra.  NO ads feature Veterans lamenting the possibility that this measure will increase their prescription drug costs.

No one has analyzed this proposition starting with the idea that there are two sides to any deal.  You have to ask the question:  Rebates in return for what?

You have to start with bargaining styles to understand the problem Proposition 61 seeks to fix.    Lowering prescription drug prices is all about changing the bargaining style of plan managers.  

A YES vote says you want the style used by the Veterans Administration (VA).  A NO vote say you want to maintain the status quo and keep the bargaining style used by contracted pharmacy benefits managers (PBMs) such as CVS Caremark, UnitedHealthcare’s OptumRx, and Express Scripts.

To better understand the implications of California Proposition 61, we need only look to the pilot episode of the HBO hit series The Sopranos.   In that episode, Tony complains to his therapist Dr. Melfi about the stresses of being a “waste management consultant.”  

His job, for which he and his supporting crew are paid handsomely,  is to manage the competing interests of various sanitation companies wishing to win lucrative garbage contracts put out to bid by suburban New Jersey municipalities.

Tony has no real insights into the complexities of bid submission.  Tony’s sells himself as an effective gatekeeper, creating value by limiting access to lucrative markets.  He collects a tariff from those whom are allowed in and sends his nephew Christopher to exclude the rest.  

No wonder Tony is stressed.  Sanitation companies put Tony in a schizophrenic double bind “damn if you do, damn if you don’t” situation.  If Tony does limit competition to a single sanitation company, the favored earns excess profits while the excluded curse Tony.   If Tony does nothing, all the sanitation companies bid so aggressively against each other that no one profits and they all curse Tony.  Either way, someone is cursing Tony.

The Tony Sopranos of Prop 61 are VA administrators and PBMs.  These gatekeepers receive rebates from drug manufacturers in return for insuring limited competition from other patented brand drugs that are “therapeutic equivalents.”  

For example, there is fierce competition today among manufacturers of patented, but substitutable, combo drug therapies used to treat the Hepatitis C virus.  This includes pills from AbbieVie (Viekira Pak and Technivie),  Merck (Zepatier). and the more expensive, but more effective, treatments from Gilead Sciences (Solvadi and Harvoni).

Indeed, Harvoni is one of the most expensive drug therapies in the world with the list price of each pill at $1,125 and a total list price of $84,000 for a 12 week cure.

Plan administrators are able to slice off an estimated 30% to 60% of the list price in form of rebates in cases where there is competition among a few patented, but substitutable, brand drugs.

Indeed, over the past few years, a vicious cycle has emerged: drug  manufacturers raise list prices 15%, PBMs raise rebates demands 10%. Next year there is 20% increase in list prices coupled with a 15% raise in rebate demands, etc.   It is not clear who initiates and who responds here.  The villains might not be CEOs of drug companies like smirk-faced Martin Shkreli, but rebate-hungry CEOs of pharmacy benefit managers.

Prop 61 is about what version of Tony Soprano you want as a bargaining agent.

The vehicle for limiting competition is a list of drugs covered by the plan called a formulary.  The VA formulary is severely limited in terms of total drugs, but there are no copay tiers.  This highly restrictive formulary allows the VA to collect the largest rebates and the lowest net drug prices of any plan in the United States.

The PBM formulary lists many more drugs overall, but exerts secondary power over demand via copayment tiers, step therapy, and prior authorization.

Make no mistake.  Drug rebates are not volume-related price discounts.   If this were the case, then Medicare Part D drug plans with total enrollment of 70 Million enrollees would get higher rebates than the VA drug plan with 9 Million total enrollees.

The VA has a transparent business model.  VA employees earn a salary and only seek rebates in order to lower government costs.  But, unfortunately, the federal government historically has underfunded the VA.  Over the years, VA thinking has become narrowly focused on costs at the expense of quality of care for Veterans.  

A YES vote on Prop 61 is a vote for an honest, but a narrow-minded Tony Soprano seeking rebates for rebates sake,  with not enough weight given to consumer choice and quality of care.

A NO vote is for a secretive Tony Soprano pocketing rebates on the sly, but willing to pay higher prices for newer, more effective prescription drugs.  

We have no strong conviction either way.  

A YES vote is not good for Vets in the short run.  It will link California plans to VA prices and provide a disincentive for drug manufacturers to give big discounts to the VA.  But, ironically, a YES vote might be good for the Vets in the long run as it will call attention to the narrow-mindedness of VA administrators and force them to cover higher cost drugs that deliver better quality of care for Vets.

Our concern with Prop 61 is that it is tries to fix a problem by legislating outcomes rather than by legislating practices.  A YES vote legislates an outcome without any limits placed on the practices used to achieve mandated results. A NO vote preserves the status quo of PBMs as managers of state government employee drug plans.

We would have preferred that Proposition 61 mandate changes in the business model of any PBM that manages a state employee drug benefit plan.  This would include mandating a transparent fee-for-service business model with 100% pass-through of rebates  and no opaque “spread-margins”  earned on the resale of mail order generics.  

It would also mandate that enrollees have the option of obtaining 90-day prescriptions at local pharmacies as well as PBM-owned mail order operations.  Finally,  it would include outside review of PBM formulary choices.

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Lawrence W. Abrams, Ph.D. has written over 20 papers on pharmacy benefit managers freely available at www.nu-retail.com  He lives in N. Monterey County, California and can be contacted at labrams9@gmail.com