More on Puncture

This time from DOTmed:

In the suit, Shaw claimed, in essence, he was shut out of the hospital market and nearly driven out of business because of exclusive supply contracts between the other syringe-makers and the GPOs that, in some cases, could prevent hospitals from buying needles from smaller suppliers -- such as Shaw's company. The defendants claimed Shaw's product was rejected for market reasons, such as its high cost.  

But in July 2003, Tyco, Premier and Novation settled with Retractable. The settlement was sealed, but a 2005 Fortune article said the defendants together coughed up about $50 million. Premier and Novation also said they would change their business practices. Although Becton Dickinson initially appeared to hold out, in 2004 it agreed to pay Retractable $100 million to settle the claims of illegal market manipulation, making Shaw, in the words of the Fortune article, "the richest citizen in Little Elm, Texas." 

Good for Shaw but bad for us, as these practices continue unabated.  I didn't know BD had settled either- $50M between Premier and Novation isn't chump change, but that $100M figure should be a red flag that something terribly fishy was going on at Becton Dickinson.

Old but still relevant Ezra

Ezra Klein links to an old column he wrote for TAP.  I missed it back in the day, but it's so good you should read the whole thing.  Some especially salient points (to me) below:

Where Canada's system has a high floor and a low ceiling, France's has a high floor and no ceiling. The government provides basic insurance for all citizens, albeit with relatively robust co-pays, and then encourages the population to also purchase supplementary insurance -- which 86 percent do, most of them through employers, with the poor being subsidized by the state. This allows for as high a level of care as an individual is willing to pay for, and may help explain why waiting lines are nearly unknown in France.

France's system is further prized for its high level of choice and responsiveness -- attributes that led the World Health Organization to rank it the finest in the world (America's system came in at No. 37, between Costa Rica and Slovenia). The French can see any doctor or specialist they want, at any time they want, as many times as they want, no referrals or permissions needed. The French hospital system is similarly open. About 65 percent of the nation's hospital beds are public, but individuals can seek care at any hospital they want, public or private, and receive the same reimbursement rate no matter its status. Given all this, the French utilize more care than Americans do, averaging six physician visits a year to our 2.8, and they spend more time in the hospital as well. Yet they still manage to spend half per capita than we do, largely due to lower prices and a focus on preventive care.

(...) 

A wiser approach is to seek to separate cost-effective care from unproven treatments, and align the financial incentives to encourage the former and discourage the latter. The French have addressed this by creating what amounts to a tiered system for treatment reimbursement. As Jonathan Cohn explains in his new book, Sick:

The French do the same for pharmaceuticals, which are grouped into one of three classes and reimbursed at 35 percent, 65 percent, or 100 percent of cost, depending on whether data show their use to be cost effective. It's a wise straddle of a tricky problem, and one that other nations would do well to emulate.

In order to prevent cost sharing from penalizing people with serious medical problems -- the way Health Savings Accounts threaten to do -- the [French] government limits every individual's out-of-pocket expenses. In addition, the government has identified thirty chronic conditions, such as diabetes and hypertension, for which there is usually no cost sharing, in order to make sure people don't skimp on preventive care that might head off future complications.

Look, I bag on the French like any other good red-blooded American.  I've been to France a couple of times, and it's not a place I'd want to live (but visiting is fun).  But they really seem to be on to something here with their health care system.

Ezra doesn't get into the active military system or Tricare, probably because they're not great examples of cost control on the payor end (the US government) but on the consumer end my wife and I couldn't have asked for a better or more generous system while I was in uniform.  He does mention the VHA:

As Longman details, the VHA suffers from none of these problems. Its patients are patients for life, so investing early and often in their long-term health is cost-effective; the system was set up to deal with the sick, so the emphasis is on learning how to best manage diseases rather than avoid the diseased; and the doctors are salaried, so they have no incentives to either over- or undertreat patients (emphasis mine- JG). Moreover, the VHA is not only empowered to bargain down drug costs; it also uses formularies (lists of covered drugs), and so is actually empowered to walk away from a pharmaceutical company that won't meet its offer.

Now, talking up the French system and even suggesting that we'd be better off if all doctors were salaried employees of the state has undoubtedly eternally damned me to the special hell reserved for communists and people who talk at the theatre, but you can't argue that these measures don't answer some of the biggest underlying problems in our current system.

It was true four years ago when Ezra wrote it, and remains true today.

Medicine vs. Consumerism

Jonathan Chait:

With most market goods, the seller is supposed to maximize his profit. You may have good reasons not to try to fleece your customers, but if you're selling cars, you have every reason to steer them toward the more expensive (or, at least, more profitable) model. The traditional basis of medicine is not based on the market for very sound reasons. Doctors have a massive information imbalance over patients. That's why we don't set them up as parties to a financial transaction. The doctor is a kind of secular clergy presumed to be acting in a way synonymous with the patient's interest.

This is a situation that I am all too personally familiar with.  My wife has successfully battled cancer twice in her life (leukemia, then breast cancer) and is a regular patient at Houston's excellent M.D. Anderson Cancer Center.  For a patient with her history, doctors have a need to be extra-cautious, so just about any complaint is justification for an expensive battery of tests.  On her most recent visit, she complained of frequent headaches (acute sinusitis is another curse that she has lived with for years) so her doctor (actually a nurse practitioner who works for her oncologist) ordered a full-body MRI, a test that typically runs in the vicinity of several thousand dollars.  She is lucky enough to have extensive insurance via her employer (a major university) but even then we determined that our out-of-pocket cost for the procedure would be prohibitively high.  Previously, we had the option of shopping around for a cheaper MRI provider- there are any number of hospitals and private surgical centers that have these machines.  Not this time, said the nurse, the hospital wants you to have it done here, and we won't take anyone else's tests.

Which now puts us in a bind.  The nurse practitioner and oncologist clearly think this is a necessary test for her to rule out any new cancers, but we simply do not have the cash to afford it right now (we waived bye-bye to our credit long ago... cancer, even with insurance, is insanely expensive) and are not allowed to even explore the option of getting it somewhere else for less.  So we really have no options: no scan will be done (for now).

Now, I admit that I resent the hospital somewhat for putting me in this position.  On the surface, I feel like I'm being fleeced- aren't there other, cheaper tests that could be done?  Why was cost not a factor in this decision?  Do they expect me to sell my car or rob a bank so that my wife can have her scan done sooner rather than later?

No, the truth is, nobody is getting fleeced here.  This is the best, most comprehensive test available, and I personally believe that no effort should be spared if it means possibly catching another cancer early enough to treat.  The doctor is doing exactly what I want her to do- take whatever steps are necessary to keep my wife well.  The fact that MRI machines and the techs to run them are expensive, that even good insurance isn't ever going to be good enough (as an actuarial liability to the insurance company, my wife is like a black hole down from which no money escapes), are not factors that her doctors consider when making purely medical decisions- and that's the way it should be.  I don't want her doctor to have the attitude that medicine needs to take a back seat to considerations of the lightness of my wallet.

The only question is, are we better off as a society when we leave it to individuals to shoulder all of the financial burden of the right attitude in making medical decisions?

A Brief History of GPOs

Noah has asked for a more thorough explanation of what Group Purchasing Organizations are and how they affect the healthcare debate.  Since he is currently my only reader, I shall oblige him.

Group Purchasing Organizations, or GPOs, leverage the increased purchasing power of a group of purchasers to obtain lower prices from suppliers.  In theory, the GPOs obtain the lowest possible prices by bargaining aggressively with vendors, who lower their prices in order to access the big chunks of the market that the various GPOs represent.  Since pricing outside of a GPO agreement is (again, in theory) always higher, there is a big incentive for hospitals to do the bulk of their business through a group buy contract.  In the U.S., this means that the majority of hospital purchasing, from consumables to capital equipment, is handled through GPO contract pricing.  

A bit of history: the first healthcare GPO was founded in 1910 by the Hospital Bureau of New York as a response to price-gouging on the part of suppliers in the Manhattan area.  Hospitals in the same city realized that they were paying wildly different prices for consumables like bandages and bed linens.  The Hospital Bureau organization allowed them to get together and bargain collectively with their vendors to obtain better pricing; in exchange, the most aggressively priced vendors would be able to move greater volume by selling to all area hospitals at once.

The advent of Medicare (and, to a lesser extent, Medicaid) in the late 60s fostered a boom in healthcare GPOs.  Suddenly, elderly people of all income levels represented a guaranteed stream of income from the federal government to the healthcare industry.  Medicare reimbursement rates were (and always have been) low compared to market rates, but the reliability of those payments compared to cash or the fledgling private insurance business led to Medicare becoming one of the most important pillars of the hospital community (more on the importance of Medicare to hospitals later, for now, we focus on GPOs).  Flush with cash, the medical device and consumable markets, and with them, the GPO industry, boomed.

One problem with GPOs was traditionally their sources of funding.  The slew of GPO startups in the 70s and early 80s focused on not charging fees to hospitals for their services, instead, (and this is the important part) they took from their contracted vendors a percentage of sales to cover their costs.  The more money a vendor made, the more money the GPO made, essentially incentivizing GPOs to find the highest price that they could get away with and still be able to claim "savings".  If this seems counterintuitive to you, you're not alone.  The problem was exacerbated by the emergence of the first Integrated Delivery Networks (IDNs), parent corporations that owned both the hospitals and the GPOs that supplied them, which found they could take a slice of the money leaving the hospital (in the form of payments for supplies and equipment) by simply setting up the GPO as a required middleman between vendors and hospitals.

In 1986, Congress granted the first of several "safe harbor" exemptions for GPOs from federal healthcare-related anti-kickback laws that threatened to undo an industry that had relied on what were, for all intents and purposes, direct payments from vendors in exchange for access to a hospital's business.  Healthcare Group Purchasing Organizations now had legal cover to operate in a way that would get any other kind of healthcare entity in hot water with the Feds.  The justification at the time was that GPOs were so integral in reigning in the cost of healthcare (proved by a series of GPO-sponsored studies) that they deserved a special exemption that allowed them to continue to operate as they had been.  

In a coming post, I will explain how the current state of the GPO field is making healthcare more costly, the studies both by both private and public institutions that point this out, and the enormous political power GPOs and IDNs wield to defend themselves and their business practices from reform.

Why Patients Are Not Consumers

Movin' Meat:

1. Health care is generally not a refusable or elective service.By this, I mean that in most cases, the health care costs are driven by medically necessary procedures. You get pneumonia. Your knees wear out. You find a lump in your breast. You notice blood in your stool. Barring the denial/self-neglect approach that some people take, when you develop a medical problem, you need to spend money to remedy it. While the timing of your knee replacement may be elective, whether to do it or not generally is not, if the alternative is being disabled and non-ambulatory. It is an inelastic demand, like the demand for gas. When gas gets more expensive, you still have to fuel your car, and except for very small variations, the demand for gas does not vary with the price. Similarly, the demand for medically needed care is not going to be terribly price responsive. When your doctor tells you that you need chemotherapy, you don't make the decision to proceed based on the cost, but on the need. And the number of recreational colonoscopies performed is actually very low.
It is true that some medical costs are elective and price sensitive -- preventative care, luxury procedures like Lasik, some office visits. These, however are a tiny fraction of overall health care costs. As in my analogy, some people do drive less when the price of gas goes up -- they take the bus instead -- but this does not reduce demand enough to make a difference in the price of oil.

2. There is an asymmetry of informationThis asymmetry relates to both price and necessity. When your orthopedist tells you that your knee pain is due to a degenerated meniscus and that the best treatment for that is athroscopy, most consumers are going to simply accept the surgeon's advice. Now, as it happens, there is good evidence that arthroscopy of the knee provides no more benefit than placebo, but 99% of patients are not going to be aware of this and are not going to bother to do the research to find it out. Those that do, might find that the surgeon has an explanation why, in your case, he thinks it will be helpful despite the studies showing otherwise for other people. In most cases, the patient must trust the physician to provide accurate information on what is really needed. And if you should ask your surgeon what the cost of the arthroscopy will be, the answer will probably be "I don't know." Price transparency is poor to begin with but there is the very real fact that based on a patient's individual payer status the cost will vary dramatically, and the surgeon probably does not know what the cost will be for your case. Finally, when consumers make health care providers compete against one another to decide by whom and where the care will be given, they tend to be concerned primarily with quality and with cost as, at best, a secondary concern.
All these factors greatly inhibit competition and the development of a free market. To some degree it is possible to mitigate these, through, say, all-payer price setting, and mandatory disclosures and publishing outcomes data, etc. However, the third variable, in my opinion, makes the rest all-but-moot.

3. Purchasing power is concentrated in the hands of a very small number of "consumers"This is the wooden stake through the heart of the idea that consumer behavior can effect cost containment. The functioning of a free market is dependent on the ability of consumers to vary their behavior to force suppliers to compete. However, you and I can be as scrupulous and cost conscious as we like. We are not sick. (Well, I'm not anyway. I hope you're OK.) The driver of cost is the small fraction of people who have serious medical conditions. It's the old 80/20 rule writ large.

I've heard of some doctors performing "recreational colonoscopies" on irritating patients.  Tip from the pros: always be nice to your gastroenterologist.

Puncture

Found out today that the Tribeca Film Festival is screening Puncture.  I haven't seen it (yet), but I hear that as a movie it is basically a dramatization of the consequences of the GPO structure in America.  Read Mariah Blake's excellent article in Washington Monthly for more.

For those who don't know, Group Purchasing Organizations, or GPOs, negotiate medical equipment and consumable prices from suppliers for healthcare providers.  They claim to negotiate the lowest possible prices from vendors for the providers in their network, however, this is a dubious claim  (PDF) at best:

Two factors worth commenting on:

1) in 1991, HHS established a "safe harbor" exception for GPOs from anti-kickback laws that said, essentially, that GPOs can pay their clients back, in cash, a percentage of the total revenue generated by said client.  This kickback is classified as an administrative fee, and it gives hospital managers an incentive to spend more on their supplies, not less.

2)  smaller medical device manufacturers, like the "safety syringe" guy in the WaMo article and in the Litan/Singer report linked above, suffer from exclusionary agreements negotiated between the big medical vendors and the GPOs, sometimes to the detriment of patients and providers (which is the focus of the film).

I'll be going on and on about GPOs on this blog, mostly related to point #1.  But this is a good place to start, and it helps that people are beginning to notice.  Here's hoping the film gets a wider release.

So here I am, with a mountain of stupid

Noah has been wheedling me for weeks to start a blog on health-related policy, so here it is.  I'm not a doctor, just a cog in the byzantine American healthcare purchasing machine- think of me as the guy who bought the Wizard his machine and helped install it behind the curtain.

I was preparing my first post on why hospitals never pay their bills on time, but that's going to have to wait. Yesterday, Noah put this mountain of stupid in front of me and said sic' em!

As you can see private US spending easily outstrips every other country in the world... That in-and-of itself establishes the US as the most efficient system. One does not need to look at outcomes to determine Why? (sic)

Well, we know that patients like to spend money on health care. We can see that as they are provided more insurance, they spend more money. We can see that as they become wealthier, they spend more money. We can see that as they are exposed to the market mechanisms – compare private insurance to Medicare – they spend more money. Spending more money on health care seems to be inline with satisfying consumer preferences.

Yet, couldn’t this all be a waste. Don’t outcomes matter for efficiency?  No, they don’t...

....They don’t because patients themselves do not look at outcomes and satisfying consumer preferences is the gold standard of efficiency.

I'm hoping/assuming Karl Smith is being ironic here.  For one thing, you can't just redefine "efficiency" to make it anything you want.  Now, I'm no economist- some political economy classes in college went far enough to make it clear to me that an economics debate is mostly a values argument concealed behind lots of complex statistical math.  But still, arguments over efficiency in economic outcomes stick close to the most familiar definition, as related by eminent statistician Professor Wik I. Pedia:

efficiency corresponds to the ratio r=P/C of the amount P of some valuable resource produced, per amount C of valuable resources consumed.

No one is quibbling over C, which is simply "money spent on healthcare per capita".  Karl Smith defines P as being "satisfying consumer preferences", and then extrapolates to imply that more money spent means more satisfied consumers - as if consumption of health care is the same as adding the movie channels to your cable subscription.  This is, of course, overlooking the fact that healthcare is not different in other countries.  They use the same antibiotics and chemotherapy drugs in France that they do here in the U.S.  Canadian cardiac surgeons perform the same procedures as American cardiac surgeons.  Presumably, the same procedures are effective everywhere regardless of price.  So how can the American system be more "efficient" even using Karl Smith's new definition of efficiency?

I (and, I think, most people) tend to think of P as being "positive patient outcomes" - being cured of illness, living instead of dying, being relieved of chronic pain, improving overall quality of life.  One can argue the cost vs. benefit ratios of these outcomes, especially regarding what physicians refer to as QALY- Quality-Adjusted Life Years.  But the point here is that nobody measures the value of their healthcare solely by the amount of money spent, Jack Donaghys of the world aside. 

Basically, Smith is arguing that American consumers don't pay attention to things like comparative effectiveness of different hospitals and physicians when shopping for healthcare.  His implication is that since patients are not bargain-shopping, the "efficiency" inherent in getting the right outcome for less money is irrelevant.  This is actually right, but not for the reasons (and I still can't tell whether he's being snarky or serious) Smith outlines.

The crux of the matter is that, with healthcare providers, information about effectiveness is difficult to come by, and about pricing, nearly impossible.  Hospitals don't post a "menu" of services with a price tag attached because they literally can't- they don't tell you this at the check-in counter, but what you'll finally end up paying for your procedure is not set in stone.  In fact, in many situations, the final price takes weeks or months of negotiating between your doctor or hospital, your insurance provider, and you.  Different insurance plans negotiate often wildly different prices based on their bargaining clout (something I plan to get into in future posts).  Insurance companies often have the power to dictate how much they will pay, how much their client will pay (the patient's out-of-pocket expenses) and then declare by fiat that any remaining balance is null and void-leaving the hospital to decide whether to try and go around the insurance provider to collect that difference or drop it altogether.  Imagine if buying a car worked like that- ("I'll pay $10k of the cost of this car for my kid, the kid will pay $5k, and the remaining $3700 will not be a part of this purchase price."- after you already have the keys and have driven the car off the lot.  Sounds like a shitty bargain for the dealers, eh?).  Medicare plays a role too, even for patients who are not members, since their near-monopsony bargaining power allows them to dictate prices which become, in effect, the "floor" for a caregiver's pricing schedule.

Why is this important?  Because under the current system there really is no such thing as choosing a doctor based on pricing.  You choose your doctor based on location, on recommendations from others, Google searches, and (most likely) based on which doctor your insurance will let you see, which is often based on referrals from other doctors.  You judge the effectiveness of your doctor by the outcome- are you well?  Free of pain? Not dying?  To judge that outcome more "efficient" because you spent more money rather than less is just plain silly.