Scenario in Senate Bill: Drug Rationing

By slashing Medicaid’s budget, the health-care bill would lead to prescription price controls.

Senate Republicans may not realize it, but their repeal-and-replace health-care legislation, if passed, would set the U.S. on the road to European-style price controls and rationing of prescription medications. This would follow fairly directly from the enormous cuts to Medicaid that the bill would impose.

By 2026, according to the Congressional Budget Office, federal spending on Medicaid would be reduced by 25 percent. And the cuts would build further every year thereafter.
Starting in 2025, the federal reimbursement to states for each person covered by Medicaid would rise only at the rate of overall inflation — far less than the rise in medical costs for those beneficiaries. Consider that, over the coming decade, spending per person on Medicaid is expected to grow by about 4.5 percent annually, while the overall inflation rate is projected to be more like 2.5 percent. A per capita cap that increases only at the rate of inflation would thus amount to a cut in federal spending on Medicaid of about 2 percent a year.

After a couple decades of this — on top of the cuts through 2026 — federal support for Medicaid would be cut to about half the level it would be without this legislation.

How would states respond? The CBO says they “would continue to need to arrive at more efficient methods for delivering services (to the extent feasible) and to decide whether to commit more of their own resources, cut payments to health care providers and health plans, eliminate optional services, restrict eligibility for enrollment, or adopt some combination of those approaches.”

One specific and perhaps underappreciated thing states could do would be to aggressively restrict Medicaid beneficiaries’ access to drugs, and impose price constraints on the medicines allowed.

This would come as a blow to both beneficiaries and drug manufacturers, because Medicaid is the largest insurer in the country. In 2015, it spent about $30 billion on retail prescriptions for its 70 million beneficiaries — about 10 percent of the national retail drug spending total.

The per capita caps would also affect state incentives to cover newly discovered breakthrough drugs. Currently, under Medicaid, state governments pay only a fraction of the cost of such medicines, typically well under 50 percent. (The exact share depends on the state’s per capita income and the type of beneficiary involved.) The rest of the cost is paid by the federal government. Even with this generous federal cost-sharing, state governments still often balk at covering new drugs.

Most states have been reluctant to pay their share of drugs to treat hepatitis C, for example, and have instead significantly limited access to only those patients who meet specific conditions. Waves of lawsuits have been filed to push states to provide more generous access to the medicines.

Now imagine what would happen with a per capita cap on federal spending. Any new drug entering the system whose costs had not been anticipated would have to be borne entirely by the state. A governor choosing whether to pay the full freight or, say, hold down tuition at public universities might well decide that access to the drugs should be limited, even if the drugs are a major clinical breakthrough or could reduce other health-care spending over time.

Under the existing Medicaid drug rebate program, states are required to cover nearly all drugs from manufacturers that have signed rebate agreements. But they nonetheless restrict access — by establishing preferred drug lists and prior authorization rules, and by rigidly limiting the number of prescriptions a beneficiary can fill each month. These techniques would probably be used more and more under a per capita cap. And governors would dial up the pressure on Congress to loosen the requirement to cover all drugs — and allow states to ration them directly through highly restrictive or closed formularies based primarily on cost rather than value.

States have already become more aggressive in negotiating extra rebates from drugmakers, in addition to the federal Medicaid rebate. A new law in New York promises extra state scrutiny of profit margins and drug effectiveness for any company that doesn’t agree to sufficient rebates. If the Senate health-care bill becomes law, such measures would probably become more widespread, as states struggle to accommodate Medicaid drug costs.

The likely result of the legislation would thus be to push state governments to aggressively set prices and ration access to new drugs. To be sure, the U.S. needs to shift drug payments in a way that places more emphasis on value. But loading more risk and cost onto fiscally strapped state governments is not the way to do it. I wonder whether Republicans, who generally espouse less government interference in drug pricing, understand what forces their bill would set in motion.

Originally published at bloombergview.com on June 28, 2017.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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Virtual Reality Can Conquer Real Pain

It’s a promising medical weapon to deploy in the opioid crisis.

Despite all efforts to combat the opioid epidemic, the crisis continues to destroy lives and contribute to the growing gap in life expectancy by income and education in the U.S. But it appears that some relief may come from an unexpected source: virtual reality. Anyone who thinks virtual reality is just a sideshow for gamers should pay close attention to the stunning results it’s achieving in the medical world.

A virtual reality game called SnowWorld — in which patients throw snowballs at snowmen while virtually immersed in a white, snow-covered environment — has been used for more than 20 years to relieve the pain experienced by burn victims, and it’s been surprisingly effective. As David Rhew, the chief medical officer at Samsung Electronics America, recently explained to me, the promising results from burn management have led to broader use of virtual reality in an array of medical settings, including the type of chronic pain that leads to opioid abuse.

In one trial at Cedars-Sinai Medical Center in Los Angeles involving 100 patients experiencing significant chronic pain, half the patients played a 15-minute virtual reality game called Pain RelieVR, in which the patient tries to shoot balls at moving objects in an immersive 360-degree environment. The other half were shown an ordinary video of relaxing nature scenes.

Sixty-five percent of the virtual reality patients experienced pain relief, compared with 40 percent in the control group, and the change among the game-players was more substantial. Virtual reality seems to do more than a two-dimensional movie to shift the brain’s experience in a way that helps patients handle pain.

To be sure, this study involved only a brief virtual reality experience, and it did not randomly assign the patients to each group. But other studies of virtual reality in chronic pain management are showing similar results. The conclusion of a review done several years ago remains true today: “Virtual reality has consistently been demonstrated to decrease pain, anxiety, unpleasantness, time spent thinking about pain and perceived time spent in a medical procedure.”

Perhaps the most remarkable medical results from virtual reality involve spinal cord injuries. In a small study of eight Brazilian patients who were paralyzed below the waist, researchersused virtual reality, a robotic suit and tactile limb feedback to train the subjects’ brains to develop alternative neural pathways to the affected limbs. After a year, all of them experienced some improvement, and half were upgraded from full lower-body paralysis to partial. (None of these patients were able to walk independently, but they were closer to being able to do so. One patient could move her legs by herself while supported by a harness.)

There’s some concern that virtual reality, if used to treat opioid addicts, might become the focus of new kind of addiction, but even so, it wouldn’t be as deadly as the very real one we currently face.

The use of virtual reality as a medical tool is in its infancy, and the results to date should be viewed as promising rather than definitive, especially given the exceedingly small sample sizes in studies so far. Nonetheless, there’s reason to be hopeful, since the results are fully consistent with the well-researched placebo effect in addressing pain, depression and other health problems.

The brain is remarkably powerful, perhaps even able to reawaken limbs that have been paralyzed for years. Virtual reality might be able to help channel that power in beneficial ways.

Originally published at bloombergview.com on June 13, 2017.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Health Care Is Reforming, Just Not in Washington

Business leaders see better value for the dollar before the end of the decade.

As lawmakers in Washington continue their debate over how to modify the U.S. health-insurance market, health-care investors and business leaders around the world need to see past the political drama and run their businesses with a view toward improving value in health care. If they succeed, it will make a bigger difference for the cost and quality of care — globally and for most Americans — than whatever action is taken by Congress.

We’ve just finished a study involving 300 senior health-care executives from leading companies in health-care services, pharmaceuticals, biotechnology and medical devices, along with top investors in the field. And it’s clear that they see big changes in the years ahead, driven largely by pricing pressure across the industry.

The pricing pressures, in turn, are expected to drive innovation. Interestingly, in the coming years, changes in how health-care payments are made are expected to be the most important form of innovation, though scientific breakthroughs will also play a critical role. What’s more, these leaders expect health-care companies to engage in new partnerships and collaborations — including with nontraditional competitors in the technology world, such as Google, IBM, Apple and Fitbit.

Most surprisingly, we found strong expectations that value-based payments for medical care will displace the traditional fee-for-service model, transforming the industry over the next five to ten years. Despite doubts after the recent presidential election that the movement away from fee-for-service would continue, more than half of American executives and four-fifths of American investors who responded to the survey after Nov. 8 said they believe the majority of U.S. health-care payments will be value-based before 2020 — that is, in less than three years, a stunning shift. And the industry still expects the government to lead the way; most respondents said the U.S. Centers for Medicare and Medicaid Services will drive the payment change, though many also see private health insurers playing an important role.

To be sure, there were differences among subsets of the industry. Pharmaceutical and biotech executives, for example, tended to be more skeptical about value-based payments, with more than 70 percent doubting they would prevail before 2020. These leaders clearly had other issues on their minds; they were the most worried about pricing pressure and political risks, especially in the U.S. Almost three-quarters of American pharma and biotech executives listed the “political environment” as one of the top three drivers of drug pricing pressure, for example, whereas only about 40 percent of European pharma/biotech executives did.

And while the 300 respondents broadly agreed that innovation through new health-care payment and delivery models and scientific breakthroughs can be expected in the years ahead, investors more so than executives also pointed to other forces, including improved diagnostics and personalized medicine, and more transparency in health-care pricing and quality.

Industry leaders also expect to see a lot of dynamism in health care. More than 40 percent of executives said new partnerships will help transform health care, including partnerships with tech companies and other nontraditional competitors. In fact, 80 percent of all respondents said nontraditional competitors will change the industry, either through new partnerships or other means.

Here again, people’s views varied depending on their particular business. About 30 percent of respondents in medical devices and health-care services said nontraditional players will transform the industry over the next few years, but only 14 percent of pharma and biotech respondents agreed. More drug and biotech leaders pointed to innovation in key therapeutic areas and scientific breakthroughs. Advances in oncology and central nervous system therapies are most needed medically, they said, and offer the greatest opportunity for innovation and growth. Gene editing, therapeutic vaccines and gene therapy top their list of disruptive technologies.

Against the backdrop of incessant political chatter over repealing and replacing Obamacare, we found an industry poised for dramatic transformation, led by innovation in payment models, science and technology, and supported by new competitors, new partnerships and other strategic transactions.

Our study, in turn, provides guideposts for both government and business leaders on the best path forward in delivering higher-value health care. The money we spend on medicines, for example, should increasingly reflect the higher-value innovations that executives and investors anticipate. And U.S. policymakers must satisfy widespread expectations that they will move toward value-based payments that reflect the benefits of investment in innovation.

Originally published at bloombergview.com on May 15, 2017.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

People Lie, But Search Data Tell the Truth

Looking to Google for a revolution in social science.

 

Seth Stephens-Davidowitz, a former research assistant of mine, would not strike most people as a revolutionary. Yet in his new book “Everybody Lies,” he argues persuasively for a mutiny in social science.

The problem should be familiar to anyone who’s followed political polling in the past few years, despite the successful predictions of Emmanuel Macron’s victory in France. Put simply, most people tend to lie on surveys and on social media, too. As a result, when we study people’s responses to surveys or what they say on social media, we come up with a misleading picture.

Rather than disparage surveys and social media posts, Stephens-Davidowitz points to a different way of understanding ourselves. In the ostensible privacy of online searching, he argues, we inadvertently reveal ourselves, and this digital truth serum offers the best way of finding out who we really are.

Examples abound. According to survey data, Americans overall are not particularly racist, and any racism that does exist is more dominant in the South — a view that is often endorsed by the media. Yet online searches reveal a remarkable number of racist inquiries by Americans, and these searches are in no way limited to the South. Indeed, the highest rates for racist searches are found in places such as upstate New York, eastern Ohio and western Pennsylvania. The true racism divide is not North-South, it turns out, but East-West, with limited racist search behavior west of the Mississippi River. This pattern correlates strongly with presidential election results; in the local areas with the highest share of racist online searches, Barack Obama substantially under-performed, and Donald Trump substantially over-performed.

Another example involves homosexuality. Survey data and social media profiles suggest the proportion of men who report being gay is roughly twice as high in Rhode Island as it is in Mississippi. Yet Google searches of terms associated with gay pornography vary little across the country, and are only marginally higher in Rhode Island than in Mississippi — suggesting that the survey results and social media profiles in some states may not reflect reality. Indeed, in the states where under-reporting may be larger, spouses tend to be more suspicious. The most searched-for term on Google after “Is my husband…” is not “cheating” or “depressed” but “gay,” and that question is asked far more frequently in states where the survey reports are low.

Many other myths are exploded in the book, some by search data and some by other evidence. The notion that violent movies cause violence? Not correct. The crime data show that violence declines before, during and after the showing of violent movies — perhaps because people who would be inclined to commit violence instead go to see the violent movie, and given the association between drinking and violence, the diversionary effect lingers because movie theaters generally don’t serve alcohol.

Another accepted idea, first offered by the historian James McPherson, is that the Civil War caused Americans to shift common usage from “the United States are” to “the United States is.” Nope again: A search of digitized books shows that there was no noticeable shift around the time of the war, and “the United States are” remained common for 15 or more years afterward.

Consider, next, the assumption that people start out liberal and become more conservative as they age. Again, not really. Instead, what seems to matter is an imprint effect that occurs when people are 18. Americans born in 1941, for example, turned 18 during Dwight Eisenhower’s presidency. And by about 10 percentage points, they have tended to be lifelong Republicans. A similar phenomenon applies to sports teams: A person’s favorite baseball team tends to be one that won the World Series during his or her childhood.

All of this would be merely amusing if it left us with only a collection of punctured myths. But Stephens-Davidowitz aims higher, writing that “Google searches are the most important dataset ever collected on the human psyche.” Therein lies the power of his new book: While acknowledging the limitations, Stephens-Davidowitz argues that big data can rescue social science from its garbage in-garbage out problem.

We are still early on this journey, but “Everybody Lies” provides the ballast to suggest it’s the right road.

Originally published at bloombergview.com on May 09, 2017.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

A Better Goal for Trump on Health Care

Forget about repealing Obamacare. Work instead on lowering medical costs and improving treatment.

 

Rather than renew their failed effort to repeal and replace Obamacare, President Donald Trump and congressional Republicans should move on to another aspect of health care: the need to contain costs and improve value.

Such a shift would allow them to be far more productive. For many if not most Americans, cost trends and value matter more than what’s happening on the individual insurance exchanges. Progress on this front would raise people’s take-home pay and improve the nation’s long-term fiscal balance, while also constraining the growth in premiums for those who buy insurance on the exchanges.

All the recent debate over the individual insurance market has made it easy to lose sense of the broader picture. In 2015, more than 155 million Americans received health insurance through an employer, and another 43 million, through Medicare, according to the Kaiser Family Foundation. Roughly 80 million more received coverage through Medicaid or the individual market — the areas where Obamacare expanded access — but even here, most of the coverage still reflects pre-Obamacare Medicaid. Consider that repealing Obamacare would reduce insurance coverage by about 30 million people in 2026, according to the Congressional Budget Office. While that’s a very large number, the population with coverage through other sources is many times greater, and these Americans still spend too much for too little on health care.

So what could the Trump team do to improve value? The way to start is by addressing the extreme variation in health costs across the U.S. Within Medicare, most of the variation reflects the amount of care provided — especially in post-acute care (the care a person receives after he or she leaves a hospital, including in skilled nursing facilities). Within the world of employer-provided insurance, in contrast, most of the variation reflects prices paid.

The accumulated evidence suggests that more care is not better, at least on average. That has been confirmed by clever research just published in the Journal of Health Economics, which analyzed how costs and outcomes vary depending on which ambulance company happens to pick up a particular patient. It turns out that ambulance companies tend to funnel patients to particular hospitals, so the rotation among ambulance companies provides an almost random rotation of patients to different hospital systems. The results show that there is little if any connection between overall spending and subsequent mortality rates. But they also show that higher in-hospital spending seems to be associated with better outcomes.

In contrast, higher levels of spending after patients leave the hospital (the part that drives variation in Medicare costs) is associated with lower-quality care.

These results light the path forward for President Trump: Find ways to lower prices in employer-provided insurance, and to reduce utilization (especially of post-acute care) in Medicare. In future columns, I will explore each of these paths in more detail.

This agenda would also enable Trump to involve Democrats, whom he will need as part of a new governing coalition to pass spending bills and a debt limit increase this year. After all, plenty of Democrats would rather find ways to deliver better-value health care than debate proposals to take people’s insurance coverage away.

Originally published at bloombergview.com on April 25, 2017.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Management Practices Matter More Than You Think

To understand macroeconomic changes, look at how individual companies are run.

Management consultants face perennial questions about what value they add to companies. But management practices go a long way toward explaining why some businesses perform better than others, an important new analysisshows. Perhaps management consultants are onto something after all.

Surprisingly large and growing differences across businesses in wages, productivity, capital returns and worker mobility may influence income inequality and even macroeconomic growth, many recent studies show. Now it seems management practices play a big role in explaining the variations across businesses, at least in manufacturing.

The new study, by a group of well-respected researchers, is based on a Census Bureau survey of about 32,000 U.S. manufacturing plants. The survey asked such things as how frequently managers track performance indicators, how quickly underperforming employees are reassigned or dismissed, and whether managers are promoted based solely on performance and ability.

The researchers used the companies’ answers to construct a management practices index, with higher ratings for plants that do such things as monitor performance, detail targets and tie management incentives to performance. Because the survey included multiple plants within individual firms, the economists were able to examine how practices vary both within companies and between them.

They found, first, that management techniques vary widely from plant to plant. Less than 20 percent use three-quarters or more of the performance-oriented management techniques, for example, while more than a quarter use less than half of them. Perhaps most surprisingly, the authors found that a little more than 40 percent of the variation in overall management practices occurs within the same firms.

They also found that the management techniques matter — a lot. The plants practicing more structured performance-oriented management are more productive, innovative and profitable. Every 10 percent increase in a plant’s management index is associated with a 14 percent increase in labor productivity, for example. And the relationships hold over time: The more performance-oriented a plant becomes, the more productive it is. Companies with higher management scores are also more likely to expand and to survive.

The researchers were able to compare the management approaches with more traditional explanations of business performance — things such as research and development, information-technology expenditures and workers’ skill levels. The authors lined up plants according to total productivity, and looked at differences between those ranking in the 90th percentile and those in the 10th percentile. Management techniques can explain 18 percent of that difference, they found, while R&D accounts for 17 percent; employee skills, 11 percent; and IT variation, 8 percent. In other words, management matters more than conventional explanations for performance.

Finally, the researchers looked into why management practices vary so much. They examined factors such as the competitiveness of the market in which a plant operates, the business environment (including state Right to Work laws), whether there is a college nearby, and learning spillovers from large multinational plants. All these other factors matter, but collectively they explain only about a third of the variation in management techniques.

Whatever the larger explanation, management practices vary substantially, even within manufacturing companies, and they cause big differences in performance. Those differences, in turn, have macroeconomic implications. Someone worried about why wage inequality has risen in the U.S., or why productivity growth has declined, may not immediately think to question why some companies are well managed and others aren’t. But increasingly, the evidence shows that those questions matter.

Originally published at bloombergview.com on April 11, 2017.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

No Raise? It’s Not You. It’s Your Company.

At top-performing firms, workers of all skill levels climb the income ladder.

The kind of company you work for makes a big difference to your chances of getting raises, new research has found. This adds to growing evidence that what goes on inside firms matters beyond their walls. Researchers have shown that company-level differences have become large enough to influence national productivity growth and overall wage inequality. The new study suggests they affect income mobility, too.

Having gathered data on workers and companies from the Census Bureau and the Social Security Administration, researchers John Abowd of the Census Bureau, Kevin McKinney of the California Census Research Data Center and Nellie Zhao of Cornell University categorized workers and their employers along three dimensions: skill, earnings and average company pay. Not surprisingly, they found some correlation between workers and firms. Low-skilled workers tend to work at low-paying companies, for example, and to earn low wages.

From Bloomberg View – Articles by Peter R. Orszag