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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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.

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.

The Wrong Way to Lower Health-Insurance Premiums

Republicans’ Obamacare replacement would bring lower-value policies.

For proponents of the American Health Care Act, perhaps the most encouraging nugget in the Congressional Budget Office’s otherwise critical analysis is that insurance premiums could fall by 10 percent on average by 2026. Even this prediction is more mirage than reality, however, in part because of an obscure concept known as “actuarial value.”

As many opponents of the Republicans’ Obamacare replacement legislation have already noted, for many people, the decline in premiums would be smaller than the cutback in their subsidies, so they would still end up paying more. And in any case, the predicted fall in premiums partly reflects a troubling rise in the share of older Americans without insurance, a change that would shift the enrollment pool to younger, less expensive beneficiaries.

From Bloomberg View – Articles by Peter R. Orszag

Selling Health Insurance Across State Lines Won’t Save Money

An idea that sounds easy is too complicated to work.

The effort to replace Obamacare faces increasing challenges, the more it is subjected to the harsh light of scrutiny. A good example is the proposal, apparently central to the Republican replacement plans, to allow people to buy health insurance across state lines.

This idea has been put forward as an elixir to all sorts of health sector problems. In his joint address to Congress, President Donald Trump argued that allowing people to buy health insurance in other states would “create a truly competitive national marketplace that will bring costs way down and provide far better care. So important.”

From Bloomberg View – Articles by Peter R. Orszag

Here’s How Trump Will Change Obamacare

Congress will take symbolic steps while states do the work.

Promises made by Donald Trump and Republicans in Congress to repeal and replace the Affordable Care Act are proving to be more complicated than they sounded on the campaign trail. With reality now setting in, what’s most likely to happen?

I expect to see Republicans stage a dramatic early vote to repeal, with legislation that includes only very modest steps toward replacement — and leave most of the work for later. Next, the new administration will aggressively issue waivers allowing states to experiment with different approaches, including changes to Medicaid and private insurance rules. At some point, then, the administration will declare that these state experiments have been so successful, Obamacare no longer exists.

In other words, the repeal vote will be just for show; the waivers will do most of the heavy lifting.

From Bloomberg View – Articles by Peter R. Orszag

 

Another Piece of Obamacare That Trump Should Keep

To get a sense of the future of American health care, amidst the post-election uncertainty, watch what happens to the Center for Medicare and Medicaid Innovation. This agency, created as part of the Affordable Care Act, has attracted substantial opposition. A recent proposal to change reimbursement to doctors for administering certain drugs, in particular, has led to calls that it be abolished. But let’s hope the center survives, because it could prove crucial to any new effort to raise the value of health care in the U.S.

From Bloomberg View – Articles by Peter R. Orszag