Is the pharmacy benefit manager market competitive?

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This last week, I spoke with someone who works at an insurer. When I asked if it’s relatively easy for them to identify the pharmacy benefit manager (PBM) that’s offering the best deal, they said that it is, with caveats.

Quick sidenote: I’m finding kind people to answer my probing questions about PBMs, but I’ve also faced a fair amount of hesitancy in general. I think it’s because they worry what is going to happen with the information they are giving. I’m committed to being as transparent and unbiased as possible about the information I receive, and I’m equally committed to not disclosing any of my sources. So I guess that means I cannot prove the reliability of the information I’m sharing, but it’s worth it as long as I maintain access to good sources to help me understand this stuff!

Remember that for a market to be competitive it needs (1) multiple competitors, (2) the customers need to be able to identify the value (price and quality) of each competitor, and (3) the customers need incentives to choose the highest-value option.

The PBM market fulfills all these criteria pretty well. There are plenty of competitors (three big ones, several midsize ones, and lots of smaller ones). So, when an insurer submits a request for proposal (RFP), they will get multiple offers. Identifying the value of the proposals received is doable, if a bit tricky, as discussed below. And the insurer has incentives to choose the highest-value option–getting a great comprehensive formulary with the desirable meds makes for happy members, and lowering the costs goes to their bottom line (assuming there are no annoying medical loss requirement issues).

Let’s talk about the challenges that come into play when they try to identify the highest-value option. It’s actually pretty straightforward–these are incredibly complex contracts, to the point that regular healthcare consultants are not deeply specialized enough. And PBMs leverage that by trying to define things in ways that save them money. To the extent that, if an insurer wants to identify the best PBM proposal, they will probably need a consultant that specializes in helping insurers contract with PBMs. They need the help of someone who knows all the PBMs’ tricks.

I won’t even get into all the complexities of those contracts, partly because I don’t know many of them and partly because those details don’t change the big-picture incentives I’m talking about.

But the good news is that, with the right knowledge/assistance, insurers are able to make value-sensitive decisions in the PBM market! In fact, apparently many insurers submit an RFP every few years to make sure what they’re getting from their current PBM is still competitive, otherwise they’re probably leaving money on the table.

So, that’s one question answered. More to come.

Transitioning to Value Instead of Volume in the Drug Market?

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In response to some of my recent posts on pharmacy benefit managers (PBMs), as well as my overall interest lately in understanding the drug market better, someone asked what a value-based PBM would look like. Interesting question!

When analyzing healthcare from a “value versus volume” perspective, realizing exactly what we mean by that is an important starting point.

Consider what we mean when we say that healthcare providers are “rewarded for volume.” This is usually interpreted to mean healthcare providers are paid in a fee-for-service way–they deliver a service, they get paid. Which means they make more money when they deliver more services, so the incentive is to deliver as many services as possible.

And when we say that providers are “rewarded for value,” this is usually referring to some form of capitation, which means they get paid per head (that’s where the capit part of capitation comes from). In other words, providers would, for example, get paid a monthly fee for every patient whose care they are responsible for. Which means they make more money when they deliver fewer services (which, theoretically, happens when they are doing the right things to prevent their patients from getting sick).

These two methods of reimbursement are seen as “good” and “bad.” Capitation and its variations have good incentives (to prevent illness) and fee for service has bad incentives.

But they’re not opposites, like two sides of a coin or something. They are actually two different ends of a single spectrum. That spectrum is the “breadth of products/services sold as a single unit” spectrum. (I should come up with a better name for it.)

At one end of the spectrum, you have people buying very narrowly defined things. Like if a hospital really did send you a bill for every single nursing task and bandage and bag of saline and tablet of acetaminophen you received while you were there. This is the essence of fee for service–buying narrowly defined things. A doctor visit here, a procedure there.

The other end of the spectrum is buying very broadly defined things. Like paying a healthcare organization an annual fee for covering every single healthcare need that you could possibly have during that year, all inclusive. Every surgery and cancer treatment and emergency department visit etc. would be included.

I’ve written about all this before (way back in 2013!), but the way to figure out where on the spectrum the service should sit (i.e., how broadly defined the product/service should be) is to think about it from the patient’s perspective to see what “job” they want done that it’s fulfilling for them.

The easy example is if someone needs a hip replacement, let’s say they’ve tried all the conservative measures and now their job is simply to get their hip replaced and then recover/rehab from that. So why would they pay separately for the surgeon’s time, the OR time, the anesthesiologist’s time, the medications administered, the hardware used, the physical therapy appointments, the pre-op and post-op appointments, etc., when they could just pay a single lump sum to get their job fulfilled?

When we buy a plane ticket, we don’t pay a separate bill for the airplane depreciation, the fuel, the pilot’s time, the flight attendant’s time, the snack, etc., right? No, we just pay for the single plane ticket that includes all the products and services that go into getting us from point A to point B.

Using that principle of identifying the job to be done and then defining the service as broadly as is necessary to allow the patient to pay a single price for getting that job fulfilled will allow anyone to determine where on the “breadth of products/services sold as a single unit” spectrum anything in the world should sit.

So what about the drug market?

Much of the time, we know pretty well how long we’ll be on a medication. If it’s an asthma med, such as an inhaled corticosteroid, usually the patient will be on it for years or decades, so just knowing how much it costs per month is probably the right breadth of services.

Or, if it’s not a chronic medication, such as a cure for hepatitis C, figuring out the total cost of your direct-acting antiviral regimen is pretty easy if you at least know how much each pill will cost you and how many days (weeks) your treatment course will last.

My point is that the drug market, even though you’re typically buying either a short course of pills or a monthly allotment of them, is already “value based” because the breadth of products is attuned to the job you have for the medication (“keep my asthma at bay for 1 month,” or, “cure my hepatitis C”).

How do PBMs fit into all this?

Well, they’re middlemen. As far as I can tell, even though they’re the ones making the formularies, they aren’t really doing anything to actively shift the breadth of products sold one way or another, which is good because it already seems to be sitting on the spectrum in a good place.

Is there a role for including medications in capitated arrangements so that patients’ diabetes and hypertension and heart failure meds are all included in their annual or monthly fee? I guess that’s possible–it would encourage providers to choose cheaper meds, and it would decrease financially motivated medication nonadherence. So maybe PBMs would be involved in coordinating those efforts.

Ultimately, the big improvements that will change the drug market aren’t so much going to come from optimizations in the volume versus value space, but rather they will come from increasing competition and value-sensitive decisions. And maybe from limiting the degree to which PBMs distort the market? But I’m still figuring that one out.

Maybe This Is How PBMs Started Getting Kickbacks?

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In case you haven’t been following all the riveting posts I’ve been writing lately about pharmacy benefit managers (PBMs), here are the main ones:

Pharmacy Benefit Managers: Kind of a Mystery to Me

I’m Still Confused by PBMs But Trying to Fix That

Why Does GoodRx Exist, and How Does It Work

In the “I’m still Confused by PBMs” article, I went through the step by step process of PBMs coming into existence, which they did by filling a need in the market for companies to help consumers pay the correct copay right up front when they buy a medicine.

This time, I want to think more about how they went from that simple software solution (integrating an insurer’s formulary into the pharmacy’s software system so that it can spit out the right out-of-pocket price on the cash register when a patient buys a medicine) to being seen by many as the “shady middlemen.”

The starting point is the position they found themselves in the market. They were responsible for creating formularies for several different insurers. Their goal, assuming the PBM industry is competitive, is to help insurers have the most generous formulary for the cheapest.

I bet at some point, some young upstart working for a PBM had an idea . . .

Young upstart: “If we want to offer a cheaper formulary than our competitor, why don’t we try to negotiate directly with drug manufacturers to lower the costs of the drugs?”

Old manager, feeling superior: “But how are we going to do that? You don’t understand that drug manufacturers only negotiate with pharmacy wholesalers. The wholesalers are the only party to which manufacturers sell their drugs. Nobody else buys directly from the manufacturers, so no one else can negotiate with manufacturers.” And then, with a taunting eyebrow raise, “Unless you are suggesting something radical, like that we start backward integrating to act as drug wholesalers as well?”

Young upstart, undaunted: “Not at all. How about this. Why don’t we pay a visit to a drug manufacturer that is selling a medication that has several competitors in the same drug category and make them an offer they can’t refuse. We could tell them we’ll put their medication in the lowest copay tier and all the other medications in that same category will still be in the middle copay tier. They will sell way more of their medicine and make a lot more money. But, in return, they have to pay us a “rebate” for every transaction of their medication that we process. They still make more money because they’re selling so much more of their medication, and we get some of it.”

Old manager, interest piqued: “And how is this going to allow us to offer a cheaper formulary than our competitors?”

Young upstart, gaining momentum: “We’ll simply charge less for insurers to use our formulary. Sure, they’ll have to pay a slightly larger share of the total cost of that specific medicine, but the lower price we offer them will more than make up for that. And the best part is, everyone wins! The drug manufacturer wins by increasing profit, the patient wins by paying a lower copay, the insurer wins by getting a cheaper overall formulary, and we win because we keep some of the rebate!”

Old manager, ever skeptical: “If everyone wins, then where is the money coming from?”

Young upstart: “The money comes from the other drug manufacturers, whose market share goes down. That profit that they’re losing is being divvied up among (1) us, (2) the drug manufacturer we’re contracting with, and (3) the insurers using our cheaper formularies, some of which will be passed on to patients.”

Old manager: “Ok, that makes sense, but this sounds too good to be true. You haven’t mentioned pharmacies yet–how would this impact them?”

Young upstart: “I was hoping you’d ask. This won’t impact pharmacies at all. They won’t even know about this transaction between us and the drug manufacturer. As far as they’re concerned, all they see is that they’re still getting paid the negotiated price for the medication, it’s just that patients are paying less and the insurer is paying more.”

Old manager, nodding: “So the patient pays less but the insurer pays more. Yet the insurer is saving money overall because our formulary is cheaper enough to more than compensate for that.”

Young upstart: “Exactly.”

And that is what I imagine to be the start of PBMs negotiating “kickbacks” with drug manufacturers. It was all in the name of PBMs being able to offer lower-priced formularies to insurers by orchestrating a way to help some drug manufacturers sell more drugs and get rebates/kickbacks/volume discounts in return.

This surely boosted the profitability of the PBMs that started doing it, which, when others heard about it, started doing the same thing.

Eventually, every drug manufacturer started paying some kind of rebate to PBMs, which means it became a zero sum endeavor overall for manufacturers because the net effect of having a higher market share through a specific PBM but a lower market through the others that made deals with their competitors means that they end up with essentially the same market share, the only difference being that now they are paying money to PBMs to avoid losing that market share.

Shady middlemen indeed. But I can’t blame them for doing it–this is what capitalism and competition is all about. It’s just a market failure that this specific strategy turns out to be a cost-increaser in the market.

The Non-financial Reasons for Unwarranted Regional Variations in Care Delivery

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Ever since the start of residency, the Journal of the American Medical Association (JAMA) has been delivered to my mailbox without me ever subscribing to it. They keep threatening to stop sending them if I don’t pay for a subscription, but I keep finding the journals in my mailbox. Usually I will glance at the titles of the articles and read the ones I find interesting. That is why, this week, I am writing about what I read in the viewpoint article, Reducing Low-Value Care and Improving Health Care Value, by Drs. Allison Oakes and Thomas Radomski.

They start the article by talking about how there’s a lot of low-value care delivered in U.S. healthcare, even in the absence of financial incentives for delivering more care. They cite some studies from places like the VA system and the Alberta, Canada, system (my home province!), showing how they, too, deliver lots of low-value care. This is their great encapsulation of that important insight: “The provision of low-value care when financial incentives are not present suggests that there are other motivating forces that contribute to overuse. . . .”

Next, they talk about regional variation, saying that from one region to another, there are “systemic differences in care delivery.” But how could doctors act so differently from one region to another? Their answer, at least in part, is that “organizational culture influences patterns of low-value service use. Individual organizations have distinct overuse profiles.” I like that phrase: distinct overuse profiles.

And it’s true. Very true. I’ve worked in the midwest, the northwest, and the mountain west, and I see it. For example, almost no one ordered blood ammonia levels at one hospital, and at another it’s an almost expected part of any workup of confusion, even if the patient has no liver history.

Another example: Just today a colleague was telling me about how if she ever ordered a certain kind of fluids (LR), she would get multiple phone calls checking to see if she’d really meant to order that. Evidence is fairly convincing these days that LR is usually better than normal saline, but that hadn’t caught on at her old hospital. At her new hospital, there’s literally a pop-up warning for anyone who tries to order normal saline that says, “LR is better.” And it offers to switch the order to LR for you.

Another example: At my current hospital, I very frequently see a urinalysis ordered on patients who presented to the ED without any complaints that would make me suspect a UTI. And since urinalyses are commonly falsely positive, those questionable urinalysis orders frequently lead to questionable antibiotic administrations. At other hospitals, the ED physicians’ culture is to have a much higher threshold for ordering urinalyses, and even when they are ordered, the likelihood of treating “asymptomatic bacteruria” is much lower.

Another example: The likelihood of the radiologist reading a chest x-ray as having an opacity that could be pneumonia seems to be different from hospital to hospital. And even if the patient hasn’t had any other symptoms of pneumonia, if they have any sort of respiratory complaint and the chest x-ray report says possible opacity “consider pneumonia,” it seems they always end up getting admitted for pneumonia and started on antibiotics.

These are just a few examples of how the practice of clinical medicine is so different from facility to facility in 1,000 tiny ways. And I understand why it happens.

In residency, your practice patterns are being strongly shaped by what your attendings do. But they’re also shaped, to a large degree, by the personal studying you’re doing and by presentations given at noon conferences and morning reports, where the presenter has spent a lot of time reviewing the newest evidence on the topic. There is a ton of active learning, and your connection to the newest evidence is fairly strong. Although, possibly as a side-effect of this, you also seem to add rare diagnoses to your differential more often, and this probably leads to more low-yield testing.

After residency, working as a regular attending not affiliated with a residency program, the focus is very different. The overall goal of practicing medicine is the same–delivering great care for patients–but there isn’t nearly as much active talk about ways your group might be practicing low-value care. (Instead, ensuring adequate coding and documentation dominates the discussion topics.) The connection to the newest evidence is a lot weaker. And there seems to be more of a focus on avoiding malpractice, which leads to having a lower threshold for ordering tests and scans for common diseases, which also counts as low-yield testing when the diagnosis in question is unlikely in that given scenario.

Individual physicians will still learn new things through personal study, but it’s an uphill battle to justify doing something different than your colleagues. So as you take over your colleagues’ lists of patients when you come on service, and as you take over newly admitted patients from the night before, you are frequently seeing and slowly being influenced by how others in your group are practicing medicine. The practice patterns naturally homogenize. I was once asked by a colleague to send an email to my hospitalist group about the evidence backing up something that I was doing because it was different than the other hospitalists.

This is how particular practice patterns spread and homogenize throughout an organization. Combine those effects with the other active pushes for practice pattern changes that come through leadership communications and EMR integrations (like the “LR is better” pop-up warning), and distinct overuse profiles start to make a lot of sense.

All these cultural factors that lead to systemic but regionally different low-value care delivery will need more than simply top-down Medicare reimbursement changes.

I stand by my solution that, if value-sensitive decisions in healthcare became more widespread, the financial incentives for decreasing low-value care would not only change the macro incentives, but they would be strong enough to induce healthcare managers/clinical leaders to go about finding creative and effective ways to make the organizational changes necessary overcome the cultural factors I’ve talked about in this post.

The Argument for Putting a Price on People’s Lives

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There are arguments out there that say we need to cover everything for everyone; that it’s immoral to ration care. Each human life is priceless, and choosing not to pay for a service that could save or prolong a life is trying to put a price on something that is priceless. It violates the moral test of government:

The moral test of government is how that government treats those who are in the dawn of life, the children; those who are in the twilight of life, the elderly; those who are in the shadows of life; the sick, the needy and the handicapped.

Former U.S. Vice President Hubert Humphrey

I disagree. And having recently read The Road to Serfdom by Hayek, I’ll put it in his terms because he’s given the best explanation of the counter-argument.

If we spend all that money on healthcare and ignore all the other potential uses for that same money, we are making a huge spending decision without even being able to determine whether that money was put to its best use.

How about an example?

If a grandma has the choice to (1) spend $300,000 on cancer treatment that is likely to give her about two more months of life or (2) spend that same sum on 4 years of university tuition for her granddaughter who would not otherwise be able to afford university, what would she choose? Maybe some would choose to live two months longer, but I suspect most grandmothers would put a price on their own life by choosing a better use for that money.

I know–she’s getting to make the decision for herself, which is a very important difference. But I hope the principle is clear: Governments could choose to spend a huge portion of their limited resources on covering every single healthcare service for every single person, but that crowds out other virtuous options, such as school lunches for low-income kids, housing programs for the homeless, mental health treatment for incarcerated individuals, . . .

(Incidentally, in the context of the grandma’s decision, it seems better for the grandma herself to decide what’s best with the money, which is the same argument I have been giving all along that we should allow patients to bear directly some percentage of the cost differential between their various options.)

If we don’t let micro- and macro-considerations of the alternative uses of limited resources enter into our economic decisions, we are headed down the same road that all planned economies in the past have traveled.

NEJM’s Fundamentals of U.S. Health Policy, Part 7b: My Commentary on Creating a More Efficient Delivery System

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In last week’s post, I summarized this article, which is the last in the Fundamentals of U.S. Health Policy series published by The New England Journal of Medicine. The article was written by Michael Chernew, Ph.D., and discusses the role of market forces (more specifically, competition) in improving our healthcare delivery system.

I’m heavily biased toward using competition inasmuch as it is possible (for good reason), but that doesn’t mean I’m blind to our failed attempts at improving competition in healthcare. And Dr. Chernew does a great job summarizing many of those failed attempts while remaining optimistic that competition still has a role in improving our healthcare delivery system.

I completely agree with his conclusion that where the market fails, we need government involvement. It’s a conclusion that is commonly agreed upon amongst researchers in this field.

But the difference between me and most other health policy researchers is this: I believe the market will work to a much greater degree than others do. Maybe this is because my original bias toward decentralized decisions and efficiency led me to question harder why all those supposedly market-improving reforms failed.

Others may say, “Well, all these reforms failed, so I guess the market just won’t work in healthcare, so let’s see what the government can do to fix this mess instead.” But I say, “Let’s figure out why they failed. And if the reason they failed is because markets just won’t work in healthcare, great! Let’s turn to the government for help.”

The answers I’ve found over the last several years about why all those competition-improving efforts have failed tell me that markets can work to an extensive degree in healthcare, we’ve just never created the environment for it to happen.

I’m passionate about this because if we don’t understand that environment and then create it, the future fiscal health of most countries will sooner or later be ruined because the non-market government solutions they’ve come up with so far are insufficient at stimulating the cost-reducing innovation necessary to make healthcare systems sustainable.

My concerns with Dr. Chernew’s paper are in the section where he lists all the ways transparency efforts and benefit design change efforts have failed and then gives as the explanation for these failures that, “The core problem is that for markets to work, patients must face the economic consequences of their choices, but labor-market concerns dampen employers’ enthusiasm for adopting plans that impose such consequences.”

Translation: Employers don’t want to force employees to face big out-of-pocket spending in the plans they offer them because that’s not popular among employees, which will lead to employee dissatisfaction and possibly even lead to the best recruits choosing other jobs. And so employers are unwilling to adopt the insurance plan benefit designs that are necessary to make competition work in healthcare.

I disagree for a few reasons. First, an insurance plan does not have to make the patient pay the entire price out of pocket for them to be price sensitive. They only have to make the patient pay some of the price difference between their provider options. Second, employers can offer a few plan options to employees, only one of which would impose such requirements. Third, if there were multiple plan options to choose from, the one with such requirements would likely be fairly popular because the premium would be much lower on account of all the savings generated by those requirements leading enrollees to choose lower-priced providers.

The main potential limiter to the popularity of such a plan would probably be in its implementation. Is there an app that the patient can use that would easily tell them the provider options in their region and what their out-of-pocket cost would be for each one? Better yet, does that app also integrate patient-relevant quality information? Such apps are out there. And providing an explanation about the benefit design purpose and the accompanying app in the plan’s description would probably overcome a big chunk of the issues causing people not to use transparency information.

So I disagree with Dr. Chernew’s implication that competition in healthcare is going to be fairly limited because employers are unwilling to implement such plans. I actually wonder if there aren’t already groups of large employers banding together in different regions of this country making plans to all make such benefit designs available to their employees at the same time in an effort to get so many people in the region choosing based on quality and price that the providers are forced to respond in value-improving ways. (If any employers are out there considering such an attempt, I am happy to advise!)

But I do think that this last topic was the perfect one to end the series with, and Dr. Chernew was one of the best people they could have chosen to address the topic so effectively. How to increase the efficiency of the delivery system is the big challenge that neither the Republicans nor the Democrats seem to have an answer to, but it’s the issues that is going to loom larger in the future, especially if we turn to more administrative pricing and quickly discover that the price floor (the point at which the price is too low because it makes providers unprofitable) is actually incredibly high.

Well, that wraps it up for this series. I learned a ton and I appreciate NEJM’s efforts to educate more people about health policy!

NEJM’s Fundamentals of U.S. Health Policy, Part 7a: Creating a More Efficient Delivery System

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This is the last part of the Fundamentals of U.S. Health Policy series! And it’s a super interesting one. Michael Chernew, Ph.D., wrote about the role of market forces in U.S. health care. Since this is squarely in my area of focus, I have a lot of thoughts. Thus, this week I’ll stick to summarizing Dr. Chernew’s article, and then next week I’ll provide some commentary.

Forewarning, I’m following the paper’s logic flow, which, to my brain, is a little meandering, so it’s easy to lose one’s place, but I’ll clarify as much as I can now and then attempt to provide additional insight next week.

Remember how Total Healthcare Spending = Price x Quantity? (Well, actually, it’s the sum of the price x quantity of all the different services being provided in our healthcare system.) Dr. Chernew is basically using that equation when he starts out by saying that our challenge is to reduce the quantity of low-value services provided and to lower prices.

And then the big question . . .

What role should markets play in doing that?

He finally gets to the answer at the end, which is that markets and government should both be used to complement each other. Markets can be leveraged inasmuch as they will help, and this should be paired with the government regulations needed to help them work as well as they can.

I won’t list his specific recommendations quite yet about how we could do that because first I need to review what he says in the rest of the article about markets and how they work.

First, he says that markets are the “foundation of our economy,” and they promote efficient production and cost-reducing innovation. He doesn’t exactly give the step-by-step explanation of how they do that, but you can gather it from his next several paragraphs. Markets create competition, which is when consumers (in this case, patients) have “the ability and incentives . . . to seek low-price, high-quality providers. . . .” And because of that competitive pressure to win consumers, the players in a market are forced to innovate in ways that make production more efficient.

Great, so a good healthcare market will help patients choose low-price, high-quality providers. Unfortunately, healthcare markets are more imperfect than other markets. Want a big piece of evidence for this? Look at the extent of unwarranted price variations that exist in healthcare. It’s way more than in other markets.

But why is the healthcare market so bad?

“Competition in health care fails for several fundamental reasons. First, patients often lack the information needed to assess both their care needs and the quality of their care. Second, illness and health care needs are inherently difficult to predict, exposing people to financial risks that they must insure against. This risk gives rise to an insurance system that shields patients from the price of care, dampening their incentive to use care judiciously and to seek care from providers offering high-quality care at affordable prices. The information problem, amplified by insurance, reduces the ability and incentives for patients to seek low-price, high-quality providers and impedes well-functioning markets. This problem has been magnified lately by consolidation of health care providers.”

So, basically, it’s difficult for patients to really know what care they need, they have a hard time assessing quality of care, they’re shielded from prices because of insurance, and consolidation has limited their options. The result of all that is they have neither the ability nor the incentives to choose low-price, high-quality providers.

This, by the way, sounds almost exactly like what I’ve written (or linked to) a thousand times before, which is that patients need to start making value-sensitive decisions, and to do that they need (1) multiple options, (2) the ability to identify the value of each option, and (3) the incentive to choose the highest-value option.

Regarding consolidation, he gives some interesting data, which show that only 51% of markets have 3 or more hospital systems.

Based on all of that, many would conclude that we should abandon markets altogether in healthcare. But he says, “The weaknesses associated with market-based health care systems are severe, but that does not mean the market should be abandoned.”

And then he proceeds to give a few examples of beneficial things that have come from markets already, such as new payment models, telemedicine, a shift from inpatient to outpatient care, and narrow networks (which allows for lower prices).

Those, however, end up being overshadowed by the list of ways we’ve tried and failed to bolster market function by providing patients with better information about quality and prices and by changing insurance benefit designs.

The summary of this section of the paper is that giving patients better information about quality and prices have had very little success because . . .

  • Patients rarely use price- and quality-transparency tools
  • These sorts of decisions are complex
  • Patients fear disrupting their relationships with their physicians

Changing benefit designs to get patients to directly pay for more of their care (e.g., implementing high deductibles) has had a larger effect on utilization, but it hasn’t significantly impacted the market because . . .

  • What tends to happen is higher-value and lower-value care both decrease
  • Not enough patients end up getting steered toward higher-value providers to actually impact market prices.

He provides his explanation for all these failures: “The core problem is that for markets to work, patients must face the economic consequences of their choices, but labor-market concerns dampen employers’ enthusiasm for adopting plans that impose such consequences.”

In the realm of getting patients to choose higher-value insurance plans, there’s been a little bit of headway with insurance exchanges, although there are many drawbacks to those, too . . .

  • Beneficiaries make poor plan choices
  • Insurance exchanges induce more price sensitivity, which leads people to choose lower-premium plans that impose greater financial risk on them, which they often cannot bear

And, to make things worse, many of the downsides of insurance exchanges can worsen inequity.

Dr. Chernew is not exactly giving a glowing review of market-based reform attempts, is he? His comments are all accurate though.

Next, though, he says that “in evaluating their merits, we need to compare them with other systems, such as government-run models.” And government-run models have their own set of limitations.

Luckily, we are not facing an either-or decision. The important question is how government and markets can complement one another. “We do not need to abandon markets–we can make them better.”

Finally, getting to his recommendations about how to use markets and government to complement each other, he says we could work to increase the effectiveness of transparency initiatives, limit provider consolidation, and impose gentle regulations to prevent the most severe market failures (like limits on surprise billing and instituting price caps on the most excessive prices).

Dr. Chernew’s conclusion is that, “If we fail to improve market functioning, stronger government involvement will most likely be needed.” Agreed.

Next week, I’ll give my thoughts on all this!

NEJM’s Fundamentals of U.S. Health Policy, Part 6: The Future of U.S. Health Policy

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This is the second last paper in the NEJM series, and I think they’ve done a great job covering the major topics so far to give the “lay of the land” of this incredibly exciting field.

This one, written by Matthew Fiedler, Ph.D., gives an overview of the different camps that are vying for their respective visions of how to reform the healthcare system. And I’ll start by giving a quick summary of all his main points, then I’ll discuss some issues I have with this paper after that.

He first defines the main big-picture policy issues that are being debated by the two competing groups (essentially Republicans and Democrats, although he doesn’t refer to the groups by those names): What role should government play in ensuring broad health insurance coverage? And, How should we cope with the lack of competition in many health care provider markets?

Then Dr. Fiedler explains that the two groups disagree about which problem should be solved first. There’s the group that advocates first for universal coverage, which is because their beliefs are that health insurance substantially improves health and financial security, and that the well-being of lower-income people is particularly important, and that governments should have broad latitude to intervene in the health care system. And the other group, he explains, disagrees, and they instead believe that federal coverage programs, particularly those serving lower-income people, are too expansive.

He then talks more about the first group, explaining that there is actually a division between those who want to expand on the ACA-type approach of keeping the patchwork of coverage and those who want to replace the coverage patchwork with a single integrated coverage program. The second option would be simpler and impose smaller administrative and hassle costs, but it would require higher taxes and greater disruption to existing coverage arrangements.

Circling back to the group that feels that programs that serve lower-income people are too expansive, Dr. Fiedler says that their plan is to repeal things and take away subsidies for helping individuals obtain coverage. That’s why the CBO concluded that their approach would increase the uninsured by more than 20 million (but would also substantially reduce federal spending).

As for the second issue that he defined at the beginning of his paper–that of dysfunctional health care competition–he seems to attribute it to concentrated health care markets (for example, 90% of hospital markets meet the threshold for being highly concentrated), and then he explains the implications of that and approaches to addressing it.

The implications of concentrated markets are, as he explains, that it allows providers to demand high prices from private insurers, which increases the cost of insurance. It may also encourage providers to operate inefficiently and can even reduce providers’ pressure to improve quality because patients’ ability to switch providers is limited.

One approach to addressing this issue is a combination of several efforts, such as strengthening anti-trust enforcement, eliminating other policies that weaken competition (such as certificate-of-need requirements, which limit market entry, and “any willing provider” requirements, which keep insurers from offering providers increased volume in exchange for lower prices), and enhancing price transparency. About price transparency, he says it is pursued in hopes of encouraging patients to seek out lower-priced providers and encouraging providers to price more competitively, “although prior experience with price transparency is uneven.”

Limitations of this competition-enhancing collection of policies are that enhancing antitrust enforcement is too late in already-concentrated markets, and even if the other efforts help, robust competition may not be realistic (or even desirable) in some smaller markets anyway given the fixed costs associated with operating another hospital or physician practice.

Dr. Fiedler then discusses the other approach to addressing non-competitive healthcare markets and their high prices, which is to turn to administrative pricing. This could include price caps, and it could also include a “public option,” which would be a new publicly run insurance plan that would compete alongside private plans, thereby keeping private insurers honest in their premiums. He gives the downsides of these policies, especially that they may decrease providers’ incentives to improve quality because they prevent providers from parlaying investments in quality into higher prices or lucrative new volume, but then he acknowledges that the magnitude of this effect is uncertain.

That pretty much summarizes his main points. On the upside, I think he did a good job approaching the topic in an organized fashion. On the downside, I think this paper was incredibly (yet subtly) biased, which is totally inappropriate for a series of articles that is ostensibly providing a neutral introduction to health policy. This does NOT mean I’m accusing Dr. Fiedler of trying to trick people–I think this paper is simply an accurate reflection of his political influences and his understanding of these health policy topics. The fact that the NEJM editors did not make him change many of these things before publishing this paper is probably a reflection of their political persuasions as well.

This post is already long enough, but I’ll try to succinctly point out some of my main issues.

First, framing the two problems as a coverage issue and a “competition” issue. The second one is not just about healthcare competition. It’s about reigning in healthcare spending, which, if it continues on its current trend, will be the primary cause of bankrupting our country. His narrow focus on competition minimizes the problem, which then undermines the legitimacy of the group that wants to focus on that problem first rather than focus on the coverage issue first. He would have done well to at least parrot conservatives’ statements about not wanting to put even more people into an already unsustainable healthcare system and push us even faster toward bankruptcy but instead to get the costs down first, which would have the side-benefit of pricing many of the uninsured into the system as well.

Next, he describes liberals’ beliefs about the benefits of insurance and their interest in getting coverage for the poor, and then his description of conservatives’ beliefs and priorities is . . . nonexistent, other than to say that they “disagree” and then list all the things they want to take away without providing any rationale for why this might also be a reasonable approach (depending on your core values and priorities). It’s a subtle marginalization of the other side and, unfortunately, reflects all too well our current intolerant political atmosphere.

Another concern, which I’ll make my final concern, is how he makes a show of providing the downsides of his favoured policies but then immediately minimizes them as if to say the downsides are minor, and, conversely, how he describes much more persuasively the downsides of his unfavoured policies without any minimization. A good example of this is his entire discussion about the two different approaches to addressing non-competitive healthcare markets. I’ll spare you long quotations; go read directly from the paper if you have access, starting at the last paragraph of the second page of the article.

I realize Dr. Fiedler did not have room in that article for a thorough analysis of the huge and multifaceted issues he was introducing, so I hope one day to meet him and discuss some of these topics with him. Until then, for anyone interested in a few more details on these topics, here are some links to material I’ve written on these topics before . . .

For how market consolidation fits into our overall spending issues, see here. For a more complete discussion on price transparency, see here and here. For the potential harms and potential benefits of administrative pricing, see here. For some discussion on public options, see here. And for a thorough evaluation of Medicare for All versus other options, see here and here and here and here.

Pharmacy Benefit Managers: Kind of a Mystery to Me

Let’s see if I can make sense of pharmacy benefit managers (PBMs), the companies that seem to have a reputation as shady price-increasing middlemen in prescription drugs. This is part of my effort to better understand prescription drug prices and what’s wrong with that market.

First, consider the flow of a medicine from start to end.

The obvious start is that drug manufacturers make the medicine. And then that medicine has to get to pharmacies. Pharmacies do not want to contract with every single drug manufacturer directly, so instead they use wholesalers, who do that contracting for them and buy the drugs from the manufacturers and store them, and then those wholesalers are able to quickly supply all the drugs a pharmacy could want for a small markup. I don’t know the details on whether pharmacies can shop around for the best deal on a drug from different wholesalers or if they just contract with a single one, but, regardless, now the pharmacy has its drugs, and this part of the supply chain seems to work properly.

Next, the patient. They buy the drugs from the pharmacy. If they’re going through insurance, the pharmacy inputs into their computer the medication details and the patient’s insurance information and then out of the black box comes an out-of-pocket price for the patient to pay to obtain the medication and a price for the insurer to pay (and that bill gets sent directly to the insurer). That’s the end of the line for the medicine.

But the tricky part is that final transaction, how the prices are determined in that black box. This is where the mystery and intrigue and confusion come in.

Let’s talk about PBMs.

Originally, the precursors of today’s PBMs were simply companies that helped insurers process medication claims after patients would buy them. I’m not sure exactly how they morphed into today’s version of a PBM, but based on what I’ve been reading, my guess is that it went something like this . . .

Insurers (especially smaller self-insured employers) wanted someone with expertise in all things medications to create a formulary for them–surely a very complicated process–and since these precursor PBMs were already processing all the drug claims anyway, they were an obvious choice to ask to take on the new role of creating and managing formularies.

Next, since these precursor PBMs were now making formularies for several different insurers, they inadvertently had amassed significant power over many patients’ out-of-pocket prescription prices (and, therefore, patients’ prescription choices). So when drug prices started to climb higher, these precursor PBMs wanted to stay competitive and offer formularies with all the best medicines for the cheapest, so they got into the game of negotiating directly with drug manufacturers. And that is probably the point where they became modern-day PBMs. The three PBMs with the largest market share today are Express Scripts, CVS CareMark, and UnitedHealth’s OptumRx

But if the drug manufacturer is selling their drugs to pharmacies via wholesalers, what are PBMs and drug manufacturer negotiating over?

Kickbacks for PBMs to get more patients to buy their medications. That’s really what it boils down to. Although the payments from drug manufacturers to PBMs can take various forms, the simplest one is that the drug manufacturer pays a PBM a nice sum for the PBM to include their drugs on the PBM’s formulary. The PBM then passes some of this money on to the patients by lowering their copay for those drugs.

There are a lot of hidden details in these PBM-drug manufacturer negotiations. It’s an area rife with hidden numbers. The main question is, How much do PBMs actually get paid (including all the different forms of kickbacks) from the drug manufacturers? Nobody knows. There have been government attempts to force them to disclose this, but the laws only require them to report on certain kickbacks, and it’s probably not too difficult for them to look really good by shifting the majority of their kickbacks to different categories that are not reported.

My other question is, How do insurers choose a PBM? This should be a fairly answerable question with the right contacts. Is this a fairly transparent market, where insurers can go to each PBM and ask how much the total cost will be of the drugs their patients will get, plus the fees paid to the PBM? Based on the sheer complexity and number of variables involved, I doubt the PBM selection is easy and transparent. This means PBMs can get away with not only hiding how much they are getting paid by drug manufacturers, but also not passing much of that money on to the patients and insurers. And nobody will ever know truly how much these middlemen are adding to our skyrocketing drug prices.

NEJM’s Fundamentals of U.S. Health Policy, Part 5: Getting Rid of Health Inequities

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Let’s talk about health inequities. This is the topic of the 5th (of 7) paper in the New England Journal’s health policy fundamentals series. This one is written by Michele K. Evans, M.D.

My research emphasis is on systemwide financial incentives to improve value, which means I do not talk on here very much about the nitty gritty of health disparities. I do, however, regularly comment on the big-picture aspects of health disparities, usually by saying that it’s important for society to determine how much care citizens should be guaranteed and then to go about getting that to them in ways that don’t undermine the financial incentives in the system.

Having a clear idea of what we mean when we throw terms like “health inequities” and “health disparities” is a good place to start, and I love the definition that Dr. Evans provides:

Health inequities are “inequalities that are deemed to be unfair, unjust, avoidable, or unnecessary, that can be reduced or remedied through policy action.”

So not every inequality is bad. And of the ones that are, not all of them can be reduced or remedied through policy action. There are facts of genetics and demographics and even socioeconomics that lead to appropriate inequalities or that lead to inappropriate inequalities that there is no way to fix through policy. So, the ones that are bad and are amenable to policy solutions are what we are calling “inequities,” and they are what we are interested in. (By the way, in case you hadn’t noticed, this topic falls squarely into the wealth redistribution spectrum.)

After the definition, she goes on to write about several aspects and causes of inequity, notable inclusions being the unresolved carryforward effects of our nation’s history of racism and slavery, intergenerational poverty, White supremacy, and our unwillingness “to respect Indigenous Americans’ rightful claim to their native lands.”

What currently has the most profound effect on health inequities? Probably access to stable health insurance coverage. The unfortunate fact that our American healthcare system uses employers to provide health insurance makes this worse because minorities have higher unemployment and underemployment.

Dr. Evans also goes over some data on the underrepresentation of minorities in health professions, and then she makes this somewhat perplexing (to me at least) statement:

“Underrepresentation [of minorities in medicine] further intensifies health disparities by limiting the pool of culturally competent clinicians who can offer appropriate leadership in both academia and patient care.”

I guess by “culturally competent,” she is meaning someone who is a member of or who at least has a deep understanding of minority cultures.

She then gets more political, and this is interesting to me, so please allow a brief detour . . .

I have noticed that in perspective articles like this in NEJM and other medical journals, outright “liberal” statements are given boldly and unapologetically; on the other hand, outright “conservative” statements are eschewed in favor of couching in general values and academic speak. I think this is a reflection of academic medicine’s general political persuasion, which extends to judging which positions are socially acceptable and unacceptable. It makes me sad that both sides are apparently not equally able to give their opinions directly and powerfully because they both have essential contributions and ideas and conceptions of values that must be understood if we want to make a truly thoughtful decision about how to address health inequities. And, if this commentary is making you wonder about my personal political biases, I’ve disclosed them before here.

Anyway, Dr. Evans gets more political: She refers to the Declaration of Independence and the Constitution and says they incorporate the ideals of a social contract, which she defines by saying “the state exists to serve the people’s will.” But then she writes, “Fracturing of this social contract has reinforced inequality, inequity, and poor access.” Is our social contract fractured? Is having health inequities somehow the same as our government not reflecting the people’s will? She seems to think so. Regardless, we do need some serious changes to our political system, and this book should be required reading for any political reformer.

Finally, Dr. Evans gives some recommendations: Provide adequate income and educational supports to lift all children from poverty, stage a frontal attack on racial and gender pay gaps and on occupational segregation, and recognize health care as a human right.

There you go. This was a great primer on what you can expect to hear from most researchers and health policy folk on the topic of health inequities!