Archive for March, 2004

Medicare Reform As Three Movies

Saturday, March 6th, 2004

With the passage of the Wholly Inadequate Prescription Drug Benefit for Seniors (WIPDBS) and the capture of Saddam Hussein, George Bush should be a shoo in for re-election unless the economy reverses its apparent recovery. Bush and his advisors have taken the healthcare issue away from the Democrats while apparently rewarding their supporters in the private sector of health care: most notably health plans and pharmaceuticals. But in the long run the combination of the passage of Medicare reform may come back to bite the republicans and the drug industry. The best way to think about the long term effects of the legislation is by using three movies as metaphor.

Movie 1: As Good as it Gets…for the Private Sector and Some Seniors

Much of the mainstream media has portrayed WIPDBS as a major victory for the pharmaceutical and managed care industries. And from a myopic point of view that is right, after all the drug companies got: prohibition on price controls on drugs, (Medicare cannot use its raw naked purchasing power), and there is prohibition on reimportation of pharmaceuticals from Canada. In addition, many actors got short and long term handouts: corporations to subsidize retiree health plans, health plans to provide Medicare PPOs, PBMs to deliver pluralistic administration, and doctors and hospitals to deliver services and support the bill. Rich people got MSAs and HSAs (The Warren Buffet PPO) and no new taxes. And to be fair, there was some fresh new coverage for the poor uncovered elderly who are not in states with rich PACE or Medicaid programs. To many analysts this was as good as it gets for the private sector and for some low-income seniors.

While it is undeniable that some low-income seniors will see a benefit from the new plan (when it becomes fully operational in 2006) most seniors will face a high degree of cost sharing for their prescription drugs. The key cost sharing feature is the famed “donut hole” in the middle where seniors would be exposed to the full cost of their drugs between $2,250 and $5,100 of annual expenditure on medications. Practically speaking, most seniors taking two or three prescription drugs would end up stuck in the middle of the donut and on the hook for 30-50% of the total cost of medications (according to actuarial estimates in the bill). Many critics of the donut hole cite this as a necessary evil because of the lack of money to pay for the bill. I disagree. As we say here in Silicon Valley “it’s not a bug, it’s a feature”. The donut hole mirrors exactly the initiatives in the private sector (tiered formularies and escalating co-payments) that have successfully forced employees to switch to generics and forego medications. It is part of a broader trend in healthcare to make the consumer more responsible for payment, thereby reversing a forty year trend since the passage of Medicare in which the consumers has paid a smaller and smaller share of the total health care bill. This is an effort by corporations and politicians to “break the culture of entitlement” by making consumers more responsible. The early evidence shows that the poor and the chronically ill are most affected, but even the middle class trade down to generics twice as often as they trade up to the brand when faced with steep co-payments.

Movie 2: The World is Not Enough…

Despite the fact that the private sector seems to have gotten the world, the world is not enough. Why?

  • When the wholly inadequate coverage arrives in 2006 most people will be paying for more than half their medications.
  • There will be tremendous price transparency of drugs, now and in the future (discount cards in the short run and donut holes in the long run).
  • The drug industry will experience the coverage kicking in when many of their big blockbusters are off patent and when huge classes of drugs like statins will be both generic and OTC.
  • Despite the subsidies to corporations there is still a huge incentive for corporate America to phase out retiree health benefits and now a morally acceptable alternative exists (i.e. have their retirees look after themselves through Medicare).
  • HMOs and HSAs will have to find a way to make money on anybody but the rich well elderly (all four of them).

When it comes to healthcare for the elderly we are all poor. Most people cannot afford the enormous burden of paying for retirement and healthcare costs. It is likely this bill will be a platform for future Democrats to go after the drug industry when it is at a low ebb, lacking innovation and subject to five years of public outrage about prices. What would Hillary do with Medicare in 2008?

Movie 3: The Ten Commandments

While the bill may backfire it really is an attempt to set in stone a set of ideological principles kinda like the Ten Commandments:

  • There shall be competition (Even if it is unpopular, doesn’t work, and there are no HMOs or congressional districts willing to participate in it).
  • There shall be liberty for seniors to be confused by a myriad of private health plan and drug coverage offerings.
  • There shall be skin in the game (consumer responsibility for payment through co-payments, deductibles and premium sharing) because it is good for consumers to pay at the point of care (it will stop them overusing the Medicare system for recreational purposes and it teaches seniors that they should look after themselves in their forties and fifties).
  • There shall be no supplementary coverage because supplementary coverage nullifies skin in the game.
  • There shall be no new taxes for rich people, only raised premiums for all.
  • There shall be privatization because private is better than public (don’t argue, this is a commandment).
  • There shall be unrestricted free choice of plans each of which has a restricted choice of doctors because choice is good.
  • There shall be big differences in coverage among seniors but thou shall not covet thy neighbor’s coverage.
  • There shall be no Canadian drugs in the veins of Americans even if the drugs are made in America and purchased by Americans.
  • There shall be no senior left behind…in traditional Medicare.

Actually, I believe that while the intent may be to undo traditional Medicare the new plan offerings will be so confusing and lame that good old traditional Medicare program will be the choice of most seniors. The question is now what do we do?

Ian Morrison is an author, consultant and futurist based in Menlo Park, California. This column was published in Hospitals and Healthcare Systems Online, March 2004.