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Thursday, June 9, 2016

Health Care Reform Articles - June 9, 2016

‘Value Creation’ And ‘Value Shifting’ In Health Care

Corporate executives, the management consultants who advise them, and the financial industry executives who help corporations finance their capital investments tend to believe that whenever their joint work enhances the wealth of a firm’s shareholders, they ipso facto enhance also the nation’s wealth. It is a soothing narrative, one routinely trotted out to college students in their textbooks of economics, which often slouch vaguely toward propaganda.
Very often this narrative is, of course, valid. It is especially so for venture capitalism, which acts as the midwife, so to speak, of newly-born companies creating valuable products hitherto unknown. It is valid also when established companies introduce new products or even when they merely expand existing product lines. Hereafter in this post, this version of capitalism will be labeled “value creation.”
But, as the pharmaceutical industry has been busily teaching us in recent times, alongside this value-creating facet, modern capitalism can also play a more dubious role by merely redistributing wealth from some members of society (for example, sick people) to the shareholders of particular enterprises, without making any net contribution to overall social value. Hereafter we refer to this process as “value shifting,” meaning that value is taken away from some members of society and channeled to the owners of capital.
Exhibit 1 serves to illustrate this distinction.
Reinhardt_Exhibit1
Source: Author’s analysis
In this exhibit, we assume that Acme Inc., possibly a pharmaceutical company, has developed a new product that is highly valued by the rest of society. Let us call that value “social value.” Measuring it is a methodological challenge. At the conceptual level, however, we may think of it as follows: Acme, Inc. can sell the new product to each individual, prospective customer at that individual’s maximum bid price — the monetary expression of the value that individual puts upon a unit of the product. That bid price naturally varies among individuals, because their income and wealth varies and also because their desire for the product—economists call it “taste” for the product—varies.
If we added up these maximum bid prices across all individuals potentially interested in the new product, we might call that sum the product’s “social value.” In the exhibit, it is shown as the value-flow in pipe A. In many instances, the true social value might even be higher, if there are spill-over effects from the individual user of the new product to other members of society. That would be the case, for example, if the products cured an infectious disease.
Usually, in the real world, firms cannot extract from society all of the social value their products create. Even drug companies with government-granted monopolies usually capture only a fraction of total social value in the form of the firms’ sales revenue. That captured value is shown in pipe B of the chart. The firm distributes that captured value to its employees (pipe C), to its suppliers of other productive inputs and of credit (pipe D), and to government in the form of taxes (pipe E). The residual that is left over accrues to the firm’s shareholders (pipe F). It is the source of the wealth the firm bestows on them.
A major point to take away from the preceding discussion and the accompanying exhibit is that a firm adds net social value to society as a whole only through pipe A. If a firm’s policies do not add net social value, but its shareholders nevertheless are enriched by the firm’s decisions, the firm merely has redistributed already existing value from some members of society (for examples, customers or employees) to its shareholders.
Normally, neither politicians, nor the media, nor the general public pay much attention to the fraction of total social value (pipe A) that firms can capture as revenue (pipe B). In health care, however, that fraction can be quite controversial, as was seen in the public’s reaction to the pricing of high-value specialty drugs such as Gilead Sciences Inc.’s new drugs Solvadi and Harvoni.
It is widely thought that the proper fraction of total social value to be garnered by health care product manufacturers as sales revenue is one that just covers research and development (R&D) and production costs, with a profit margin designed to encourage further innovation — hence the demand that drug manufacturers make their costs transparent to the public. Health care product manufacturers, on the other hand, argue that the proper base for their pricing policies is not the cost of developing and producing their products, but the total social value they create for society. This pricing policy is called “value pricing.” At its extreme, it can extract enormous prices from seriously stricken patients or their insurers, because better health and longer life are so precious.
There is growing evidence that, save perhaps for some economists, American society is not comfortable with the idea of value pricing in health care, as can be inferred from the uproar over the pricing policy adopted by Turing Pharmaceuticals, which raised the price of one long-established product by 5,000 percent, and of Valeant Pharmaceuticals International. Valeant’s business model has been to acquire already existing pharmaceutical companies with long-established products, substantially increase the prices of these products and further enhance short-run cash flow to shareholders, reducing outlays on R&D by the acquired firms. These strategies are purely value shifting. In fact, it can be argued that by reducing R&D spending, Valeant destroyed social value.
Although Turing Pharmaceuticals’ and Valeant Pharmaceuticals’ business models are extreme versions of value shifting, the entire drug industry has for some time now leaned more and more toward that model by repeated price increases for long-existing products. Substantial price hikes have been observed even for off-patentgeneric products.
Spokespeople for the industry argue that the cash from these price increases flows directly to higher spending on R&D. Some of it probably does. But these firms spend considerably more on SG&A, which stands for “sales [marketing] and general and administrative expenses.” Spending on R&D by these companies tend to be well below 20 percent of revenue, while spending on SG&A is well above 20 percent. From the endless series of advertisements for prescription drugs on cable and network news and entertainment, patients (sick people) can infer that with the prices they pay for drugs, directly out of pocket or through health-insurance premiums, they now have become the main source of financing for the television industry — a truly bizarre circumstance.
Another part of the added cash flow generated by price hikes on existing pharmaceutical products often flows to shareholders through buy-backs of these firms’ stocks in the open market, to boost the earnings per share of the remaining stock outstanding. As Obi Ezekoye, Tim Koller, and Ankit Mittal of McKinsey and Co. argued in a recent article, these stock buy-backs usually do not create value even for the remaining shareholders, let alone add social value (enhance the value flow in pipe A).
In short, it is far from clear to what end the industry’s repeated price increases under value shifting are used by the industry. There is no reason to believe that they will all, or even predominantly, flow into R&D.
Consolidation in both the R&D-based and the generics industry through mergers appear to have contributed to value shifting. When large pharmaceutical firms acquire smaller entrepreneurial companies, the objective usually is to expand the R&D pipeline of the large companies whose own R&D shops may have failed to produce enough new breakthroughs. But when large pharmaceutical companies or other health care companies merge, the objective is likely to be mainly to reduce price competition. Usually these deals are sold to regulators and the public as means to enhance the efficiency of pharmaceutical production, which should result in lower prices. But as The New York Times Leslie Picker observes in her “Health Care Companies See Scale as the Only Way to Compete” (April 28, 2016):
The whole industry seems to be reading from the same playbook: Pair up with a company that makes the same product to become a leading provider, and thus gain more clout to negotiate business with hospitals and health insurers.
There is ample empirical research in health economics showing that consolidation on the supply side of the health care sector has served to drive up prices. It is another way of saying that it supports value shifting, rather than value creation.
There has been harrumphing in the business media at millennials who, in a recent survey, revealed that they reject capitalism as a social order. Perhaps these millennials sense that capitalism as practiced these days is not quite like the creative capitalism introduced to them in economics courses. There is similar sneering at, and handwringing over, the supporters of extreme political views in the current presidential campaign season—the supporters of Bernie Sanders on the left and of Donald Trump on the right—who sense that their economic position in society has been eroded through manipulation by “the establishment” and who look to a political messiah promising to lead them out of their misery. Value shifting of the sort described in this post is part of that manipulation.
My gratuitous advice to the drug industry, and to the health care industry in general, is to be very mindful of the distinction between value creation and value shifting in their pricing policies, lest they eventually invoke the wrath of the losers in that game, with dire consequences.
A healthy addition to corporate board meetings at these companies, for example, might be a presentation on the distribution of family income in the United States, whose median now is around $52,000 (meaning 50 percent of American families have a lower family income). Similarly, the boards should know more about the health insurance status of the American people, including the ever-increasing deductibles and coinsurance families are made to bear. These data might give boards some feel for how much money can reasonably and humanely be extracted from their fellow Americans, especially those in the bottom half of the income distribution, with whom the boards and business executives have lost touch.
But should not businesses in a free-enterprise economy be free to charge for their products what the market will bear? Here, the leaders of the R&D-based pharmaceutical industry should keep in mind that their industry is not really a free-enterprise model, selling products in perfectly competitive markets. In a very real sense, their industry is partly a creature of government, which protects the industry’s economic turf through patents, market exclusivity, data exclusivity, prohibition of resale of drugs among customers and of parallel imports, and so on. These many protections are provided for defensible reasons. But they inevitably and legitimately invite political considerations into the protected firms’ drug pricing policies.

JAMA Forum: Why Many Medicare Beneficiaries Cling to an Allegedly Worse Deal 



By Uwe Reinhardt, PhD
Under the Medicare Prescription Drug, Improvement and Modernization Act of 2003, Congress granted private Medicare Advantagehealth plans more money per Medicare beneficiary than it granted traditional, government-run Medicare. In other words, the per beneficiary cost paid by the US taxpayers was higher for those enrolled in the private plans than for those enrolled under the traditional, government-run Medicare program.
In addition to these extra payments from government, the private Medicare Advantage plans are able to cut costs through tactics forbidden to traditional Medicare, such as conducting cost-effectiveness analysis for coverage decisions and offering limited networks of health care providers. As a result, the Medicare Advantage plans have been able to offer Medicare beneficiaries more benefits at lower premiums than what is available to them under traditional Medicare–evidently a better deal.
So it’s not surprising, as a recent JAMA Forum post noted, that the Medicare Advantage program has grown in popularity. Currently, about 30% of approximately 55 million beneficiaries are enrolled in a Medicare Advantage plan compared with only 6% a decade ago.
But even so, about 70% of the approximate 55 million Medicare beneficiaries still prefer the “worse” deal, traditional, government-run Medicare. What can explain this revealed preference?
Freedom of Choice
One answer, as the JAMA Forum post hinted, is that traditional Medicare still offers  beneficiaries complete freedom of choice among physicians, hospitals, and other professionals or facilities providing health care. In contrast, under Medicare Advantage, beneficiaries are confined to the limited network of such health professionals and facilities chosen by their insurer. Concerns have been raised about the adequacy of networks in the plans, and a September 2015 report from the US Government Accounting Office recommended that the Centers for Medicare & Medicaid Services increase its oversight of Medicare Advantage networks.
Does the general US public actually share the idea that freedom of choice among insurers is more important than freedom of choice among physicians, hospitals, and others who offer health care or is that merely the preference of a policy-making elite that forces the public to accept more limited choice for the sake of cost containment? It is an important question in light of the endless debate over restructuring Medicare.
The Issue of Trust
Another factor that may explain the revealed preference among Medicare beneficiaries for traditional Medicare might be the issue of trust.
It is said that in the eyes of US public, government is incompetent and cannot be trusted. But is that really so?
The strong revealed preference for traditional, government-run Medicare suggests quite the opposite. So does the tenacity with which US veterans defend the existence of the Veterans Health Administration health care system, the purest form of socialized medicine in the world; the public’s staunch opposition to privatizing Social Security, their government-run pension system; or even the most conservative state governor’s swift solicitation of assistance from the Federal Emergency Management Agency whenever natural disaster strikes. Would these same governors have the same trust in, say, an emergency management system operated by a consortium of private casualty insurers?
Enrolling in traditional Medicare can be likened to being married to a spouse who, if not generally thrilling, is an always faithful and reliable companion. The social contract under traditional Medicare is not easily changed and can be changed only after much open debate.
By contrast, by their very nature, private enterprises cannot be more than ephemeral companions. They may be acquired by another company with different ideas of management and social obligations, and their contracts with customers are easily changed, at the behest of boards and managers who make those decisions in secret. The limited networks of physicians, hospitals, and other health care professionals and facilities under Medicare Advantage can easily change over time, as can be the benefit packages they offer.
It is good that older adults in the United States have a choice between traditional, government-run Medicare and the private Medicare Advantage plans. Ideally, US veterans would be offered the same choice. But policy makers should think twice before writing off traditional, government-run Medicare, which evidently has served the elderly well enough to remain their most popular choice.
https://newsatjama.jama.com/2016/06/01/jama-forum-why-many-medicare-beneficiaries-cling-to-an-allegedly-worse-deal/

Would you give up your life savings for guaranteed care until death?

By Meg Haskell, BDN Staff

BELFAST, Maine — On a quiet residential corner in the coastal town of Belfast stands a spacious, Victorian-era home. A small, gilded sign near the door identifies it simply as the Deborah Lincoln House.
Founded in 1903 as the Belfast Home for Aged Women, the nonprofit Deborah Lincoln House is now a state-licensed, private-pay, assisted-living facility with a six-bed limit. Currently, because there’s a rare vacancy, five independent-minded women live here, ranging in age from 72 to 103. Each has her own bedroom and a private bath. Some have a separate sitting room as well. The rooms are clean and modern, furnished by the resident, with big windows overlooking the neighborhood and admitting lots of natural light. The sweeping central staircase boasts a chair-style lift in addition to its massive oak handrail.
The “ladies” — as they’re affectionately called by the staff — come together in the high-ceilinged dining room for family-style meals and in the spacious living room for yoga classes, birthday parties, afternoon jigsaw puzzles and other activities. They’re provided with transportation for medical appointments, church services, community events, shopping and other outings.
“It’s a really homey atmosphere we have here,” said administrator Diane Martin, a registered nurse who has managed operations for more than seven years. “The food’s great and the staff is friendly.”
But the Deborah Lincoln House is not for everyone. Whereas most nonprofit assisted living facilities accept Medicaid as part of their funding stream, the Deborah Lincoln House does not. Its unusual funding mechanism, a holdover from earlier times, requires each resident to sign all her financial assets over to the organization when she is admitted. These assets, including retirement pensions, Social Security payments or other income, are deposited to an interest-earning investment account that funds all elements of the program, including building maintenance, staff salaries and resident services.
In exchange, each resident is assured, for the rest of her life, of a room and meals, housekeeping services, assistance with bathing, dressing and medications, transportation and a $225 monthly allowance for personal expenses. In addition, any medical expenses not covered by Medicare — including dental work, eyeglasses, hearing aids, medications, and even nursing home care, if it’s needed — are paid by the pooled assets of the Deborah Lincoln House.
In the rare event that a resident is unhappy or doesn’t fit in, she may leave and be issued a pro-rated refund.
“This is unique. We don’t know of anything else like it,” Martin said. “There is no Medicaid, no state funding at all.”
While a committee of the board of directors reviews prospective residents to ensure “a good fit” with the culture of the home, Martin emphasized that there is no financial test for who can or cannot qualify for admission. She said the ladies at Deborah Lincoln House are not rich, though they do need to have enough in assets to “make it work.”
“Most are financially comfortable, and most are college-educated,” she said. “But I can’t think of anyone I’d really call wealthy.”

A home for aged women

Deborah Lincoln, the original benefactor of the house, is believed to be the daughter of a successful farmer in the nearby town of Searsmont, who married a shipyard worker and moved into Belfast. Widowed with no children, she lived alone for several years before dying in 1903, leaving the bulk of her estate — her private home, which was to be sold, and about $9,000 — to the local chapter of the Women’s Christian Temperance Union to create “a home for aged women” in Belfast. If such a facility was not established within three years, her will stipulated, the money was to go to an existing home in Bangor.
Before the year was out, the Women’s Christian Temperance Union had purchased the expansive private house on Cedar Street for $3,000 and established the Belfast Home for Aged Women. The home has been in continuous service since, providing housing and care to women 60 and older from Belfast and surrounding communities. With changes in life expectancy, Martin said, the average age of applicants has moved up to between 70 and 80 years.
For 103-year-old Georgia Randall, who has lived here for about 16 years, the Deborah Lincoln House is much more than a care facility. The former Army nurse, who served in the Pacific theater in WWII, grew up in Belfast.
“I lived in this neighborhood and I used to go by the ‘old ladies’ home’ every day,” she said, taking a break from a complicated jigsaw puzzle set up on a table in the living room. “Now, I like living here very much. Everything we need or want to do is available. It’s just like being home.”
She paused and corrected herself. “It is home.”

Educate Your
Immune System

by Moises Velasquez-Madoff - NYT
IN the last half-century, the prevalence of autoimmune disease — disorders in which the immune system attacks healthy tissue in the body — has increased sharply in the developed world. An estimated one in 13 Americans has one of these often debilitating, generally lifelong conditions. Many, like Type 1 diabetes and celiac disease, are linked with specific gene variants of the immune system, suggesting a strong genetic component. But their prevalence has increased much faster — in two or three generations — than it’s likely the human gene pool has changed.
Many researchers are interested in how the human microbiome — the community of microbes that live mostly in the gut and are thought to calibrate our immune systems — may have contributed to the rise of these disorders. Perhaps society-wide shifts in these microbial communities, driven by changes in what we eat and in the quantity and type of microbes we’re exposed to in our daily lives, have increased our vulnerability.
To test this possibility, some years ago, a team of scientists began following 33 newborns who were genetically at risk of developing Type 1 diabetes, a condition in which the immune system destroys the insulin-producing cells of the pancreas.
The children were mostly Finnish. Finland has the highest prevalence — nearly one in 200 under the age of 15 — of Type 1 diabetes in the world. (At about one in 300, the United States isn’t far behind.) After three years, four of the children developed the condition. The scientists had periodically sampled the children’s microbes, and when they looked back at this record, they discovered that the microbiome of children who developed the disease changed in predictable ways nearly a year before the disease appeared. Diversity declined and inflammatory microbes bloomed. It was as if a gradually maturing ecosystem had been struck by a blight and overgrown by weeds.

Universal Health-Care Bill Passes Assembly

ALBANY, N.Y. -- A bill to provide health-care coverage to every New Yorker has passed in the state Assembly by an overwhelming majority.

Health-care costs continue to rise despite the federal Affordable Care Act, and almost 2 million New Yorkers still lack health insurance. The New York Health Actwould provide complete health care without deductibles, co-pays or provider networks.

Dr. Oliver Fein, who chairs the New York Metro Chapter of Physicians for a National Health Program, said it would make the state a leader in providing health-care coverage, "offering a pathway to universal coverage without costing more and guaranteeing access to health care for everyone."

Assembly Health Committee chair Dick Gottfried, D-Manhattan, lead sponsor of the bill, said the publicly funded system could save New Yorkers $45 billion a year.

According to Fein, the profits and administrative costs of the private insurance industry now consume from 20 percent to 30 percent of every health-care dollar.

"What you're measuring in administrative costs is not merely the insurance company costs," he said, "but also the costs within hospitals, which have to maintain billing departments."

Last year, 40 percent of New Yorkers reported having to cut down on other expenses to be able to afford medical care. New York's health-insurance plans are asking the state for a 17 percent rate increase for next year.

Fein said eliminating the costs of private insurance would make it possible to extend coverage to those who now have no insurance.

"We could do it without actually increasing the overall costs to the system," he said, "so there would be no necessity to raise premium rates."

The bill has the support of more than 20 state senators, but Fein said he believes the current leadership is unlikely to bring the bill to the floor of the Senate for a vote.

Detailhttp://www.publicnewsservice.org/2016-06-03/health-issues/universal-health-care-bill-passes-assembly/a52238-1


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