One Big Mess The health care system in the United States has fallen and it can't get up. It is expensive and becoming more so everyday. Because of that, health care is a potent factor shrinking our money. You pay for health care even if you never have to see a doctor. You pay because your insurance becomes more expensive you pay because your taxes increase and you pay because your employer is less profitable. The average American now spends approximately $5,500 per year on health care, almost as much as we pay for food and housing combined. As a whole, we spend more on health care than the gross national product of France.
It was not always that way. In the 1960s, we spent six percent of our GNP on education and six percent on health care. Today, we still spend six percent on education, but we now spend approximately fifteen percent on healthcare. Since 1965, after adjusting for inflation, the cost of healthcare has quadrupled. On an annual basis, costs have risen at twice the rate of inflation during that same time-period. If health care costs had simply grown in line with the economy, we would be spending only half as much on health care as we do today. While we cannot attribute the rising costs of health care to one factor alone, the aging of the population (a trend that we cannot control) is the primary driver. Even as the population has tripled since 1900, the population over 65 has grown ten times, and the population over 85 has grown thirty times. Older people require much more health care than younger people do. Health care expenditures per person decline from birth to early adulthood, and then rise continuously into old age. In fact, on a per capita basis, health care costs for those over 65 are nearly five times as much as those under 65. As more and more people cross over into old age, we can expect the total dollars that we spend on health care as a nation to explode. The money must come from somewhere. The federal government will have little choice but to call on younger workers to contribute even more to pay for the health care costs of our non-working elderly. Why are we living so much longer? Is it because of our improved health care system? Oddly enough, the answer is no. Most of our longevity gains occurred long before we began spending an inordinate amount on health care. According to Laurene Graig, author of Health of Nations, "Most research on the evolution of mortality trends suggests that improvement in such socioeconomic factors as education, income, nutrition, housing, sanitation and working conditions are, in combination, the primary determinants of health and mortality, not medical care." Additionally, the U.S Department of Health and Human Services estimates that clinical medicine is only responsible for five of the 30 years of life expectancy that we have added since the turn of the century. [ii] Data such as this seems to imply that, instead of spending more money on health care, spending money to raise the standard of living for those in the bottom quadrant of our society would be a better choice.
Other countries have already come to that conclusion, and are proceeding accordingly. Canadians found that their increased spending on health care was not producing a correspondingly positive impact on the overall population's health. Instead, they learned that the most dramatic improvements in the health of the average individual have been associated with increased prosperity, which leads to better living conditions. Because of their findings, Canadians now intend to give human biology, the environment, and lifestyle as much attention as healthcare. In addition to Canada, Britain and other nations around the world are increasingly realizing that health care is only one part of the solution to better health, and that other areas of social policy may be equally as important.
Unlike in other countries, in the United States, health care costs for identical services vary depending on who you are. You will pay the least if you work for a Fortune 500 company or you are a retiree on Medicare. On the other hand, you will pay top dollar if you are among the working poor, have preexisting conditions, are self-employed, or if you are without health insurance. In fact, if you are without insurance and have to go to the hospital, you will probably pay more for the same services than someone who has insurance. You will pay retail, while those with HMOs or insurance will pay a discounted amount, often just a fraction of the hospital's official price. The uninsured, who are least able to pay, may be billed from three times to as much as ten times more than an insurance company whose customer receives the exact same treatment. Hospitals frequently take advantage of our most vulnerable citizens. The case of Carlos Colon is by no means unique.
Carlos, who works as a clerk at a Home Depot in Chicago, checked into Our Lady of Resurrection Medical Center to remove a cyst on his neck. The hospital would have billed an insurer $6,900 for the procedure, while Medicare would have been billed $6,100. Colon was charged $74,396, nearly ten times as much, and coincidentally, about three times his annual salary. When Carlos (who has a family) could not pay the bill, the hospital sued him and garnished his wages. It will take him 25 years to pay his hospital bill.
Unlike years ago, hospitals have become Wall Street corporations that, like all Wall Street corporations, put bottom-line profits above anything else. Many of these large hospitals chains, such as Tenet, have full-time collection departments to go after the Carlos Colons of the world. Others, such as HCA, farm their work out to the nation's largest debt collector, NCO. NCO employees are masters at squeezing working families who are struggling with huge hospital bills because they earn a bonus when they collect more than a minimum guaranteed to the hospital.
Take the case of the Jorge Silva family in Denver. Alondra Silva gave birth to a baby girl who required immediate surgery because of defective bronchial tubes. After the ordeal was over, their problems were just beginning. The Presbyterian/St. Luke's Medical Center sent them a bill for $213,802. Silva, who works for a gravel company wanted to make payments, but the amount was six times his annual salary. The hospital turned the bill over to NCO, who then (out of the kindness of their hearts) offered to allow him to settle the bill for $128,281.26. "If you choose to accept this offer to settle your account, please return your payment with the stub below. . . In the event you elect not to accept this offer our normal collection efforts will continue." [iii]
The sad part is that what happened to the Silva family is not unusual. Probably the most troubling aspect of our national health care system is that it leaves 43 million people without health insurance, and thus vulnerable to financial ruin. Approximately the same number of Americans are underinsured and nearly as much at risk. We are the only industrialized country in the world that allows this inhumane treatment. Aside from South Africa, every industrialized country has nationalized healthcare, which protects every single citizen affected by medical crises.
Even those who are fortunate enough to have medical insurance may be at risk. The health insurance industry tends to shut out those who they perceive as liabilities. Throughout the insurance industry, the trend is to restrict coverage and cut back on benefits. Not surprisingly, employers are passing the risks and added costs onto the employees. Until the late 1990s, company plans insulated many workers from the rising costs of health insurance. As health care costs rose, however, employers insisted that employees share some of the cost. Initially, employee coverage dropped from 100 percent to 90 percent, then to 80 percent. With the size of today's medical bills, even 20 percent of a very large number is enough to bankrupt many families.
According to a survey of business leaders, over the next five years, the cost of insurance premiums will rise 17 percent each year. [iv] In response, employers will continue to shift the burden to employees by increasing co-payments and deductibles, forcing employees to pay a larger share of the insurance premiums, implementing strict drug formularies, and restricting coverage. Moreover, many companies plan to freeze their contributions at a fixed dollar level, thus passing all future insurance price increases to their employees. Consequently, any future wage increases or raises could be nullified by the increased cost of health insurance. Without a raise, employees may actually take home less money.
Many companies have now cancelled the health care portion of their retiree plans, slashing or terminating health care coverage they had promised for life. Not only do insurance companies "shrink our money," by charging us more each year, they also shrink our services. While our own doctors used to determine what course of medical treatment was best for us, that is no longer the case. Today, insurance companies dictate to doctors what treatments he can use, which drugs he can prescribe, and which tests he can administer. If the doctor deviates from the proscribed course of action, he is not paid. The insurance company also determines how long you can stay in the hospital. Should you exceed its guidelines, your benefits will stop.
An actuarial company called Milliman devised the guidelines, which determine how long you can stay in the hospital based on your procedure. Those guidelines affect over 100 million Americans. Milliman is notorious for shaving hospital times to save insurers money, and doctors frequently complain that Milliman calls for much shorter hospital stays than they believe are necessary. For example, Milliman recommended same-day delivery and discharge for mothers and newborns. The American Academy of Pediatrics called their pediatric guidelines "beyond the realm of reality." [v] Regardless, under the system of free-market medicine that we have embraced, the business that pays the bill gets to make the rules.
#37 with a Bullet
Both Bill Clinton and George Bush assured us that Americans have the best health care system in the world. That statement is true for only the top two percent of the population that can actually afford health care in the United States. There is no doubt that the U.S. has some of the best technology for surgery, and is on the cutting edge for new medical procedures. In fact, rich people from all over the world come here for specialized treatments. However, technology is only a small part of a health care system. According to the World Health Organization, to have a good health care system, it must be accessible to the public. When making their assessments, the WHO also considers such factors as infant mortality, longevity, and the overall wellness of the population. We failed miserably on all counts, which is why the WHO ranked the U.S. health care system at #37.
Our performance was obviously hurt by the fact that 43 million people in the U.S. have no health care because they cannot afford insurance. In sharp contrast, every other industrialized country in the world, with the exception of South Africa, provides health care to every single one of its citizens. As to longevity, we rank 29 th . With regard to infant mortality, a baby in the U.S. has about half as much chance of ever reaching the teething stage as one born in Japan or Sweden, and even less chance than a baby born in France. We must be doing something wrong.
It could be that we just do not spend enough on health care in this country. Actually, we spend about $1.7 trillion dollars a year, which seems like a lot. Per capita, that equals about $5,500 per person per year. Compared to Canadians, we find that Americans pay about 75% more, but Canadians outlive us by about two and one-half years. We spend double what the people in Spain do, and more than twice as much as Japanese do, but the people in each of those countries outlive us too.
The reason that nearly all the other industrialized countries in the world have better health care systems, healthier citizens, and pay less for their health care is that they have nationalized health care systems. We have what most call free-market health care, but I call "Wall Street health care." Wall Street does not care about your health. It only cares about profits. Robert Blank, who wrote, The Price of Life: The Future of American Healthcare summarized the problem.
"Although there is no doubt that Americans have the most extensive range of sophisticated medical technology in the world, we fall well short of most other nations in health promotion, preventative medicine, and access to primary care. Health outcomes as measured by morbidity and mortality rates fail to reflect the vast expenditure differential with other nations. Something, therefore, is dreadfully wrong." [vi]
Along those same lines, you should know that we spend 50 percent more on health care than any other developed nation. We pay half of the total amount from revenue from public taxes. Therefore, regardless of your own situation, the health care system is definitely your problem. What do we get for our money? As a whole, Americans are the most uninsured and underinsured in the developed world, and our citizens are less healthy than those in Europe, Canada, or Japan are. According to Health Affairs, in infant mortality, we rank 23 rd in the world in life expectancy, we rank 20 th for women and 21 st for men.
Any claims that we have the best health care system in the world simply cannot be justified. Granted, we do have some very good doctors and we do possess advanced technology. Nevertheless, unless those advantages are accessible to the majority of our citizens and unless they actually improve the health of all Americans, they are not valid measures of our health care. Victor Fuchs, writing in Health Economics, claimed that a health care system should be evaluated by three criteria: (1) technology and training, (2) access by the population, and (3) outcomes. While the United States excels in technology and training, it falls far short of other developed nations in the other two categories. [vii]
Only the Good Die Young
Maybe James Dean, Jim Morrison, Jimi Hendrix, and Janis Joplin got it right. One thing is for sure: they used up a lot less health care resources than the rest of us probably will. While medical technology has allowed us to keep our older citizens alive longer, most are not healthy. While we have lowered mortality, we have increased morbidity. You could say that we have eliminated most of the easy ways to die. We have substituted deaths by slow, chronic, and degenerative diseases for deaths by acute diseases. Most seniors suffer from as many as four to five chronic conditions. According to Dr. David Eddy, writing in the New England Journal of Medicine, we need to question our logic.
"The remarkable progress of biomedical technology since WW II has made it possible for physicians to keep sicker and sicker patients alive longer and longer and at a greater and greater cost. Patients with massive strokes are saved from death, but live for years with hemiplegia and aphasia. The reason these issues are so hard to deal with is that they deal with the ultimate issue of human existence. . . Advance senile dementia patients are saved through careful nursing and round-the-clock care for lengthy lives of disorientation and confusion, and still others with metastatic cancer are subjected to a myriad of studies and morbidity – including therapies that may add little to longevity." [viii]
Sudden deaths are decreasing, while slow, lingering deaths caused by chronic diseases are increasing. To prolong the inevitable, we spend the majority of our health care dollars. We now use resuscitation, heart pumps, intravenous feeding, oxygen tanks, respirators, and other technologies to prolong life. In the United States, ten percent of our hospital beds are ICU beds compared to three percent in other countries. Intensive care units, which are extremely expensive, take a large percentage of our health care dollars. There is no evidence that we save more critically ill than other societies so for the most part, what we get for our extra costs is expensive deaths. Five percent of all patients, many of them terminally ill, account for over 50 percent of medical costs.
Some practitioners feel that we are spending inordinate amounts of money to squeeze a few more days of pain racked existence out of people for whom there is clearly no happy outcome. We spend 27 percent of our health care dollars on the sickest one percent and more than half on the sickest five percent. No other society would take a 90-year-old with a terminal disease such as cancer out of a nursing home and put him into an intensive care unit. However, in the United States, that would not be uncommon. It seems that we have created more high-tech technology than we can afford, and we spend our health care dollars on expensive technology while ignoring basic health care for tens of millions.
Oops, I Did It Again
Despite the ever-increasing costs of healthcare, there is growing evidence that the quality of health care may actually be decreasing. If care is inadequate, you will become sicker and it will cost you even more money to get well and stay well. Today, going to the hospital is tantamount to playing Russian roulette with your life. According to one study, there are an estimated two million hospital-induced illnesses annually. [ix] Medical errors play a major role in increasing your risks during hospital stays. According to a report by the Institute of Medicine, at least 44,000, and possibly as many as 98,000, people may die every year because of medical errors. [x] Using the lower estimate, medical error deaths rank as the eighth leading killer in America. More people die from medical errors than die from auto accidents, breast cancer, or AIDS, yet very few people know this. If the upper estimate is more accurate, the death count is equivalent to a passenger jet crashing every day.
The healthcare industry is the only industry in America that can give you a disease and then charge you to cure the disease it gave you. According to the same IOM report, not only do at least 44,000 patients each year die from medical errors, another 88,000 die from hospital-induced infections, and 7,000 more die from medication errors. The numbers of patients who fall victim to medical error or hospital-induced infections, but do not actually die, is vastly larger. To put that number in perspective, for every 100 patients admitted to a hospital, at least five will be the victim of a preventable error and an additional five to ten will contract a hospital-induced infection. Fixing the mistakes costs between $15 to $20 billion dollars a year.
Why do all these errors occur and why doesn't the public know about it? I will address the errors themselves first. We can trace the problem directly to the Wall Street healthcare mentality that shows up most egregiously in hospitals. Since corporate America bought up the majority of the nations hospitals, not only has patient care diminished, but profitability has become the determining factor influencing every decision in hospital care. In order to increase profitability, corporate hospital chains have cutback on staffing, leaving the remaining doctors and nurses hopelessly overburdened.
When you talk with people who work in hospitals, you find that management is constantly pressuring them to produce more, and that conditions are often unsafe or unsanitary. Nurses face the brunt of the pressure, and many have left the profession as a result. Hospitals continually recruit nurses, but many do not stay in the field. Most nurses truly want to help people, but when they finally finish school and go to work, they are often shocked by the reality and traumatized by the experience.
The migration of trained nurses out of the industry is causing severe shortages across the country. In 2001, there were 126,000 vacancies for registered nurses. If the trend continues, the shortage could grow to 400,000 by the year 2020. In all likelihood, it will. Not only are experienced nurses leaving the industry because of stress, young people are choosing more lucrative and less stressful careers. The nursing shortage may be affecting long-term health care providers the most. Ninety percent of facilities claim that the nursing shortage has jeopardized their ability to provide even basic health care for their patients. As our population ages, this problem could become a crisis.
Doctors feel the pressure of Wall Street healthcare as well. Because of potential litigation, when medical errors occur at hospitals, it is in no one's best interest to report them. There is no legal protection for doctors and nurses who report errors, so admitting errors only exposes the doctor or hospital to a lawsuit. Therefore, appropriate measures that might reduce future incidences are not fully investigated. This would not be the case if it were not for the encroachment of predatory trial lawyers into the health care system. Because of the growing number of lawsuits, doctors' malpractice insurance premiums have escalated to the point where many have left the profession earlier than they would have otherwise. In states with particularly high malpractice premiums, doctors shortages affect entire communities.
Many potential doctors are now heading to law school instead. Medical school applications have fallen each of the last five years. A study published in Health Affairs reported an expected 200,000-physician shortfall by 2020. While we will soon need 20,000 geriatric-trained physicians, we only now have approximately 6000. If current trends continue, we will not only have a shortage of physicians, but a shortage of the necessary specialists to treat an aging population.
Under Every Rock
As lawyers get rich in this country, each American pays the price witness a transfer of wealth from productive working people to non-productive predators. The costs of malpractice premiums and legal costs together total over $10 billion a year. However, the amount spent because of fear of litigation is even greater. Most doctors admit to regularly ordering unnecessary tests and procedures just to provide a possible defense in case there is a lawsuit. Some economists estimate that the cost of defensive medicine exceeds $100 billion a year. [xi]
Clearly, we are misallocating large sums from healthcare to legal costs, and it has become a serious financial burden on the system. For example, in Florida, long-term care facilities are paying as much as $12,000 per bed each year just for litigation insurance. [xii] If your aging parent is in such a facility, your bill will be $1,000 a month higher because of the necessary insurance. With not enough money to fund healthcare, these additional expenditures add insult to injury.
As the baby boom generation approaches old age, we will need all the doctors and health care professionals that we can find. Today, however, young people are seeing that trial lawyers can bankrupt health care professionals. The number of lawsuits has increased because, even though many suits do not result in payments to plaintiffs, lawyers realize that it only takes one win to set them up for life. Malpractice awards average more than $1 million, with lawyers taking more than one-third. Therefore, lawyers will continue to file as many suits as possible even though, according to the Wall Street Journal, 80 percent of those suits do not involve any negligence at all. [xiii] No wonder many of our best and brightest are opting out of medicine and into law.
The Crux of the Matter
Our health care system is fundamentally flawed because it is based upon a third-party-payer financial system. One party pays, a second party provides the product or service, and a third party receives the product or service. Let us identify the players. The payer is usually the insurance company, but it can be the government as is the case with Medicare and Medicaid payments. Because we either buy insurance and/or pay taxes, we eventually all feel the impact of healthcare costs. The providers of the product are the doctors, hospitals, and drug companies. Finally, the rest of us are the users of healthcare.
The system is dysfunctional because of conflicts of interest. Because we pay our insurance premiums, we expect to get the best care possible when we are sick, regardless of what that care costs. That goal is in complete conflict with the insurance company's goal, which is to pay the least amount possible for the service or product regardless of the quality of your care or your satisfaction. The service provider (your doctor) finds himself caught in the middle, and often frustrated because he cannot provide the quality of care that you need because of the cost constraints imposed by the payer. This kind of system maximizes unhappiness and guarantees conflict.
Because the consumers of the products and services are not the buyers, the consumers have no leverage, or even any say in their health care. The buyers (insurance companies) of the products and services do not view consumers as their customers. Instead, the insurance companies see employers as their customers. Regardless of your perspective, the current system leaves patients out of the loop concerning their own personal healthcare choices. In conclusion, the third-party-payer system is the fundamental flaw in the U.S. healthcare system, and is the primary reason that "it has fallen and it can't get up."
Shuffling Paper
The bureaucracy in healthcare is another significant factor that adds to our costs. A typical doctor's office is a case in point. One hour of patient care may require 30 minutes of paperwork. In a hospital, an hour of emergency room care often generates an equal amount of paperwork time. The problem is that each insurance company imposes it own paperwork requirements on providers to settle claims, give permission for procedures, and evaluate whether doctors are providing too much care. Some doctors' offices have to cope with over 30 different sets of rules just to get payment for the services rendered.
On the other side of the fence, hundreds of thousands of people make up an army that defends the bottom line of insurance companies by denying, discouraging, and postponing claims. To manage this bureaucratic war, the industry employs call-center clerical workers, claims-processing agents, and software developers. They also hire private contractors who manage medical back offices, as well as on-site accounting personnel who track claims for doctors' offices and hospitals. In a counter offensive, a new industry has come to the doctors' rescue by assisting them in cutting through the red tape. Called the American Academy of Professional Coders, these highly trained "special forces" exist for the sole purpose of helping doctors and hospitals obtain proper reimbursement for their services.
There are literally thousands of healthcare plans. Each has its owns guidelines specifying what it will pay for, how long a patient may be hospitalized, what medical conditions require referrals, and how much time a doctor may devote to a patient. To treat as many people as they can, most physicians find they have to accept insurance from multiple insurers. Each insurer offers multiple plans, with varying deductibles and options. Not to worry. In addition to the America Academy of Professional Coders, doctors can contract for help from the Professional Association of Healthcare Reimbursement Specialists, the National Association for Claims Assistance Professionals, the American Medical Billing Association, or the Professional Association of Health Care Office Management.
Can you see why doctors are as fed up with the American health care system as we are? All the time and paperwork spent on administration not only reduces their profit, but also makes patient care that much more difficult. What is important for you to understand is that the hundreds of thousands of employees on both sides of the bureaucratic health care war do no productive work – i.e. they produce nothing. They are one of many cancers growing in the body of America that simply shuffle paper and redistribute wealth from productive workers to the highest upper echelons of society.
How much does this bureaucracy cost us? Estimates run between 18 and 24 percent of our healthcare dollar, in comparison to other countries that average around ten percent. In recent years, the American healthcare system has added two to three administrative workers to the system for every additional doctor. Other nations have cut their costs in multiple ways. Some have reduced the number of insurers or have eliminated insurance companies from healthcare. Once again, all the money that goes into underwriting, salesmen, advertising, claims adjusters, and claims administrators could be used, instead, to produce better healthcare. A recent NBC special illustrated the high overhead that accompanies the healthcare bureaucracy. The news reporters compared a hospital in Bellingham, Washington to another a few miles away in Vancouver, British Columbia. The 300-bed hospital in Bellingham employed 42 billing clerks, while the 300-bed hospital in Vancouver employed one. Needless to say, American doctors and hospitals have the highest overhead in the world. [xiv]
Big Pharma
Prescription drugs is one of the largest and fastest growing segments of the healthcare industry. According to the CDC, in 1980 we spent $12 billion on prescription drugs. By 2002, that figure had climbed to $162 billion, an increase of 1,250 percent. Now, we spend nearly $200 billion, and our cost for drugs is increasing at 12 percent a year. In 1980, spending on drugs accounted for almost five percent of total healthcare costs. By 2002, it had doubled to 10.4 percent and is expected to reach 15 percent within a few years. The fact is that people take more drugs than they used to, newer drugs are more expensive, and drug companies price popular drugs at whatever the market will bear. The growth in drug sales correlates to the marketing efforts of the major pharmaceutical companies who are unabashedly selling us more drugs, many of which we are required to take for longer periods. Drugs for cholesterol, high blood pressure, and even depression all fall into that category. Take them for life and call me in the morning.
We all know that prescription drugs are expensive. However, not everyone knows that, in the United States, we pay from 30 percent to 60 percent more than everyone else does in the industrialized world for the very same drug. What is going on? The fact is that pharmaceutical companies charge whatever the market will bear. In countries with nationalized medicine, the country negotiates with the drug companies to pay a reasonable price. In our country, Congress allows pharmaceutical companies to charge whatever they want, which makes some drugs too costly for many citizens. To make matters worse, Congress forbids Medicare from negotiating with pharmaceutical companies to obtain a lower price. Thus, all Americans must pay the inflated costs through higher taxes. You would almost think that Congress listens to big pharma more than it listens to you and me.
The pharmaceutical industry is the most profitable industry in the country. Pfizer, the world's largest drug company has profit margins two to three times greater than General Electric's and nine times better than Wal-Mart's. In 2002, the profits for the ten drug companies in the Fortune 500 ($35.9 billion) were more than the profits for all the other 490 businesses put together ($33.7 billion). Clearly, the drug industry's outsized profitability is unparalleled by any standards. Given that employers must pay larger premiums to health insurers to pay for the higher price of drugs, big pharma has siphoned off a part of the earnings of all corporate America. When employers cut back on health benefits, the public will bear even more of the burden of overpriced pharmaceuticals than they do now.
The lobbying efforts of big pharma are monumental. Just as we saw before in the energy industry, big pharma usually can provide enough influence to get what they want in Washington. One case in point is Tom Sculley, who heads the Centers for Medicare and Medicaid Services. Sculley acted to block the importation of drugs from Canada, an important issue for drug companies. Canada has exactly the same drugs that we do. They get their drugs in one of two ways. European drug companies ship one batch to Canada and another to the United States. American drug companies ship to Canada and sell the Canadian government the same drugs we have here at a fraction of the price.
Scully, a major architect of the Medicare drug bill, also made sure that there was enough money in the bill to provide subsidies (payoffs) to HMOs, private insurers, and corporations to provide drug coverage. In fact, an estimated one-quarter of the entire cost of the bill will be used for these subsidies. The net effect is a transfer of wealth out of our pockets and into the pockets of HMOs, insurance companies, corporations, and ultimately, drug companies.
The Medicare drug bill, passed by Congress in 2003, is scheduled to go into effect in 2006. The Bush administration sold the bill to Congress based on cost projections that they knew were inaccurate. While they claimed that the bill would cost taxpayers $400 billion over ten years, the actual cost was approximately $550 billion. When Medicare's chief actuary, Richard Foster, sought to convey the true costs during the bill's deliberation, his boss, Tom Sculley, forced him to keep quiet. According to the New York Times, the Democrats were outraged five months later when the truth came out that the administration knew and purposely withheld the actual costs until after the bill had passed. [xv]
From a social policy point of view, we might question the logic of Medicare's drug bill. With eighty million people uninsured or underinsured, is it right to raise those people's taxes (and yours and mine) to increase the benefits of one group who is already insured with taxpayer money? Imagine that 300 people showed up for a town meeting. Of those 300, a group of 80 had little or no insurance. Medicare and other private plans covered another group of 38, who were the richest group. Somehow, we decide to give the group of 38 even more benefits, which will be paid for by everyone else in the room. Did you ever wonder who the richest group of Americans is? Elderly widows. As a result of this bill, working Americans will be taxed more to provide benefits to hundreds of thousands of very rich people who can well afford to buy their medications. Social justice, however, was not a consideration in passing the Medicare drug bill. As usual, it came down to politics.
The Medicare drug bill was a windfall for big pharma. First, Congress made sure that the drug buys would continue from HMOs, insurance companies, and corporate America by greasing those wheels. Then, it explicitly prohibited Medicare from using its purchasing power to negotiate with drug companies, the way that Canada and other countries do. While the Veterans Administration, Aetna, and General Motors negotiate with drug companies for favorable prices, drug companies will be allowed to charge Medicare whatever they want. To make sure that Medicare does not renege on its promise to big pharma, it has delegated the administration and payments to a number of private insurance companies.
In the final analysis, it is likely that seniors will benefit less than they expect to from the drug plan. Many seniors will pay more in premiums and deductibles than the benefits they receive from the reduction in outlays for drug costs. Whether they sign up for the drug benefit or not, they may still see their social security checks decline due to an increase in part b premiums. Expect deductibles and co-pays to rise as well.
I certainly believe that those seniors who require drugs and cannot afford them should be protected from rising drug costs. Many seniors suffer from chronic conditions like arthritis, diabetes, high blood pressure, and elevated cholesterol. To treat multiple conditions can be very expensive. I am just not convinced that the drug bill that Congress passed is a fair and adequate solution. Medicare should be able to negotiate prices with big pharma just as other major players do. Additionally, Medicare should have a formulary of the most cost-effective drugs, just as Medicaid does. Finally, the money we pay in taxes should all go for the purchase of drugs and not to payoffs of special interest groups.
Why didn't Congress draft and pass a bill that was more citizens friendly? The answer is simply because big pharma is more powerful than you and me. In 1999, Jim Nicholson, then chairman of the Republican National Committee, wrote to Charles A. Heimbold, then CEO of Bristol-Myers Squibb, "We must keep the lines of communication open if we want to continue passing legislation that will benefit your industry." [xvi] Nicholson got the drift, and personally gave over $200,000 to the Republicans in the 2000 campaign, while influencing his company to contribute $2 million to George W. Bush. There is no doubt that big pharma's voice is louder than yours and mine. Even members of Congress admit it. In the words of Senator Richard J. Durbin from Illinois, "the Pharmaceutical Research and Manufacturers of America lobby has a death grip on Congress." [xvii]
Smoke and Mirrors
Major drug companies would like you to think that the prices of drugs are high because they have to spend billions of dollars in research to discover these marvels of medicine, and that drugs are extremely expensive to bring to market. The rhetoric is mostly a smokescreen. Research and development is a relatively small part of a drug company's budget. For nearly two decades, the industry has, almost every year, been the most profitable in the United States. They did not get that way by spending a lot of money looking for new drugs. Instead, they spent their money on marketing.
For the most part, the drug companies do not discover new drugs. The number of important new drugs has dwindled in recent years, and those that have been discovered were usually the result of research at academic institutions, biotechnology companies, or the National Institute of Health. A 1997 report by the National Bureau of Economic Research found that of the 21 most effective drugs approved between 1965 and 1992, public research was responsible for 15. [xviii] A Boston Globe review of the bestselling 50 drugs approved from 1992 to 1997 found that 45 of them had received government funding. [xix] The truth is that our taxes pay for the research to invent the drugs that the drug companies sell back to us at exorbitant markups.
The National Institute of Health, funded by our tax dollars is the big dog in drug research. Universities, who are awarded government grants, perform much of its research. In 1980, the Bayh-Dole Act enabled universities and biotech companies to patent discoveries from their research, and then grant exclusive licenses to drug companies. Because of this law, big pharma does not need to spend money on their research. Instead, they just wait around until academia or biotech companies come up with a new drug and then license the rights to it. Pharmaceutical companies, for the most part, are nothing more than marketing companies who get most of their products free and spend their money on advertising, salesmen, lobbying, and lawyers.
The next bill that benefited drug companies was the Hatch-Waxman Act, which Congress passed in 1984. With this bill, drug companies could extend their patents for brand-name drugs. As long as a drug company has an exclusive patent, it can charge whatever the market will bear. With a cadre of lawyers to argue their cases, drug companies have extended the effective patents on brand-name drugs from eight years in 1980 to 14 years in 2000. [xx] For a blockbuster, those extra years of patent life can mean billions of dollars. Of course, once a patent expires, other companies copy the drug and bring generics to market, often at one-fifth the cost.
Here is a concrete example of how drug companies operate in the sweet spot of the American healthcare system. When Bristol-Myers Squibb brought out Taxol, it had paid nothing to acquire it, except royalties, which it would pay later to the National Institute of Health. Taxol sold for $10,000 to $20,000 per year, approximately a twenty-fold markup of what it cost to manufacture it. When the drug finally went off patent, they successfully sued the generic companies that wanted to enter the market, and managed to extend their exclusive rights on the patent for another three years. As of 2003, the company had paid royalties to the NIH of only $35 million on $9 billion in sales of Taxol. Meanwhile, the government paid Bristol-Myers Squibb hundreds of millions of dollars for Taxol through its Medicare program. [xxi] Let us review. We pay the government to do the research to invent the drug. The drug company gets the drug for nothing and charges us twenty times what it costs to manufacture, and a minimum of five times more than it could be marketed for profitably. Then we give more money to Medicare, which buys the drug from the drug company for twenty times more than what it costs to manufacture. I think I understand.
A more recent example that is typical of the industry's price gouging occurred in 2003. Roche brought to market the new HIV/AIDS drug, Fuzeon. Roche, of course, had nothing to do with its discovery or even its development researchers at Duke University discovered the drug and a local biotechnology company developed it. Roche charges $20,000 a year for the drug, three times the amount of most aids drugs. The federal-state AIDS Drug Assistance Program purchases about one-fifth of aids drugs. Because of the high cost, patients have been put on waiting lists. In fact, in thirteen states, the program has simply stopped providing Fuzeon to new patients. It is bad enough that people all over the world are dying from AIDS because of lack of treatment, but now we are seeing Americans denied a drug, whose discovery their own tax dollars funded.
Oldies but Goodies
When you think that there are only a handful of major chronic conditions, it is not hard to understand that there are only a handful of major drugs. That is why it is common for the drug industry to take an old drug, change a molecule or two, and parade it out as a new drug, or at least an improved version of the old drug. The new drugs, of course, cost more money. Claritin was a blockbuster drug for Schering-Plough. Because of its popularity, the company raised its price, not once, but thirteen times over five years. [xxii] Stashing Claritin would have been a winning investment strategy because its price increased at four times the rate of inflation. Knowing that their patent was about to expire on Claritin, Schering-Plough tried to convince users to switch to Clarinex. Clarinex was virtually identical to Claritin, but had longer remaining on its patent.
The story of Nexium is an even brasher tale of intrigue and corporate hoodwinking. The drug company, AstraZeneca used to produce a popular heartburn drug called Prilosec. In fact, it was at one time the top-selling drug in the world with sales of $6 billion a year. Aware that its looming patent expiration would have devastating consequences on the company's profitability, they came up with a plan. The company took out a patent on the active form of the Prilosec molecule and named it Nexium. In truth, it was simply one-half of Prilosec. Then it launched a massive advertising campaign to persuade doctors and the public that Nexium was better than Prilosec. To get the public to make the switch, they priced Nexium slightly lower, offered discounts to hospitals and barraged doctors with free samples.
In order to get FDA approval for Nexium, the drug required testing in clinical trials. Since the FDA requires only that a drug is shown to be more effective than a placebo, Nexium passed. However, the makers had hoped to show that Nexium was actually better than Prilosec so additional trials were undertaken. To stack the deck in their favor, AstraZeneca used higher doses of Nexium, comparing 40 milligrams of Nexium to 20 milligrams of Prilosec. [xxiii] The results showed minimal improvement but were enough to give credence to their advertising. What can we learn from this heartwarming tale? Well, if nothing else, we can learn that it is probably better to buy Prilosec over the counter for a fraction of the cost of Nexium.
As we learned earlier, the number of new drugs that the industry produces is dwindling. From 1998 to 2002, the FDA approved 415 new drugs. Only 14 percent were innovative, new drugs. Nine percent were old drugs that the FDA agreed had been improved. The remaining 77 percent were oldies but goodies (what the industry refers to as me too drugs) dressed up and paraded out under a new name. Some had different chemical compositions from the originals, but most did not. [xxiv] Therefore, the truth is that nearly four out of every five drugs are not new drugs at all.
Meanwhile, while the drug companies go out of their way to push me-too drugs, shortages of lifesaving drugs exist. Drug companies often discontinue drugs for many of the rarer diseases to free up production capacity for drugs like Nexium. According to Mark Goldberger, an FDA official, "We have to give approval for companies to make the drugs, but companies can leave the market anytime they wish." [xxv]
In recent years, there have been serious shortages of many important drugs, including certain anesthetics, antivenin for poisonous snakebites, steroids for premature infants, antidotes for certain drug overdoses, an anticlotting drug for hemophilia, and vaccines against flu and pneumonia in adults. The most severe shortages are showing up in childhood vaccines, most likely because the CDC capped prices of childhood vaccines the agency purchased for use in public health centers. One more example of the industry's disregard for necessary drugs has to do with the drug Isoproterenol, an important drug used in cardiac resuscitation. When the spokesperson for American Home Products was asked to explain why his company had stopped making the drug, his answer was succinct. "It was strictly a business decision," he said. [xxvi] Profit, not need, drives the drug industry.
Greasy Wheels
According to a recent editorial in the Los Angeles Times, "The pharmaceutical industry is everywhere in Washington, all but writing the Medicare prescription drug bill, fielding more lobbyists than there are members of Congress, flinging gifts and trips at doctors and trying to prevent double-blind drug trials that pit one drug against another instead of against a placebo." [xxvii] This editorial was written as a follow-up to investigative journalist, David Willman's, examination of the NIH. As you may remember, the National Institute of Health is the taxpayer funded, government agency that provides funding for most of the basic research throughout the country. It is suppose to award grants based entirely on scientific merit, conduct its own research, and collaborate with the drug industry free from commercial considerations.
In his investigation, David William found that senior NIH scientists routinely supplement their income by accepting large consulting fees and stock options from drug companies that have dealings with the NIH. Some NIH scientists made hundreds of thousands of dollars in consulting fees. The deputy director of the Laboratory of Immunology, for instance, whose salary was $179,000 in 2003, reportedly collected more than $1.4 million in consulting fees over eleven years, and received stock options valued at $865,000. His remunerations from big pharma were not illegal. In 1995, the director of the NIH lifted all restrictions as to how much money NIH scientists could earn from outside work or the time they could devote to it. [xxviii] Clearly, major drug companies have compromised the independence of our government's major scientific research institute.
One direct effect of compromised government scientists shows up in NIH drug trials. The evidence clearly shows that when scientists had connections with particular drug companies, they were far more likely to report favorable outcomes of their trials. For example, when calcium channel blocker drugs like Norvasc were tested for safety, NIH scientists wrote seventy articles. A later study found that 96 percent of the authors who were supportive of the drugs had financial ties to the companies that made them, whereas only 37 percent of authors who were critical had such ties. [xxix] Not surprisingly, drug trials conducted outside of NIH are even more biased. One recent survey showed that authors of industry-funded studies were more than five times as likely to recommend the company drug as authors of studies funded by non-profit organizations – regardless of the actual results. [xxx]
Drug companies have countless ways to load the dice in their favor when conducting drug trials. One is to enroll only young subjects in the trials, even if the drug is intended for older people. Because young people generally experience fewer side effects, drugs will look safer in these tests. Another tactic is to compare the new drug to a lower dosage of an old drug. Still another is to give one drug orally and the other intravenously. Finally, drug makers can make the trials too brief to be meaningful. This happened with Celebrex, whose test results were suppose to show that it had fewer side effects than two older arthritis drugs. The Journal of American Medical Association published the favorable results. Later, the editor learned that the drug company had released only the results of the first six months of a yearlong trial. When the editor found and examined the results of the entire trial, Celebrex showed no advantage. The editor of the Journal was later quoted in the Washington Post. "I am furious. . .I wrote the editorial. I looked like a fool. . .I am disheartened to hear that they had those data [the second six months] at the time they submitted the manuscript to us. We are functioning on a level of trust that was, perhaps, broken." [xxxi]
The FDA's only requirement to approve a drug is that it works better than a placebo in two clinical trials. Meanwhile, the drug companies, which may conduct dozens of trials, only publish the positive results in the literature. Because the FDA has no control over what drug companies publish, doctors are often mislead concerning the efficacy of the drugs they recommend to patients. For example, doctors widely recommend antidepressant drugs such as Prozac, Paxil, Zoloft, and Celexa. However, when all FDA reviews from 1987 to 1999 were studied in detail, investigators found that, on average, placebos were 80 percent as effective. Moreover, the difference between drug and placebo was only about two points on the sixty-two point Hamilton Depression Scale. The actual results appear to differ widely from published articles. Furthermore, there is recent evidence that drug manufacturers have suppressed data indicating that antidepressants are not only ineffective but also sometimes dangerous in children. [xxxii]
Drug companies directly target physicians to influence them to prescribe their drugs over competitors. In so doing, the industry employs 88,000 drug reps to visit doctors at their offices and in hospitals, plying them with gifts and luncheons. Young doctors often feel indebted to the friendly, and most often very attractive female drug reps that feign a genuine interest in their practice. Drug companies also pay doctors several hundred dollars a day to allow a sales rep to shadow them as they see patients. The practice allows the rep to gain more time with the doctor and thus develop a relationship.
Drug companies treat doctors to expensive dinners, gifts, and even vacations. At the dinners, the doctors listen to presentations by supposed experts – essentially sales talks for the company's products. They also receive lavish gifts. According to an editorial in USA Today, they might receive "Christmas trees, Washington Redskin tickets, Hawaiian vacations, and wads of cash. They have been raking in jaw-dropping gifts from pharmaceutical companies battling to give their products an edge in an increasingly competitive market." [xxxiii] The vacations are sprinkled with speakers to appear to further an educational purpose. The tremendous amount of money that the drug companies use to promote their drugs (which we pay for indirectly with higher markups) makes you wonder if their drugs are that great. The fact is, important drugs that really work require very little marketing. Only the me-too drugs like Nexium, Lipitor, and Paxil require such heavy promotion.
In 2003, The New York Times obtained confidential documents that detailed how the industry plans to buy influence in the coming fiscal year. They would spend $150 million, an increase of 23 percent from the prior year. They would spend $73 million dollars for lobbying at the federal level and $49 billion at the state level. They would spend $5 million to lobby the FDA. More than $12 million would go to subsidize particular doctors and academics. Another $1 million would go to selected economists who would testify against federal price controls. $18 million would pay lawyers to argue patent extensions. The industry would delegate any remaining money to miscellaneous items, such as blocking the influx of drugs from Canada. [xxxiv]
As powerful as the drug companies are, they may soon get their just desserts. In Boston and Philadelphia, U.S. attorneys offices are going after drug companies for bribing doctors and insurance companies. States attorneys general offices are prosecuting drug companies for bribing Medicaid. An alliance of consumer groups, The Prescription Access Litigation Project, has filed suits against more than twenty drug companies. Class action attorneys are also going after drug companies. In addition to drug companies, many prosecutions have taken aim at pharmacy benefit management companies. These companies administer drug benefits for employers, unions, health plans, and public agencies. While they are suppose to contract with drug companies for the best deals, they sometimes collude with drug companies to keep prices high.
In summary, drug prices are high because drug companies are not satisfied with reasonable profits. Not only do they not create most of the drugs, they get the drugs free from our tax-funded research. They use their outsized profits to influence the NIH, the FDA, doctors, hospitals, insurance companies, the academic and scientific communities, and state and federal legislatures. Moreover, they spend billions of dollars on television and magazine advertising to push me-too drugs, while allowing shortages of critical life and death drugs that may not be as profitable. If the public understood that big pharma is nothing more than an intermediary that has successfully lobbied for exclusive marketing rights, freedom from price regulation, and tax breaks, they would demand that their representative leaders take a stand against the drug industry.
United We Stand, Divided We Fall
In looking at the entire healthcare industry, we can see that it is a fragmented assortment of profit-driven entities, not one of which speaks for what is best for American healthcare overall. The costs of prescription drugs and health insurance premiums are in unsustainable, upward spirals. The burden of costs is being shifted to the consumer, either directly or indirectly through taxes. Even now, the present healthcare system does not adequately serve our country. As our population ages, the additional demands on the system will be enormous. Unless we address the problem immediately, there will be dire consequences for all Americans. The best solution, as proven in every other industrialized country, is to provide universal coverage for all our citizens. With a single-payer system, one agency would reimburse all providers. The same agency would negotiate with drug companies for much lower prices, just as the Canadian government does. Every American would receive basic comprehensive health care, including essential prescription drugs. No longer would families fear bankruptcy from medical emergencies.
Drug companies, insurance companies, and profit-hungry hospitals have successfully scared the public into believing that nationalized medicine is "big government." However, numerous studies have shown that a single-payer system restrains costs and provides quality healthcare. The fundamental problems with the third-party-payer system are what cause Americans' healthcare costs to be almost double those in other countries. In terms of administrative costs, Medicare, which is a single-payer system, is the most efficiently run health care system in America. While Meicare's administrative costs average two percent, the administrative costs of private insurers run between 12 percent and 30 percent. The reason Medicare's costs are less is because it provides standardized, universal coverage, whereas private insurance encompasses thousands of plans and providers, requiring an army of administrators whose primary job is to deny claims. Maybe we should think about reducing the age requirement for Medicare to zero, get tough with drug companies, and take the fat cat insurance companies out of the loop.
The Takeaway
The rising cost of healthcare in the United States is destined to continue to shrink your money unless or until the United States implements a national healthcare program. Given that such a policy shift is not imminent, you should not count on an end to that trend any time soon. If you are young, expect the government to take more out of your paycheck to provide for the costs. If you have employer sponsored health insurance, expect your participation to increase, your deductibles to rise, and your co-pays to increase. Business leaders predict that health insurance premiums will rise 17 percent per year over the next five years. For the most part, employers will pass on the greater part of those increases to employees. Therefore, you may find that standard cost of living increases will be entirely negated by the additional costs of health insurance.
Why are healthcare costs out of control? Much of the blame can be placed on drug companies. Big pharma is so profitable that it has been able to influence our government to allow it to rape our citizenry by charging us far more than citizens in other countries pay for the same drugs. Meanwhile, hospital chains raise prices and cut back on care to improve their bottom lines.
Going forward, the primary driver of higher healthcare costs will be our aging population. As people age, their healthcare costs rise dramatically. People over 65 consume five times as many healthcare dollars as younger people. It is important to note that healthcare is everybody's problem. We all share the costs of healthcare through either increased insurance premiums or increased taxes. The enormous cost of our country's future healthcare needs and the consequences of those costs have not been adequately addressed by our politicians. The aggregate costs will act as an anchor that will slow the economy and reduce standards of living in the years ahead. Any factor that slows the economy may induce the government to inflate the money supply in order to avoid recession. Such an expansion, as we have learned, would shrink your money.
MORE INFORMATION ABOUT THE COMING INFLATION CRISIS AND HOW TO PROFIT FROM IT IS AVAILABLE AT: WWW.CURTISARNOLDREPORT.COM
Graig, Laurene , Health of Nations: An International Perspective on U.S. Health Care Reform.
[ii] U.S. Department of Health and Human Services, For a Healthy Nation 2000.
[iii] Bartlett, Donald L. and Steele, James B., Critical Condition, p. 21.
[iv] "Businesses anticipate increases in healthcare insurance costs," Managed Care Weekly Digest, April 7, 2003.
[v] Ibid., p. 167.
[vi] Blank, Robert, The Price of Life: The Future of American Health Care.
[vii] Fuchs, Victor, "What Every Philosopher Should Know About Health Economics ," Health Economics, June 1996.
[viii] Eddy, David, New England Journal of Medicine, 1985.
[ix] Adverse Drug Events Prevention Study Group. JAMA 277, vol. 4 (1997): 307-311.
[x] Kohn, Linda T., Corrigan, Janet M., and Donaldson, Molla S., "To Err is Human," Institute of Medicine.
[xi] Kessler, Daniel P., "Is Hospital Competition Socially Wasteful?" The Quarterly Journal of Economics, p. 577 – 615.
[xii] Palm Beach Post, March 8, 2003.
[xiii] Howard, Philip K., "Legal Malpractice," The Wall Street Journal, January 27, 2003.
[xiv] Lamm, Richard, D., The Brave New World of Health Care, p. 115-116.
[xv] Pear, Robert, "Democrats Demand Inquiry into Charge by Medicare Officer," New York Times, March 14, 2004.
[xvi] Stolberg, Sheryl Gay, Harris, Gardiner, "Industry Fights to Put Imprint on Drug Bill," New York Times, September 5, 2003.
[xvii] Pear, Robert, "Drug Companies Increase Spending on Efforts to Lobby Congress and Governments," New York Times, September 5, 2003.
[xviii] U.S. Congress, Joint Economic Committee, "The Benefits of Medical Research and the Role of the NIH," May 2000.
[xix] Dembner, Alice, "Public Handouts Enrich Drug Makers, Scientists," Boston Globe, April 5, 1998.
[xx] Gosh, Chandrani and Tanzer, Andrew, "Patent Play," Forbes, September 17 2001. p. 141.
[xxi] Angell, Marcia, M.D., The Truth About Drug Companies. p. 66.
[xxii] Lueck, Sarah, "Drug Prices Far Outpace Inflation," Wall Street Journal, July 10, 2003.
[xxiii] Physicians Desk Reference, 56 th ed., p. 621.
[xxiv] FDA website: www.fda.gov/cder/rdmt/pstable.htm.
[xxv] Appleby, Julie "Hospitals, Patients Run Short," USA Today, July 11, 2001.
[xxvi] Petersen, Melody, "Drug Shortages Become a Worry at Hospitals Around the Country," New York Times, January 3, 2001.
[xxvii] "Subverting U.S. Health," editorial, Los Angeles Times, December 7, 2003, A1.
[xxviii] Williams, David, "Stealth Merger: Drug Companies and Government Medical Research," Los Angeles Times, December 7, 2003, M4.
[xxix] Stelfox, H. T. et al., "Conflict of Interest in the Debate over Calcium Channel Antagonists," New England Journal of Medicine, January 8, 1998, 101.
[xxx] Bodil Als-Nielsen et al., "Association of Funding and Conclusions in Randomized Drug Trials," Journal of the American Medical Association, August 20, 2003, p.921.
[xxxi] Okie, Susan, "Missing Data on Celebrex: Full Study Altered Picture of Drug," Washington Post, August 5, 2001, A11.
[xxxii] Kondro, Wayne and Sibbald, Barbara, "Drug Company Experts Advised Staff to Withhold Data About SSRI Use in Children," Canadian Medical Association Journal," March 2, 2004.
[xxxiii] "Drugmakers' gifts to Doctors Finally Get Needed Scrutiny," editorial, USA Today, Octover 14, 2002, 14 A.
[xxxiv] Pear, Robert, "Drug Companies Increase Spending on Efforts to Lobby Congress and Governments," New York Times, June 1, 2003. section1, p.33.
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