Belmont Club


They said health rationing would never come, that if you liked your plan and doctor, you could keep it.  They lied, and now that that’s over let’s move on. Since it’s the government’s doctor not yours any more, Maryland has announced a bold deal with state and federal officials not to treat people unnecessarily.

Maryland officials have reached what analysts say is an unprecedented deal to limit medical spending and abandon decades of expensively paying hospitals for each extra procedure they perform. If the plan works, Maryland hospitals will be financially rewarded for keeping people out of the hospital — a once unimaginable arrangement.

“This is without any question the boldest proposal in the U.S. in the last half century to grab the problem of cost growth by the horns,” said Uwe Reinhardt, a healthcare economist at Princeton University.

Yes, progress is not treating people. Hospitals are preparing for this brave new world by firing employees.

“We’ve all been cutting staff, looking at our expenses aggressively over the last couple of years,” said Scott Furniss, chief financial officer for St. Agnes Hospital in Baltimore. “But we’ve done most of what we can do easily now.”

Carmela Coyle, CEO of the Maryland Hospital Association, called the plan “historic” and “a challenge,” adding: “We needed to move away from a fee-for-service-driven healthcare system, where the incentive was to do more to be paid more, and instead move to a system where the incentives are aligned to what we all feel needs to be done.”

The agreement had to be blessed by the U.S. Department of Health and Human Services, which runs the Medicare program offering coverage to seniors and helps fund Medicaid care for the poor.

Of course much of the problem of overtreatment is one of government’s own making. Think tort law. One of the major reasons why American treatments cost so much is defensive medicine.

Defensive medicine, also called defensive medical decision making, refers to the practice of recommending a diagnostic test or treatment that is not necessarily the best option for the patient, but an option that mainly serves the function to protect the physician against the patient as potential plaintiff. Defensive medicine is a reaction to the rising costs of malpractice insurance premiums and patients’ biases on suing for missed or delayed diagnosis or treatment but not for being overdiagnosed. U.S. physicians are at highest risk of being sued, and overtreatment is common. The number of lawsuits against physicians in the USA has increased within the last decades and has had a substantial impact on the behavior of physicians and medical practice. Physicians order tests and avoid treating high-risk patients in order to reduce their exposure to lawsuits, or are forced to discontinue practicing because of overly high insurance premiums. This behavior has become known as defensive medicine, “a deviation from sound medical practice that is indicated primarily by a threat of liability.

Defensive medicine comprises up to 34 cents on the health care dollar. If there are three doctors in the room one of them is a lawyer.

In a recent Gallup survey, physicians attributed 34 percent of overall healthcare costs to defensive medicine and 21 percent of their practice to be defensive in nature. Specifically, they estimated that 35 percent of diagnostic tests, 29 percent of lab tests, 19 percent of hospitalizations, 14 percent of prescriptions, and 8 percent of surgeries were performed to avoid lawsuits.

But since you can’t reform the system by getting rid of the lawyers, (you can’t ever get rid of lawyers) the only choice is to reform medicine instead by firing the hospital staffers.

One of the unanswered questions in the Maryland reform is whether the projected savings will be achieved by making individual procedures cheaper or just ordering fewer of the same overpriced services. Paul Abramson, MD was curious to know how much an X-Ray really cost. He did some digging and it turned out that a $517 X-Ray actually costs $73 bucks.  It  really cost 1/7th of the list price.

Why? Because prices are set, not by the market, but by what giant insurance companies and government agencies agree to pay the providers. Barry Werth, writing in the MIT Technology Review examined the case of two drugs, Kalydeco and Zaltrap. Treatment with Kalydeco costs $294,000 a year and Zaltrap costs $11,000 a month.  He asked himself, why so expensive?

The primary customers in the United States are not patients or even individual physicians, although physicians can drive demand for a drug; rather, the customers are the government (through Medicare and Medicaid) and private insurance companies. And since the insurer or government is picking up the check, companies can and do set prices that few individuals could pay. In the jargon of economics, the demand for therapeutic drugs is “price inelastic”: increasing the price doesn’t reduce how much the drugs are used. Prices are set and raised according to what the market will bear, and the parties who actually pay the drug companies will meet whatever price is charged for an effective drug to which there is no alternative. And so in determining the price for a drug, companies ask themselves questions that have next to nothing to do with the drugs’ costs. …

There are inherent problems with a system where the government is one of the biggest payers, and where doctors, hospitals, insurers, pharmacy benefit managers, drug companies, and investors all expect to profit handsomely from treating sick people, no matter how little real value they add to patients’ lives or to society. Drug companies insist that they need to make billions of dollars on their medicines because their failure rate is so high and because they need to convince investors it is wise to sink money into research. That’s true, but it’s also true that the United States, with less than 5 percent of the world’s population, buys more than 50 percent of its prescription drugs. And it buys them at prices designed to subsidize the rest of the industrial world, where the same drugs cost much less, although most poor governments can’t afford them at even those lower prices.

“Designed to subsidize the rest of the industrial world” has a nice ring to it. After all, subsidies are good. Why not have more of them?

“Negotiated prices” between mammoth pharmaceutical companies and equally mammoth insurance companies and government agencies produce mammoth prices. The don’t produce itty-bitty prices. And since the prices are so gigantic, is Maryland is going to pay for fewer of them? Does this mean the X-Rays will be charged at seventy three bucks? Or are they simply going to order only 1/7th the number of $517 X-Rays to stay within the budget?

The reason it’s important is because Obamacare officials are making Maryland the template for the national system. “A top official with the Centers for Medicare and Medicaid Services said Friday that a state plan to reduce hospital visits could serve as a national model for curbing costs while improving patient outcomes.”  Sarah Kliff of the Washington Post says: “State officials hope that the firm budget — combined with the state’s pre-existing power to dictate hospital prices — will put downward pressure on health spending, forcing hospitals to spend their limited dollars on the most cost-effective health care.”

Hope? Is that it? Is that all they got? That didn’t work so well at cutting costs in the Defense Industry, or for that matter with CGI Federal. Talk about a $517 X-ray. CGI gave the public a $300 million Error 404.

Stick around for the Victory Gin

Stick around for the Victory Gin

Nowhere in the landscape of reform is there hide or hair of market-price setting. Just what is going to bring the prices down or are they just going to serve up less of the same overpriced stuff?  Most of the Federal Bureaucracy is exempting itself from Obamacare. A great vote of confidence in the bold new Maryland experiment.

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