Why are Health Insurers Persecuting Innovative Drug-Makers, Instead of Bloated Hospitals?

One constant refrain heard in national health policy circles is the need for “integrated” or “coordinated” care. To be sure, I have never heard anyone speak favorably of “disintegrated” or “un-coordinated” care. While there are many good-faith practitioners who do want to integrate and coordinate care for patients, these terms are often used to camouflage a more straightforward way to raise prices. Here’s an example from Bloomberg BusinessWeek:

money-burdenFor the past four years, Pennsylvania insurance company Highmark has watched its bills for cancer care skyrocket. The increase wasn’t because of new drugs being prescribed or a spike in diagnoses. Instead, the culprit was a change that had nothing to do with care: Previously independent oncology clinics and private practices have been acquired by big hospital systems that charge higher rates, sometimes three times as much, for chemotherapy drugs. “The site of care and the type of service provided does not change at all,” says Tom Fitzpatrick, Highmark’s vice president of contracting. “The only significant difference that we primarily see is the [patient] gets a wristband placed on them.”

Cancer drugs, already expensive, often double in price when hospital systems charge for them. A treatment of Herceptin, a breast cancer drug from Genentech, cost private insurers $2,740 when used in an independent clinic and $5,350 in a hospital outpatient setting, according to an analysis of 2012 claims by PricewaterhouseCoopers’ Health Research Institute. The price of Avastin, another Genentech cancer drug, increased from $6,620 to $14,100, the Health Research Institute says.

So, the price of an expensive drug can more than double when it is dispensed in a hospital. Strange, then, that the health insurers’ trade association has decided to persecute Gilead and other innovative drug-makers, instead of focusing more on how to reduce the cost structure of America’s bloated hospitals.

Health plans have had some success reducing hospital costs. One method is reference pricing, whereby an insurer will pay fully for a procedure at the lowest-cost, high-quality, hospital. Patients who go to another hospital pay the difference in fees out of their pockets. However, this has a long way to go before it is generally accepted. Medicare, i.e. the federal government, has proved utterly ineffective at preventing arbitrage between the physicians’ and hospitals’ fee schedules through the acquisitions described by Bloomberg BusinessWeek. The term of art for reforming this is “site-neutral payment,” but hospitals have successfully blocked it.

Comments (13)

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  1. Bart I. says:

    Site neutrality: an interesting catch-phrase.

    “Coordinated” central planning is the answer for everything.

    • American Patriot says:

      Exactly Bart! Government always thinks it knows best, but almost always leads to higher prices and slower growth or innovation. Newsflash: the free market is perfectly capable of “coordinating” care between patient and provider, and no government regulation is necessary.

      Another good point made here is that healthcare regulators are pursuing the wrong “bad” guys here. There is absolutely no reason to target Gilead – they are the good guys who are developing life-savings medications! How many life-savings drugs does our government provide to the market?

      • Paul says:

        Good point Patriot. Why do we not hear more in the MSM about the huge variance in healthcare costs in services provided by our hospitals? How come they are never the targets of price controls?

        Would government control even help out in such a situation? Probably not, just take a look at the VA situation.

        The best way to control costs is the promotion of competition. Low-cost, high-quality hospitals ought to have a higher demand than their more expensive competitors.

  2. Frank says:

    Wow – interesting. I wonder what the bill looks in hospitals that dispense these drugs. What are all the extra costs associated with?

  3. bob hertz says:

    Frank, hospitals use cancer care and heart care to make up for any losses that they experience for trauma care, childbirth, psychosis, the uninsured, et al.

    Great post, John. I have followed the Highmark issue for some time.

    As you know, I do not think that reference pricing is harsh enough. We need to enforce consumer laws about price gouging. Mamy of these laws are already on the books, but courts and regulators are very timid towards hospitals.

  4. Devon Herrick says:

    One possible answer is that hospitals seem to be viewed more favorably than drug makers. Your local hospital sponsors charity galas, puts up billboard of smiling children and claims they’re alive because of benevolent people who work at the hospital.

    Drug makers are less sympathetically. But, I think you’re correct that reference pricing is the direction insurers need to go. But, what will inevitably happen is lawmakers in state capitols will try to block them by passing “any willing provider” regulations.

    • Steve says:

      Yes, I think you’re right about the image differences Devon. Hospitals do not have Leftist politicians constantly criticizing them the way pharma does, even though, as this post points out, hospitals can charge wildly different amounts for the same services.

      • John R. Graham says:

        Hospitals are distributed in every town and village. They are often the largest employer in a district. Woe to the politician who suggests hospitals are bloated and inefficient!

  5. bob hertz says:

    Devon, I do not understand why ‘any willing provider’ laws actually raise costs.

    Say that an insurer states that the payout for an in-network procedure is $2,000.

    If a non-network provider wants to do the procedure for $2,000, under a “willing provider” statute. where are the extra costs?

    I do not think that ‘willing provider’ laws require the insurer to pay whatever the new provider charges.

    I am probably missing something, just let me know.

    • David M says:

      Interesting question Bob, I don’t know either. I would hope that insurers would desire to cut costs (without sacrificing quality) as much as possible.

    • Devon Herrick says:

      Bob, you’re describing reference pricing. Basically, the health plan figures out a price that covers, say, two-thirds of providers’ fees in a given area and sets that as the reference price. A patient seeking care from an expensive provider has a co-pay, but nobody has an incentive to lower their price below the reference price. Under those conditions, there’s really no need for a network.

      What I’m describing is where a health or drug plan goes to the drug makers of the top five selling cholesterol drugs and has them bid to become the preferred cholesterol drug on the formulary. The winning bidder may win 85% of the health plan’s business for cholesterol drugs. The (four) losing bidders may split the remaining 15% of the health plan’s business. That is a powerful incentive to offer your best price. On the other hand, if a health plan cannot guarantee, say, 85% of their business to a winning bigger, the bidders have little reason to big low — knowing they will be able to share in the business regardless of who wins. The incentive is to bid high.

      We published a 2-page brief a few years back by Alain Enthoven and Kyna Fong. Enthoven and Fong explained that bargaining power was the power to say “no” and deny your business to the losing bidder. Unless you can deny some bidders your business, you don’t have much bargaining power.

  6. Barry Carol says:

    UnitedHealth Group recently completed a pilot program with a number of oncologists around the country in an attempt to control spending for cancer treatment. Under the traditional protocol, the oncologists buy the drugs the patient needs and then bill the insurer for them. They earn a 6% profit margin. So, there is a considerable incentive to use more expensive drugs.

    United told the doctors it would guarantee them the same average profit per case that they earned before regardless of which drugs they prescribed. The result of the pilot program was that spending on drugs actually rose somewhat but total spending fell by 34%. Most of that savings seems to have come from less spending on hospitalization but the article I read about it wasn’t clear on that.

    • John R. Graham says:

      That is a great outcome. Good for UNH! There have been proposals to do this for Medicare, because oncologists get reimbursed a mark-up for their chemotherapy drugs. So, reform would somehow move th drugs from Medicare Part B to Medicare Part D.

      Oncologists complain that the fee schedule is too low, and that they need the spread on drugs to earn adequate incomes. UNH has shown a way around this challenge.