It’s difficult to understand why (unless, as we highly recommend, you read Dr. Rich’s Covert Rationing Blog), but President Obama and his colleagues clearly wish to eliminate any responsibility that patients might with respect to paying for their own healthcare. This might be a good idea if the ultimate objective is to maximize both the demand for medical goods and garner votes from the grateful masses, but it’s hardly a recipe for a healthcare system that spends its dollars wisely. To most people, making things “free” simply removes any need to think about just how much things cost. When is the last time you thought twice about taking an extra paper napkin at Starbucks, or felt guilty about stuffing yourself at a buffet?
This lesson was driven home to us recently by a conversation with Mr. Robert Sparkes, a retired engineer who was laid off from his job just about two years ago. In 1984 he was diagnosed with Type II diabetes and has relied on his work-related health insurance to pay for his insulin. To keep his blood sugar under control throughout the day he uses both Lantus, a long-acting form of insulin, and Humalog, a short-acting insulin. The cost of both of these drugs in the U.S. is substantial. In the U.S. both drugs are about $130 per vial, and Mr. Sparkes uses two bottles of each every month. Glucometer test strips used to check his blood sugars are another big expense. A box of fifty OneTouch test strips goes for $120, and he uses two boxes per month to keep his sugars under good control. All told, that’s $700 each month just for the medications and strips Mr. Sparkes uses to manage his diabetes. That doesn’t include a penny for doctor visits, lab tests, his other various medications or anything else.
That may seem like a lot of money, but Mr. Sparkes never gave it a second thought until last January. When he was on private insurance all he had to worry about when buying insulin or test strips was a $5-$10 copay for each prescription. The true cost of the drug was irrelevant. “You don’t really have to think about it, do you?” he says. But then his COBRA insurance, the 18 month extension of his employer’s healthcare policy, ran out. From that moment, everything changed.
Almost overnight, Mr. Sparkes began became medical cost-cutting demon. He swapped out his OneTouch glucometer for a brand whose strips were considerably less expensive. He located an on-line pharmacy in Vancouver, Canada that sold Humalog for $45 per vial, although their Lantus was the same price as in the U.S. Most of his other brand-name drugs were cheaper there as well. For others he switched to generics. Some of these were $4 per month at Walmart or Costco – less than the $5 co-pay that he had been paying to his insurance company. All along in the process Mr. Sparkes was planning for the time that he would be eligible for Medicare in July. His goal was to manage all of his medications so that he would never hit the “donut hole” in Medicare’s drug coverage. This is a gap in coverage in which beneficiaries have to pay for their own medications until their drug spending hits a certain threshold.
Mr. Sparkes’ story easily could be Exhibit A in the museum of what’s wrong with the way we’re “reforming” American healthcare. As part of the Affordable Care Act (ACA or “ObamaCare”) legislation, Medicare’s “donut hole” is being closed. This will, of course, remove any need for Mr. Sparkes or his fellow Medicare beneficiaries to worry about the magnitude of their medication spending. And on the non-Medicare side, the ACA essentially outlaws the combination of high-deductible catastrophic healthcare coverage policies and Healthcare Savings Accounts (HSAs). Because HSAs encourage their owners to make the most efficient use of the money in their accounts, eliminating them is a great way to covert patients from careful shoppers into people who are relatively indifferent to cost.
Now let’s do a little thought experiment. Let’s say that the ACA is successful, and patients all over the country no longer care whether the drugs they buy cost $130 per vial, or $45 per vial. Once the patient and his economic self-interest are removed from the equation, what tools are left that will allow insurers (including Medicare and Medicaid) to control costs?
Option #1: Force drug makers to sell their drugs for less. Of course this has some adverse consequences, such as reducing the capital and incentive any drug maker has to create new and better drugs. Indeed these concerns – along with intense lobbying efforts on the part of the drug makers – are largely responsible for Medicare being legally prohibited from negotiating drug prices.
Option #2: Drop the more expensive drugs from the formulary, making it impossible to prescribe them. This already happens in virtually all health plans that “manage care” and HMOs such as Kaiser or the VA. Of course the losers here are clinicians, who are frustrated at their inability to prescribe the treatments that may be best for their patients, and the patients themselves who may not even know that they are receiving second-rate care. Coincidentally, removing these drugs from circulation also removes any incentive that drug makers may have for developing and producing them, making it not much different from Option #1.
Option #3: Have insurers claim that all medications are available to patients, but make it so bureaucratically difficult for doctors to prescribe them that for all practical purposes they cannot be used. This is a sneakier version of Option #2, but from the bureaucratic and political perspective it retains the advantage of shifting the blame from those who set up and run the system onto those “selfish and uncaring physicians who simply don’t want to take the time to practice high-quality medicine. This option is probably the most common one in use today, and will almost certainly become the rule rather than the exception as ObamaCare is fully implemented.
The observant reader will note that all of these are forms of “rationing” that will directly or indirectly discourage the development and use of new treatments for a wide range of diseases, simply because there will be no market for them. Of course Mr. Sparkes engaged in rationing too after his insurance ran out, but where, when and how he went about it was up to him. At least he had the choice to continue using more expensive drugs if they worked best for him – a choice that the ACA will quietly but surely take away.
There is one other option, however, and it’s called reference pricing. In this case insurers can decide to pay a certain amount toward a month’s supply of a drug or treatment of a given type. For example, a given insurer might decide that a decent heart medication of a given type (e.g. a beta blocker), should cost about $50 per month. If patients wish to use an alternative drug that costs $75 per month they may do so by paying the difference. Referencing pricing has been used in Europe for some time and a version is offered by many private health plans in the U.S. as a system of “tiered” pricing.
We predict that reference or tiered pricing will be less “acceptable” in the United States if President Obama is re-elected and the ACA is allowed to continue its effort to protect patients from any exposure to healthcare costs. Despite the example of Mr. Sparkes, when it comes to healthcare Americans apparently can’t be trusted with that sort of responsibility.