<p>BDM, can you put up some utility curves and help me write a petition letter to get this thread to have transfer credit with Penn’s Health Care Econ course?</p>
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<p>This chart explains why diminishing marginal returns leads to risk aversion. (And yes, I know we’re being tongue-in-cheek here.)</p>
<p>Imagine that you’re at point C (income=5), and you have a 50% chance of losing enough money to shunt you to point A (income=1). The expected value of your income, therefore, is 3. But notice the oddity in the curve: your expected utility is point D, but the utility of the expected income is higher than that.</p>
<p>That’s the gap that insurance can help you fill. A guarantee at point B is just as good as a 50% chance at point A, even though it’s actually more than 50% of the way towards point A. So long as the insurance plan charges you less than the gap between points B and D, it’s a win-win situation. Your utility either improves or stays the same, and the insurance company gets to pocket a little bit of the cash.</p>
<p>**So health insurance was originally designed as a means of reducing financial risk. With some tax benefits added, it became a tax evasion scheme for other things I might want, even if they weren’t risky.</p>
<p>But why does my plan still include things I’m never ever going to use? Some people are never going to need psychiatric, chiropractic, orthodontic, obstetric, AIDS, hepatitis, tropical illness, diabetic, etc. care. How come they have to pay for it?**
These items, referred to as “mandated benefits”, are included because state-level laws often require them to be a part of every single insurance plan.</p>
<p>What’s the logic behind that?
“Behavioral economists” would argue that some people who do need this care will erroneously assume they don’t need it; forcing them to get that coverage is a paternalistic way of protecting them. Some find this sensible, others find it condescending. Whether you support this reasoning or not is a value judgment, e.g. beyond the realm of economic analysis.</p>
<p>The second reason is that certain types of “doctors” want to be included to boost their business. Chiropractors are notorious for wanting to be included in insurance plans and for using state governments to do it.</p>
<p>The third reason, though, is that our government also wants health insurance to function as a social safety net. The logic is that by spreading these costs across more people, some of whom won’t use it, we can reduce costs for the people who do need it.
**
Does that make economic sense?**
At first glance, no. For one thing, it’s another imprecise subsidy. Some of the people who don’t need these services are poor; some of the ones who do are wealthy.
**
Okay. But how does this even work as a subsidy at all?**
Imagine that some insurance plans offered, say, diabetes coverage while others didn’t. All the near-diabetic people would sign up for diabetes coverage, while all the normal-weight people wouldn’t.</p>
<p>As a consequence, the premium for diabetes coverage would be very high, since insurance companies would know that essentially everybody who signs up for it is going to use it. Say diabetes coverage costs the insurance company $5000 a year. If 95% of enrollees are going to get diabetes, and the insurance company wants to keep a 5% profit, it’s going to charge patients $5000 a year.
**
Why is this bad?**
It depends on your worldview. There are no pure economic problems with this scenario.**</p>
<p>What’s a “pure economic” problem?**
The proper term is a “Pareto inefficiency.” You get a Pareto inefficiency whenever a change can improve everybody’s lives without harming anybody’s. In other words, if there’s a win-win scenario that the system isn’t using, we have a “pure economic problem.”
**
Okay. So if there’s no pure economic problem, why is it bad to charge patients for the full cost of, say, diabetes care?**
Because there might be a moral problem. Depending on your worldview, you might want healthy people to subsidize care for sick people–in this case, probable diabetics. By forcing everybody to get diabetes care, the insurance company has a harder time figuring out whose rates to increase and whose to decrease.</p>
<p>So healthy people pay more, because insurance companies can’t tell they’re healthy. And sick people pay less, because insurance companies can’t be sure which ones are sick.</p>
<p>**Does this have any pure economic problems?
Yes, definitely. First, this removes a little bit of the incentive to stay healthy. Second, you discourage insurance operators from entering the market, thus promoting monopolies. Third, the insurance companies who stick around have to spend a lot more time and energy playing games with their clients to try to find other ways to screen. (We’ll talk more about this in Part IV.)</p>
<p>Fourth, and worst of all, you are increasing healthy people’s cost of insurance without increasing the benefits. People with very low risk for HIV still have to pay for HIV care but will never use it; their costs have gone up, but their actual benefits have stayed the same.
**
Why does this matter?**
Because now you are giving them more incentive to go uninsured.</p>
<p>Hm. Are a lot of the uninsured basically uninsured for this reason? They could afford insurance, but usually don’t bother because it’s a bad deal?
Yes. Unfortunately I’ve never seen a good estimate as to how many, partly because it’s an ideological question. Some tend to say it’s about half of all uninsured people, some (depending on their definition of “could afford”) say that there’s practically nobody.</p>
<p>I’m uncomfortable making an estimate, but suffice to say it’s probably a noticeable group.</p>
<p>**So charging full-price has no pure economic problems, but using healthy people to subsidize sick people does. Does this mean that mandated benefits are a bad idea?
**Not necessarily. Just because something is a bad economic idea doesn’t mean it’s a bad idea. You have to weigh the tradeoff: we’re harming the economy a little, but maybe the moral fulfillment is worth it.</p>
<p>This is a question that every person has to answer for himself.
**
What do the parties propose regarding mandated benefits?**
John McCain planned to permit consumers to buy their health insurance from any state. Remember, mandated benefits are imposed by state laws, not federal laws. So if I can buy my insurance from any state, I’m allowed to circumvent my own state’s laws on the subject. I could go shopping around until I found a plan that only included things I wanted.</p>
<p>In other words, McCain would have effectively eliminated mandated benefits. During the debates, Barack Obama vigorously objected to this provision.
**
Is there anything else I can read on the subject?**
Yes, Lawrence Summers wrote a very definitive review article on the subject.
**
Lawrence Summers? Why does he sound familiar?
He served as President Clinton’s Treasury Secretary and then the (embattled) president of Harvard University. He was unpopular for a variety of reasons and eventually resigned under fire. He’s now one of President Obama’s closest advisors.
**
What did he say about the subject?
Summers essentially said that whiel he sympathized with the desire to subsidize care for sick people, it didn’t make any sense to do it by increasing the costs of insurance for everybody else.</p>
<p>He suggested that a different subsidy mechanism would be more efficient: perhaps something more like basic welfare, where you tax people directly based on their income and send the money directly to sick people. You alter everybody’s incentives less, you have less of an impact on insurance markets, and your subsidy is more precise.
**
That sounds like a good idea. Why don’t we do that?
**It’d be very unpopular, not least because it’s more obvious than what we’re doing now.</p>
<p>Hm, so you’d write sick people a sort of insurance “voucher.” Does this idea have any other good uses?</p>
<p>Please read this interview with Marcia Angell, past editor of the New England Journal: [Questions</a> for Dr. Marcia Angell - Prescriptions Blog - NYTimes.com](<a href=“http://prescriptions.blogs.nytimes.com/2009/08/12/questions-for-dr-marcia-angell/]Questions”>Questions for Dr. Marcia Angell - The New York Times)</p>
<p>I hear there is a chance democrats may move away from the public option…</p>
<p>Sorry for my lack of knowledge, but can you elaborate on the “public option”? And I read that article + some other thing that listed a whole bunch of benefits of a single-payer system, and I was wondering what would the negatives be?</p>
<p>Public option just means that people can buy their health insurance from a public insurance organization that is set up by the government, instead of always getting their insurance through a private insurance company. This insurance organization is funded by various means, including collecting money from companies which choose to pay governments to do this instead of buying health insurances for their employees from a private insurance company.</p>
<p>Negatives from the point of view of the private insurance companies: These private companies do not welcome such competition, as they worry that it may take away their existing customers. Also, correct or not, some people just do not believe that a government-run organization can ever be as efficient as the private companies, as they may think politicians may be as greedy/self-interest-centered as the greedy private insurance companies and their shareholders.</p>
<p>The immediate negative would be that the public option - depending on the implementation - might crowd out private insurance, due to the inherent advantages that the government would hold. The most important advantage would be that the the public option might be able to maintain a capital reserve base at a lower cost - and might not even need to maintain any capital reserves at all - by simply availing itself to the tax generating capacity of the US government proper. For example, Medicare will be insolvent soon according to current projections - and may arguably be insolvent already according to certain mark to market calculations - and would therefore be desperately attempting to secure a capital infusion to strengthen its balance sheet if it were a private insurance firm. But that’s precisely the key - it isn’t a private firm. It’s an arm of the Federal government and can therefore demand tax revenue to fulfill its coverage obligations as necessary. Future Medicare deficits - estimated to be in the tens of trillions - can therefore exist in the nether shadows as unfunded obligations which neither Medicare itself nor the Federal government at large needs to carry on its books, something that would be considered to be a major accounting scandal at a private insurance firm. </p>
<p>A public option may also not only change its coverage rules as necessary, but also change them on a retroactive basis. Due to its solvency problems, Medicare coverage in the future will almost certainly have to be made more stringent - with higher age requirements and, probably, means testing in order to access benefits. But because all American taxpayers are forced to pay for Medicare through FICA contributions, any changes to Medicare would be forced upon many of those taxpayers retroactively. Take a 40 year old man who has been working and therefore paying FICA since he was 18. If the cut-off age for Medicare is increased from 65 to 70 - which is likely to happen - that man has effectively lost 5 years of future coverage; coverage that he had ostensibly paid for. Nor would he be refunded any of the prior premiums he had paid for what is now clearly a less valuable insurance policy. A private insurer couldn’t easily modify its policies retroactively - they might try, but they would surely be sued. However, Medicare - and potentially the expanded public option - could have its policies retroactively modified at anytime in accordance with the passage of a future Federal law. </p>
<p>Finally, a public option might monopolize certain dimensions of the health market, either explicitly as a matter of law, or merely through its tremendous monopsony power, and therefore inhibit innovation within those dimensions. Obama made the interesting analogy between a public option and the US Postal Service, which in his opinion seemed to fare poorly against private shippers such as UPS and FedEx. However, the USPS enjoys the tremendous advantage of being enshrined by law as being the only organization in the country that can deliver shipments to our mailboxes, despite the fact that we pay for our mailboxes ourselves. That’s a remarkable advantage: FedEx and UPS, by law, are prohibited from delivering anything to the mailbox that you paid for yourself. Imagine how much more innovative shipping companies might be if they could. </p>
<p>However, none of that is to say that free markets and private insurers are perfect either, not least because the market for health insurance is deeply afflicted with problems of adverse selection and moral hazard that commonly cause the market to unravel. As BDM mentioned, the sickest people are the ones who desire the insurance the most, but they are also precisely who the insurance firms least want to cover. Hence, insurance firms inevitably will ‘innovate’ by finding new ways to exclude those with preexisting conditions, including retroactively canceling policies once you become sick, by finding some medical condition that you failed to report in the application firm that you submitted to obtain the policy (the practice known as ‘rescission’). That application form is often times highly technical in nature, including the scientific names of certain medical conditions that you are unlikely to recognize, and it is therefore likely that you will make some mistake which provides the insurance company the excuse it seeks to pull your policy - one insurance firm CEO himself admitted in a Congressional hearing that he did not understand some of the terminology used in his own firm’s application document. </p>
<p>The other problem of moral hazard is, as BDM mentioned, that those with insurance will then demand medical treatments far above what they might seek if they had to pay for the full costs of the treatment themselves, and thereby imposing costs on the insurance company (and by extension, the other policy holders). Insurance companies therefore have to ration, and that may inevitably mean denying coverage for procedures that might benefit the patient. </p>
<p>In short, there seems to be a much larger issue at play, which is what the proper role of government is, vs. the role of private markets. Single-payer systems, by definition, requires price setting for medical services, and the question then is whether such prices would be ‘appropriate’ (depending on one’s definition of ‘appropriate’). Too high of prices would obviously result in a taxpayer boondoggle, but too low prices would disincentivize medical innovation and the general willingness of people to work in the health care industry in the first place. Medical rationing is inevitable, for everybody has an infinite desire for better health, so would you rather have that rationing performed by private insurers or by the government? Adverse selection might theoretically be alleviated through mandated coverage and requirements for insurance firms to offer coverage through all comers, hence building a diversified risk pool - but that means that insurance firms can no longer innovate by finding new risk pools to cover (for example, an insurance firm that wanted to specialize by specializing in children’s care and hence covering only children would not be able to do so if a law mandated that it offer coverage to everybody). More importantly, it also removes an incentive for individuals to improve their own health and therefore shift to a lower risk pool. {I.e. why should the guy who never exercises, smokes 3 packs a day, drinks and uses hard drugs heavily, insists on riding motorcycles sans helmet, and has no regard for healthy eating be put into the same risk pool as - and therefore increase the costs for - everybody else?}</p>
<p>Haven’t read through all the posts up here but while scanning through these, I noticed some mention overpriced pharmaceuticals.</p>
<p>From an insider’s point of view, I can attest that it takes us 10-15 years to develop drugs, 95% of researched meds are rejected at various time-points within development (anywhere from Phase I through Phase III for either safety or efficacy reasons). Thus, we are generally left to recoup the expenses of failed research through one or two NCEs that are successfully submitted to FDA and eventually approved. I have seen chemical entitites that get approved with barely 10-15 years patent exclusivity in the market.</p>
<p>If the costs of pharmaceuticals are cut down severely, it won’t be long before my employer starts cutting down on new hires…so we in Pharma R&D will have to cause “synergies” with fewer PhDs, fewer MDs, fewer PharmDs, fewers Statisticians, and fewer MD/PhDs… ultimately, we will end up decelerating research efforts in novel therapies. </p>
<p>Let’s look at novel therapies. Novel Disease modifying Alzheimer’s therapies for example, if launched may end up costing more than existing therapies but what would the high risk population and families of patients prefer; same old palliative cholinesterase inhibitors that do not prevent the progression of underlying pathology of the disease or novel therapies that completely modify the disease course, alter the slopes of cognitive decline, delay the onset of disease, and add productive QALYs to patients’ and their families lives? </p>
<p>Who prefers loosing their cognition to save money? Is there a price tag one can place on one’s identity, one’s executive function?</p>
<p>I would like to see a comparison of the money pharmaceuticals spend on Research and Development with the money spent on pharmaceutical lobbying efforts and drug advertising.</p>
<p>That’s a good point. Regarding money spent on lobbying -I have absolutely no idea how to determine these costs. I think only the CEOs have access to this information in each company. Also, I am sure the amount spent will vary based on each company’s portfolio</p>
<p>Regarding DTC (direct to consumer advertising)- I do not think that these costs are completely unnecessary. Why you ask? Take the examples of ED, IBS, and cervical cancers etc</p>
<p>Used to be that 15 years ago, erectile dysfunction was a word never ever mentioned. There was a huge resistance and emotional barriers attached to even talking about erectile dysfunction. Does this mean that 15 years ago, there were no people suffering in their personal lives due to ED? Of course, not! But Pfizer was the first company to open the barriers on erectile dysfunction by advertising on ‘ED’. Furthermore, they got a familiar person, Bob Dole to participate in their Public Awareness campaign. Fast forward to where we are now, and the stigma of ED is gone in public. The public awareness campaign enabled and emboldened patients to discuss this issue with their physicians. It is not a tabboo any more. How does one calculate the quality in a patient’s life satisfaction? How do you put $$ amounts to being able to enjoy intimacy with your partners? How does one calculate costs of saved relationships, marriages, and maintaining the integrity of relationships? (disclaimer - I don’t work for Pfizer!)</p>
<p>Regarding IBS, by the way, this disorder, although experienced by many patients, did not even have any defined diagnostic criteria years ago. Gastroentrologists were aware but FDA did not have an approval path/‘category’ for this disorder. IBS again, was brought out in day light by DTC marketing (recall those ads with pretty women of varied ages showing off their midrib and navels?)</p>
<p>Gardisil is another example for cervical cancer prevention… </p>
<p>Urinary Incontinence is another issue older women used to feel resistant to talk to doctors about, therefore would suffer in silence. Now a days, with the cartooned humans made of pipes, urinary incontinence is becoming less of a tabboo in old generations of today. DTC can educate and save many lives. </p>
<p>MCI (mild cognitive impairment, prodromal to Alzheimer’s disease) is another example that companies are still trying to set/validate diagnostic and therapeutic criteria on…and FDA is another battle altogether. If MCI gets validated, then public campaigns will follow.</p>
<p>Re post #50: This is actually a false (or misleading) comparison.</p>
<p>Money spent on lobbying/advertising is designed to increase profit, true. But the way it increases profit is by bringing in more revenue than the cost of the advertising. High advertising budgets do not subtract dollars from R&D, they add dollars to R&D budgets.</p>
<p>In other words, it is not a “zero-sum” game.</p>
<p>Granted, this assumes that the advertising campaigns are not incompetently managed.</p>
<p>Some pesky realities of what happens when ‘everyone’ is covered by insurance. This might interest you docs and docs-to-be.</p>
<p>During a pre-dinner symposium wine and cheese hour at the ICAD in EU, I was joined by some Neurologists from Japan. Unaware of the healthcare reform that is happening in the US, they mentioned to me how they would love to practice in a country like US where only the sick seek doctor’s help. When I probed about their own practice in Japan, these Neurologists complained that they were spending 80% of their time counseling hypochondriacs or elderly healthy who visit the clinic to feel nurtured and only 20% of time on ‘real’ patients! They sounded pretty frustrated at their inability to devote sufficient time on interesting Neuro cases that deserved their time and attention.</p>
<p>So when Healthcare is given to everyone, the demand to see doctors will automatically go up whether or not there is a real need.</p>
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<p>Actually, I think that MoMofMine’s point was regarding the notion that pharmaceutical firms spend a surprisingly high percentage of their budgets on sales/marketing campaigns and less than might be assumed on R&D, in reference to Pharmagal’s posts. And while this may not imply a zero-sum game as such, it does also mean that the major pharma firms are more marketing machines than they are research skunkworks. There has been quite a bit of empirical literature that has detailed the paucity of truly new discoveries in the past decade by the major pharmaceutical firms, which, in order to replenish product pipelines, has necessitated the numerous acquisitions of and licensing alliances with small biotech firms where the true research innovation now seems to be taking place. Some industry observers have even speculated that the major pharma firms should simply spin off their R&D labs and outsource the work to outside parties and transforms themselves into pure marketing and distribution companies, for that is what their true core competency now seems to be.</p>
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<p>All of those examples may be arguments in favor of consumer education about specific diseases/conditions, but not necessarily about specific drugs. It may be useful for consumers to understand more about and reduce their personal stigma surrounding erectile dysfunction, but not necessarily to attach that condition to the Viagra brand name. Ideally, consumers would be provided with information not only about a particular condition, but also with independent comparative information about the various treatments - including generics if available - to remedy that condition. Now, obviously no firm is actually going to promote a competitor’s product, so the next best option may be to allow DTC that discusses conditions, but bans the mention of any brands, thereby allowing the prescribing doctor to decide which treatment is appropriate. {Note, we may also need stronger ethical rules regarding the relationship between pharma firms and doctors who are paid consulting ‘fees’ on the side.} </p>
<p>Let’s face it. Most regular people don’t understand the drug approval process. DTC marketing campaigns seek to attach specific drug brand names to specific conditions in the minds of consumers, who will then demand that their doctors prescribe those particular brands, even when other treatments may be more appropriate.</p>
<p>Consumer education without any information on Efficacy and Safety of the therapeutic approach spells only half the story to me.</p>
<p>As an educated consumer, I am not sure I would like to simply hear about the disease condition. I do pay attention to T1/2, Cmax, systemic exposures, dosing regimen, drug-drug interaction information, high risk populations, and contra-indications. These profiles can be significantly different for different drugs even within the same Mechanism of Action. It would be tough to do educational campaigns that are devoid in the above information.</p>
<p>I have plenty of friends who have no formal medical sci training but are very very educated about their drug options. You would be surprised how interested general public is.</p>
<p>You can provide all of that information also. The issue is whether you also then need to provide brand names, whether they be of specific drugs, or the companies who manufacture them. Again, which specific drug you are prescribed is something best determined by your prescribing doctor. </p>
<p>The fundamental problem is that many generic medications are often times the most effective, first-line treatment for a wide range of maladies. Beta blockers, thiazide diuretics, aspirin treatment, and similar generic treatments for heart conditions have been shown to be responsible for the 20% reduction of cardiovascular deaths in the US between 1980-2000 for a cost of mere pennies per day (Garber & Skinner 2008). The problem, obviously, is that no single firm can heavily market these treatments. No firm can afford it, because the benefits would accrue to all generic manufacturers of that medication, not just the one providing the marketing. Hence, only those medications that are actually protected by patents have the proper incentives in place for firms to market them, but what that means is that customers subject to DTC marketing will perceive only a deeply skewed choice set of all of the available medications out there. Maybe a dirt-cheap generic thiazide diuretic would be the best treatment for your hypertension than Diovan or any of the branded and patent-protected medications, but you as a customer probably wouldn’t know that because Diovan is being actively promoted and the generic isn’t. Heck, you may not even know that a generic treatment even exists, because of the marketing campaign asymmetry. </p>
<p>Let’s keep in mind the power of the marketing industry to manipulate customers into making bad choices. One only needs to consider the cunning ‘brilliance’ of the marketing of the tobacco industry in successfully promoting products that are harmful.</p>