Cutting Health Care Costs

Thursday, August 21, 2006

Valuing Families

Cutting Health Care Costs: Ending Fraud, Profiteering and the Costs of Fragmented Systems

When people hear about drug companies buying up data on which doctors are prescribing prescription drugs, as we discussed in Thursday's Dispatch, they worry about their medical privacy. But when drug companies use that data to market unneeded drugs, consumers should be even more worried about how that and other shady dealings in the medical field are driving up health costs. When New Hampshire became the first state to ban "data mining" of prescription drug records, Representative Cindy Rosenwald (D-Nashua) saw the bill as a chance to "curb the ever-increasing cost of prescription drugs.”?

Prescription drugs are just one area in our health care system where profiteering and sometimes outright fraud costs health care consumers and taxpayers hundreds of billions of dollars. The result is that the United States spends fifty percent more of our annual income on health care than the average European country (15% of GDP in the US vs. 10% of GDP in Europe) and yet health outcomes in the United States place it thirtieth in the world, behind Singapore, Chile, Costa Rica, Japan, and every Western European nation.

As this Dispatch will outline, states are increasingly taking action to curb profiteering in our health care system, rein in prescription drug costs, stop self-dealing and fraud by doctors and hospitals, and create greater accountability for health care results to drive down costs. And here's a bonus: evidence suggests that if those cost savings are put towards creating a more universal health coverage, states can leverage a more integrated health care system to create even more cost savings.

Valuing Families

Reining in Prescription Drug Costs

The last few years have seen a cascade of books and reports detailing the waste and obscene profits of the prescription drug industry.  Even as they rake in large profits, most of their spending goes to marketing, advertising, and administration-- rather than research and development of new drugs as their public relations claims.

With so much fat to cut, states have been finding a range of tools to save money for both consumers and taxpayers.  Building on this success, lawmakers from a number of states have formed the National Legislative Association on Prescription Drug Prices to promote best practices in cutting drug costs, including:

Preferred Drug Lists & Encouraging Generic Drugs:  Using the latest clinical evidence, new Preferred Drug List (PDL) laws have helped encourage doctors to prescribe lower-cost and often more effective drugs for Medicaid patients -- and created savings of up to 53% in some categories of drugs.

Drug Price and Marketing Disclosure: To reduce fraud and better help both Medicaid regulators and consumers negotiate better prices, a number of state laws require companies to disclose the wholesale prices of their drugs and detail the marketing tactics and gifts they give to doctors they may compromise the integrity of the prescribing process.

Bulk Purchasing and Importation: By negotiating bulk prices and working together through multistate purchasing pools, states have cut drug costs anywhere from 25-50%, creating savings for both taxpayers and other health consumers allowed to buy drugs through discount cards. If states were given clear authority to import drugs from Canada or other countries, where prescription drugs are even cheaper, the costs savings would be even more significant.

Pharmacy Benefit Manager (PBM) Regulation: To cut down on PBM "middle men" conflicts of interest, a number of states have required PBM companies to disclose any deals with particular drug companies, pass on such special pricing deals to health plans, and create an ethical fiduciary duty by PBMs to serve the interests of the health plans which hire them, not pad their own pockets at the expense of their clients.

More Resources

Valuing Families

Eliminating Fraud and Doctor Conflicts of Interests

States are also stepping up to root out fraud and self-dealing by doctors and hospitals:

Creating State False Claims Acts:  New rules passed as part of the 2005 Deficit Reduction Act allows state prosecutors to recover part of the penalties assessed under the Federal Claims Act, the federal law that targets health providers which submit fraudulent medical reimbursement claims with tough penalties and triple damages.  Since $15 billion was recovered for the federal government between 1987 through 2005,  joining the states that have adopted state False Claims Act not only will help cut fraud costs but also raise new revenues.

Stopping Conflicts of Interests by Doctors: While both states and the federal government (through the so-called "Stark Laws") seek to prohibit doctors from referring Medicaid patients to facilities where they have a financial relationship, many of the laws need to be toughened to deal with emerging scams.  For example, a number of investigations have found that many medical imaging companies, in order to increase often unnecessary referrals, allow doctors to pocket the difference between the MRI fee and the higher reimbursement amount. Since the total spent in the U.S. on imaging services has reached $100 billion -- a $20 billion increase in two years -- ending the financial bribes that encourage overuse of MRI scans could yield significant savings.

Restricting Limited Service Hospitals: Referrals by doctors of Medicaid and Medicare patients to hospitals they own is generally prohibited under the law, but states are beginning to take steps, such as California SB 1907, to ban such "self-referrals" for private sector patients as well, who are increasingly being diverted to so-called "limited-service hospitals" owned by doctor-specialists.  According to recent studies, the elimination of such self-referrals lowers overall health costs for third party insurers, by preventing unneeded procedures while also preventing doctors from using inside knowledge to "cream skim" the most profitable patients.

More Resources


Accountability and Efficiency in Medical Services

In a system where profits, not patient health, is the top priority of many health care providers, states are beginning to develop "pay for performance" incentives and promoting other innovations to hold providers more broadly accountable. 

The federal Medicare program has introduced its own pay for performance experiments to promote financial incentives for providers based on quality and health care results.  State Medicaid systems are also using a range of tools to reward quality providers:

  • New York pays financial incentives to managed care providers who deliver good quality results.
  • California assigns additional patients to providers who perform well on quality measures.
  • A number of states are publicly reporting health plan performances to spur better performance. 

Initial studies indicate that such programs provide significantly better health care results.   States are also using such measures to tackle the racial and ethnic disparities in health care outcomes that are so prevalent in our health care system.  For example, Massachusetts' comprehensive health law enacted this year included hundreds of millions of dollars in pay-for-performance system with requirements that hospitals and doctors demonstrate reductions in such racial disparities in treatment as a condition of receiving the financial incentives.

Massachusetts also is following the trend of many states in trying to promote better use of technology in a medical system burdened with too much literal paperwork that prevents easy sharing of medical records or easy evaluation of medical data.  A 2005 RAND study estimated that full implementation of so-called Health Information Technology (HIT) could save $77 billion in costs annually across the country through better coordination, less time spent on administration and better drug utilization.

Unfortunately, as the RAND report notes, there is "no market pressure to develop HIT systems" between all the fragmented parts of our health care system -- one reason a strong government role is no needed.

More Resources


Cost Savings from an Integrated Health Care System

That fragmentation of the health care system lies at the root of much of the waste and fraud in our health care system.   Each player tries to pump up profits and often waste through excessive billing of third parties. Each party avoids taking responsibility by shifting the increased costs onto government or other third party providers. Short-term profiteering means long term investments in preventive care or technology gets shortchanged.

A recent Business Week profile (read the whole article at the link) of the Veterans Administration health system emphasized that an integrated health care system like the VA can accomplish savings that the rest of the balkanized for-profit health insurance system cannot.  

After reforms in the 1990s, the 154 hospitals and 875 clinics run by the VA now rank as best-in-class on health quality, on measures ranging from quality of chronic care to percentage of members receiving flu shots to having a prescription accuracy rate of 99.997% (compared to a 3% to 8% inaccuracy rate more generally).  According to research by the University of Michigan, the VA now outranks private-sector hospitals in patient satisfaction.

And the VA delivers this quality at a cost of $5000 per patient versus a national average of $6,300.

How does it achieve these savings and quality?  According to Business Week:

  • Not having to rely on piecemeal insurance payments means the VA can finance large-scale improvements such as the electronic medical-records system, up and running in all of its facilities since 2000-- compared to just 20% of civilian hospitals with computerized their patient records. When hospitals were evacuated from New Orleans during Hurricane Katrina, the VA's patients were the only ones whose medical records could be accessed immediately anywhere in the country.
  • Because the VA treats patients throughout their lives, it can invest in prevention and primary care, knowing it will reap the benefits of lower long-term costs. Because the government pays the bills, the VA doesn't have to waste time or money on claims-related paperwork.
  • Unlike Medicare, the VA is allowed to negotiate prices with drug companies and other suppliers, and it uses that power aggressively. The consumer group Families USA estimates that Medicare Part D enrollees, on average, pay 46% more than the VA for the same drugs.
  • And because its doctors are salaried employees, the VA can implement systemwide changes without having to persuade outside doctors to go along (and without doctors having a financial incentive to undermine reforms by self-referrals or other profiteering).
  • The VA uses the data gathered in its computers to pinpoint problem areas, such as medication errors. The network also allows it to track how closely the medical staff is following evidence-based treatment and monitor deficiencies.

States can and will continue to pursue piece-meal reforms, but as they seek to achieve more universal coverage, as we discussed in a recent Dispatch, they can take lessons from the VA and begin ending the fragmentation of health care systems in favor or encouraging more integrated and publicly-accountable health care systems.

States may not achieve the level of integration of a completely publicly-run system like the Veterans Administration, but by simplifying and integrating health plan options across employers and the public sector, states can create more of the accountability and cost savings that in turn can help finance those broader health coverage goals.

More Resources

Reining in the Drug Industry

National Legislative Association on Prescription Drug Prices
NCSL Pharmaceuticals Resources
Families USA, Prescription Drugs: The Industry and Drug Pricing- list of reports detailing abuses by the drug industry., list of state and local reimportation campaigns
Prescription Policy Choices, State Regulation of Excessive Drug Prices -- analysis of legal options for states seeking to control excessive drug prices.

Fraud and Conflicts of Interest

Taxpayers Against Fraud, Model False Claims Act
NCSL Incentivising State False Claims Acts
California SB 1907 -- law that banned "self-referrals" by doctors to providers where they have a financial relationship
American Hospital Association, Self-referral to limited-service hospitals:Bad for America’s health care system!- series of facts sheets on problems due to the rise of limited-service hospitals.
Effects of Physician-Owned Limited-Service Hospitals- report by Jean M. Mitchell, professor at the Georgetown Public Policy Institute, detailing the increased health care costs of Limited Service Hospitals.

Accountability and Efficiency in Medical Services

Commonwealth Fund, Quality Matters- Monthly Updates
Center for Health Care Strategies Inc, Are Incentives Effective in Improving the Performance of Managed Care Plans?
RAND, Health Information Technology: Can HIT Lower Costs and Improve Quality? (2005)

Cost Savings from an Integrated Health Care System

Business Week, The Best Medical Care In The U.S- How Veterans Affairs transformed itself -- and what it means for the rest of us
Physicians for a National Health Program, Single Payer System Cost? and How Single Payer Improves Quality
Health Care for All California, Summary of Two Studies on Cost Savings from Universal Coverage

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Eye on the Right

The pharmaceutical industry spends a lot of money on marketing their products to consumers. They've also been known to devote cash to keeping politicians happy. According to a report from the Institute on Money in State Politics, the drug industry dedicated over $13 million between 1998 and 2002 on state-level candidates. State lobbying totals for PhRMA, the drug industry trade association, hit $50 million in the organization's 2004 budget. The industry clearly has money to burn, even as Americans continue to get raked over the coals by drug prices.

Outrages of the Week

In this week's Outrages, a major corporation encourages their low-income employees to go dumpster diving, a network of school privatization advocates claim to speak on behalf of public school teachers, and a rightwinger claims to have gathered roughly a signature a minute 24/7 for some truly awful ballot measures in Montana. All that and some corruption in Texas in this week's Outrages.

Upcoming Events

Upcoming Partner Events Around the Country

Tuesday, August 22 -- Americans for Health Care, a project of the Service Employees International Union, is organizing Chalk It Up, a National Day of Health Care Action. Using chalk as a creative unifying theme, Americans for Health Care is hosting rallies, house parties, and public events across the nation. To find a local event, or create your own, go to
-- Manchester, New Hampshire ”“ The Center for American Progress Action Fund is hosting a candidate forum on health care reform for United States House of Representative candidates in the New Hampshire 1st Congressional District. 6:00 PM | Location TBA Check New Hampshire for Health Care for more info.

Thursday, August 31 -- If It's Broke, Fix It: Health Care Providers and Health Reform -- This event hosted by the Center for American Progress Action Fund will explore the challenges the current health care system poses for health professionals, patients and policymakers, and how doctors, nurses, and other health care professionals can use their unique insight and real-life experiences to steer the nation towards a solution. Featured Speaker: Senator Tom Daschle, Distinguished Senior Fellow, Center for American Progress. 5:00 PM-6:00 PM | HealthSpace Cleveland | 8911 Euclid Avenue | Cleveland, OH 44106

Jobs & Internships

Progressive States' policy department is hiring for new policy positions and is also looking for interns. For details, visit the Jobs & Internships Page.


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Matt Singer
Editor, Stateside Dispatch


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