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Follow the money: Why we are getting THIS health care reform now

November 17, 2009

We don’t have a health system in the United States. We have a patchwork of competing commercial interests and government programs. Instead of their interests being aligned to the overall goal of improving the health of the population in general by promoting health, preventing and treating illness, each component is working for its own goals. Their incentives are misaligned with the desired outcome. Their private benefits come at the expense of social costs.

Because of this misalignment, each of the main components of our health system – the health insurance industry, the pharmaceutical industry, the health care providers, and the government – have contributed to the skyrocketing costs and lack of access that have been identified in the mainstream as the big problems with health care. In order to understand the current heath care reform legislation we have to understand how each of the commercial entities make their profits and what they really need to get out of reform to insure that their profits grow. In other words, we have to follow the money.

The Health Insurance Industry

Health insurance companies make money in 2 main ways. They take premium payments from their enrollees an put them in a pool of money from which they pay their enrollees’ medical bills. When they pay out less for medical bills, marketing and administration than they take in in premiums, they make money. They also profit by investing the pool of money in the stock market and other investments. Historically, insurance companies make about 3-5% on premium revenue. That’s a relatively low rate of return compared to other industries.

Insurance companies have a fundamental problem that threatens their future profits. Health care costs, and the premiums they must charge, have risen so much that fewer individuals and business can afford to buy their products. Enrollment in commercial insurance has gone down significantly over the past 25 years. Kaiser Permanente estimates that the current high unemployment rate has lead to an additional 12.1 million people losing coverage through the workplace since 2007.
Percent of people under 65 with private insurance

Companies now have to buy up other companies to get more customers. Higher costs mean more income for insurance companies in that the more money that flows through them the more profits they make, but eventually the high costs will drive away enough customers that their revenues will stop increasing or decline.

Insurance companies try to reduce costs by negotiating for lower rates from doctors and hospitals. Their success depends on how much competition they have from other companies in the same local market. Only the dominant insurer in a region has a chance of getting lower costs. This is why insurance company competition doesn’t necessarily mean lower costs for consumers.

The Pharmaceutical Industry

Pharmaceutical companies (Pharma) make money selling drugs. Most profits come from brand name drugs that are on patent. Once the patent expires 12 years after approval for testing, any company can make a generic version of the same drug and sell it for a lower price. Usually drugs get about 5 years of sales while under patent. During that time the company charges as much as it possibly can. Pharma has been an extremely profitable industry, but it also has some problems. One is that we now have pretty good drugs for most of the common medical problems. The other problem is known in the industry as the patent cliff.

“The specter of possible healthcare reforms and the fact that drugs representing more than $74 billion in sales will lose patent protection by 2012 are also driving a new trend of later-stage mergers.”
Pharmaceutical Companies’ Patent Cliff Could Bolster Mergers and Acquisitions

“The pharmaceutical industry’s ten biggest players face the expiry of patents on brands that generate annual revenues of more than $130bn within the next five years.”
The Evolving Pharma M & A Landscape: Emerging trends and predicted post-blockbuster targets

So Pharma needs some kind of new medicine to patent that treats less common diseases to keep its profits growing.

Health Care Providers

Most clinicians didn’t get into patient care mainly for profits, but to take care of people. However there is a sizeable minority with a more entrepreneurial spirit who become owners of practices, hospitals, labs and diagnostic machines. By ordering more tests and procedures than are really needed, self-referring, and charging more, these docs profit immensely and play a major role in increased health care costs. As Atul Gawande says in his widely read article in the New Yorker The Cost Conundrum:

“…the damning question we have to ask is whether the doctor is set up to meet the needs of the patient, first and foremost, or to maximize revenue.
There is no insurance system that will make the two aims match perfectly. But having a system that does so much to misalign them has proved disastrous.”

But doctors and hospitals have a problem, too. The government, the people, and even the insurance companies want to decrease the cost of health care. If that happens, the docs and hospitals will make less because they are the final pool in the waterfall of money that starts in the pockets of people, who give it to the government or the insurance companies, who in turn use the money to pay for drugs and hospital and doctor services. If there is less money being spent, health care providers and pharma will lose out.

The Government

The federal government is the largest single funder of health care in the country through Medicare, Medicaid and the Veteran’s Administration. The insurance and pharmaceutical companies have already discovered this as one of the solutions to their problems. The elderly and poor population is growing, so these corporations have gotten the government  to pay them through Medicaid Managed Care and Medicare Advantage, instead of paying doctors, hospitals, and pharmacies directly. One would think that the government would have an interest in improving the health of the people and in not wasting their money by giving it to middleman insurance companies that provide  no actual health care products or services. However, the government went along with this because it is dominated by people who believe that government shouldn’t regulate business or provide services because the free market does everything best. Both Republicans and Democrats believe this, but Republicans believe it more. Republicans generally believe that the government should be small and not fund or regulate most things that the private sector does. Consequently, they are against most taxes.

How they did it

So, looking at the options for the future – a government with money to spend, or one without – the health care players could see that the waterfall of money would dry up if the Republicans stayed in power. Unlike previous elections, they donated mostly to Democrats and to the representatives who would have the most influence over the health care reform everyone wanted.

“…it is remarkable that the health sector has reversed a long-standing pattern of favoring Republican candidates, by contributing substantially more money to Democrats ($17.7 million) than to Republicans ($11.2 million). This trend also holds when the presidential and congressional elections are considered together…”

Election 2008 – Campaign Contributions, Lobbying, and the U.S. Health Sector – An Update, Robert Steinbrook, M.D, NEJM, Volume 359:1313-1315, September 25, 2008, Number 13

After helping the Democrats win, the corporate health interests got busy lobbying for health care reform that would solve their problems. It is a falsehood promoted by liberal groups that these industries oppose health care reform. They oppose some reforms, like single payer, or a robust public option that would undermine their profits. However, reforms that increase access to insurance can only help their bottom line. Insurance companies would rather not be subjected to the new regulations on individual market plans like guaranteed issue and no lifetime caps, but they already live by these rules in most of the plans they sell – the ones people get through their employers. And there had to be something in the legislation that would be promoted to ordinary people as reform.

The health care industries sent 6 lobbyists for every representative and spent millions in an effort to ensure that health care reform would benefit them. Contributions focused on key committee members who would be actually drafting the legislation. They launched an incredibly slick PR campaign that even tricked many progressives.

The Democrats worked alongside with a campaign that divided progressives, kept single payer (Medicare for All) out of consideration, made people think the health care reform fight was about a red herring called the public option, and got people ready to accept whatever they ended up passing.

We watched as Obama went against his campaign plan and embraced a mandate to buy insurance. Obama and Democrats stopped talking about health care reform and started talking about insurance reform. We watched as the goals of reform shrank from ensuring access to health care for everyone and reducing costs to providing insurance for everyone and slowing the growth of costs.

It will provide more security and stability to those who have health insurance. It will provide insurance for those who don’t.  And it will slow the growth of health care costs for our families, our businesses, and our government.
Barack Obama’s address on health care to the Joint Session of Congress, 9/9/09.

Then congress started coming out with bills that solved the industries’ problems.


Insurance companies will get millions of new customers, many of them subsidized by the government, and help with marketing via the Insurance Exchange. If there is a public option in the final bill it will be so puny  that it will pose no real threat. The newly insured will also be able to buy drugs. Pharma gets new data exclusivity regulations for their new class of drugs known as biologics that will protect them from competition for 12 years with potential for more. This particular amendment was courtesy of Anna Eshoo, D-CA, who received more than $712,000 in contributions from the pharmaceutical industry. On top of that, the so-called “donut hole” in Medicare Advantage prescription drug coverage will be closed, helping seniors to buy more drugs.

Entrepreneurial doctors and hospitals, especially the prestigious ones with negotiating power, will have a continued waterfall of money, because there is nothing that reduces health care costs in the bills now pending. They know they’ll make more money because Massachusetts, a state that enacted a similar system to the one in the federal legislation, has the most expensive health care in the country, even though all of its insurers are  non-profit.

House Democrats were so eager to solve the health care industries’ problems, they were willing to sell out the women of America and end insurance funding for abortion.

The reform we are getting in no way aligns the interests of the health care players with the health of the nation. (Yet Health Care for America Now calls the House bill “the embodiment of everything we’ve worked for.”) We will continue to be completely out of step with international health standards. Almost everywhere else it is accepted that government should be the main funder and overseer of health systems, that comprehensive primary health care is the basis of the health system, and that profits in all sectors of the health system must be limited to keep costs under control. Without aligned incentives we can not as a nation implement, for example, a national AIDS strategy, or address the divide between public health and clinical practice. This isn’t a pie-in-the-sky dream that’s never been done before, but standard operating procedure in almost every other country on earth.

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