Insight, analysis & opinion from Joe Paduda


The pharmacy-payer faceoff

The war between payers and pharmacies just got nastier. In a pre-emptive move, GM anounced that Walgreen’s would no longer be allowed to fill prescriptions for its insureds. It appears that GM made this move after Walgreens got into a dispute with Toyota over Toyota’s efforts to increase the use of a mail-order pharmacy by its employees. (Mail order pharmacies are generally significantly less expensive than retail. Retail pharmacies want people to come into their stores, buy drugs, and pick up other goods on the way to check out, thus they really do not like mail order) As a result of the Toyota-Walgreen’s dispute, Walgreen’s cut Toyota out.
Perhaps Walgreens hoped Toyota’s employees would rise up in arms and demand Toyota include the chain, or perhaps Walgreen’s just could not afford to participate on Toyota’s terms. Regardless, GM decided to pre-empt any similar move by Walgreen’s towards the GM employee benefit plan. As one of the largest private payers, GM represents significant dollars for many health care providers.
According to Reuters, “GM provides health care coverage for 1.1 million workers, retirees and their families in the United States. Last year, GM spent $5.2 billion on health care in the United States, including $1.5 billion on prescription drugs.”
GM’s move is a clear indication of how seriously large employers take this issue. And with prescription drug costs leading the inflationary charge, don’t expect them to back down.


Medicare drug costs – trigger for serious reform?

The announcement last week that the Medicare Drug benefit will cost $724 billion over ten years, instead of the Administration’s original forecast of $400 billion, may be the long-awaited trigger for fundamental reform. Perhaps this is wishful thinking, perhaps not.
Three recent reports from prominent media outlets present rather compeling arguments that the sticker shock may well cause Congress to rethink its approach to prescription drugs.
In an article labeling the issue “sticker shock and awe, the Christian Science Monitor reports that the price tag is “focusing the minds of many lawmakers” on confronting the rising cost of drugs in Medicare.
The San Francisco Chronicle quotes a Heritage Foundation spokesman who claims the drug cost issue, along with the seemingly unstoppable rise in other entitlement programs will “cast a shadow over the entire conservative domestic agenda.”
National Public Radio on Thursday featured a segment with Dan Schorr commenting on Medicare costs and the potential fallout from same.
Among the suggested fixes to the problem are the reimportation of drugs from Canada (a non-answer, as discussed in previous postings here) and the negotiation of prices by the government with drug companies. The former is no answer at all, but the latter may well offer some hope. Almost every other country negotiates directly with pharma manufacturers, and receives much better pricing than does Medicare. In addition, the US Veteran’s Administration negotiates drug prices directly and has done a very effective job in containing prescription drug costs.
While this may offer scant hope for commercial payers, it is important to recall that many physician, hospital, and ancillary reimbursement arrangements are based on Medicare rates (Workers’ comp fee schedules, DRGs, RBRVS, etc.). Therefore, it is possible that any Federal pricing standard would replace the much-maligned Average Wholesale Price as the basis for pricing drugs.
And that would be great news.


Medicare reform timing

Pres. Bush stated Wednesday that Medicare reform will be addressed after Social Security reform had been completed. According to the NYTimes, Bush’s statements were in response to the recent disclosure that the Medicare prescription drug program cost estimates are now in excess of $700 billion for the program’s first ten years, “with costs reaching $100 billion annually by 2015.”
By way of comparison, the Administration’s initial estimate of program costs for the first eight years was $400 billion, a number that was, according to reports, significantly less than that predicted by the Medicare Actuary. Readers may recall the mini-scandal that erupted when the Actuary disclosed that he had been threatened with dismissal if he went public with the discrepancy (the Actuary’s estimate was $534 over the same period.)
According to California HealthLine,
“lawmakers listed several possible changes to the present Medicare program. The potential measures include capping spending for the benefit; cutting payments for wealthy beneficiaries; allowing the government to negotiate bulk drug prices with pharmaceutical firms; banning Medicare coverage of “lifestyle drugs,” such as Viagra; and legalizing the importation of prescription drugs from Canada and other countries. ”
It is encouraging that our elected officials are becoming more realistic about the costs of this program, and may consider allowing the Federal government to negotiate with drug manufacturers. However, if the Feds are succesful in their efforts, there could be a massive cost-shift to private payers as drug companies seek to recoup lost income.
We’ll be watching this very closely.


What happened to First Health?

Over the last year or so, there has been quite a bit of speculation, especially in the workers comp arena, about First Health’s future. Consulting clients in particular were unsure of the future direction of the company, as it seemed to have lost its way, embarking on diverse acquisitions, gaining a (well-deserved) reputation for arrogance and heavy-handedness in client relations, and in the process losing credibility both among customers and in the equity markets. Now that First Health is part of Coventry Health Care, a little historical perspective may help shed some light on what went wrong.
The first question is – did anything go wrong? Past management would likely argue that all was according to plan. To refute that (potential) argument, one need look only at the stock price, which declined significantly over the last couple years. I doubt that was “part of the plan”.
One can categorize most of FH’s problems as due to the Innovator’s Dilemma, Clayton Christensen’s terrifically insightful explanation of what happens to companies that fight like hell to hold onto and improve products and services whose time has past. FH was very successful in building and growing a WC network business, one that came to dominate the WC industry and by so doing generated a disproportionate share of the company’s profits. As the market matured, FH did what most companies in maturing markets d – they grew by acquisition. CCN, HealthNet employer services, and Priority Services were all acquired to consolidate share, freeze out competitors, and solidify customer relations. What FH failed to do, and what caused them pain and is likely to continue to afflict Coventry, is innovate.

Continue reading What happened to First Health?


Innovation in cost control?

Weiss Ratings (yes, I’m a big fan) released an analysis of recent changes to employees’ health plans, and there is a notable lack of innovation.
According to Weiss, “Higher prescription drug co-pays were cited by 34.3 percent of consumers polled, while 23.8 percent indicated higher co-pays for physician visits.” In addition, in perhaps the most drastic move to control health insuranc costs, 11.3% lost their health insurance altogether.
This last statistic may be inflated due to the nature of the study, so I wouldn’t generalize the result to a larger population. However, it is important to note the large percentage of respondents who saw an increase in costs shifted to them from the health plan. Call it “consumerism”, “accountability”, “burden sharing” or what you will, it is clear that employers are fast running out of ideas.


AIG hammers execs

While this is somewhat off-topic, it is nonetheless quite important…
(NYTimes, free registration required) AIG revealed that it paid most of the $126 million penalty assessed by the Feds for wrongdoing out of a bonus pool for AIG Financial Products executives. The decision affected some 50-60 executives, most of whom usually received the majority of their compensation from the annual bonus. Many found their checks were missing a few zeros, and a few received no bonus at all.
This does AIG credit. The penalty was assessed by federal investigators for AIG’s sale of financial instruments whose only purpose was to smooth out earnings for public companies, thereby hiding the true nature of their results. By focusing his anger, and retribution on the individuals responsible for the malfeasance, Hank Greenberg (79), , AIG’s long-serving and highly successful CEO is sending an unmistakable message.
However, remember that the same execs who are paying the fine likely received bonuses in the past based on their financial successes, which undoubtedly included the sale of the financial instruments that led to the investigation. Here’s hoping that the execs affected were the only ones involved, and the wrongdoing did not go any further.
Kudos to AIG and Mr. Greenberg for this move.


Health care costs are 15.5% of GDP

BU’s School of Public Health just released a study indicating US health care costs will be $1.9 trillion in 2005, an increase of $621 billion over 2000. The study also reported that health care is a major driver in GDP growth, with this sector of the economy responsible for a disproportionally high amount (24%) of the growth in GDP.
Two specific items deserve attention, one related to what we get for what we pay, and the other concerning what drives medical inflation.
“The report found that per capita health care spending in the United States on average is double that of Canada, France, Germany, Italy and Britain, which provide universal health coverage to residents.
The report stated, “Current U.S. spending should be adequate to cover all Americans.”
The obvious question remains, what is driving these astronomical increases? While that question has many answers, according to the LA Times one of the more provocative is “doctors receive or determine how to spend 87% of health care spending, with tests and services ordered by doctors comprising 66% of health care spending and doctors’ fees accounting for 21%. ”
When one strips away all the details and nuance of technology, pharma, hospital increases, nursing shortages, and end-of-life care, it always comes down to the treating physician.

The treating doc is the key to delivering care and managing cost.


A start to a partial solution to drug costs?

DR. R Centor’s DB’s Medical Rants weblog has a great piece about an MD’s decision to stop meeting with drug reps and accepting gifts from same. The piece is short and well worth the read.
Timing is everything; I am just finishing the second annual survey of prescription drug management in WC. One of the notable changes from last year to this is the recognition by WC payers of the key role of the treating MD in prescription drug cost. There is what can only be characterized as wide-spread recognition on the part of large WC insurers that the most important single stakeholder in this is the treating physician.
Kudos to the Cedar Rapids docs for showing the way.


HMO profits up

Weiss Ratings reported very strong earnings from HMOs in the first half of 2004. Weiss, perhaps the most insightful of the rating agencies, noted that over half of the HMOs studied were financially strong, and the industry generated $5.8 billion in profits during the first six months of 2004.
The strong results were felt even among the less-well-off HMOs, as the number of plans considered “weak” financially dropped from 40% in 1998 to 17%.
Weiss did not provide any insights into the reason for the financial improvement, but strong premium growth generated by higher rates, better risk selection and exiting of unprofitable markets, and industry consolidation were likely contributing factors.
Interestingly, the financial improvement occured at a time when health care costs were continuing to increase at rates well above those for overall inflation. Some may note the contradiction here – the companies tasked with managing health care costs were generating big profits while failing to accomplish their appointed task.


A miracle on Capitol Hill

Just when we thought the holiday season was over, the CMS Actuaries gave their biggest gift of the year to the White House, Senate, and House – an accounting change that reduced Medicaid expenses by $73 billion over the next ten years.
To be fair, and who doesn’t want to be fair when dealing with the Feds, the change was triggered when CMS determined that inflation in Medicaid for 2004 was 9%, not the 11% originally forecast. But let’s focus on the implications.
Recall that new HHS Sec. Leavitt was seeking to reduce Medicaid by some $60 billion by eliminating “accounting gimmicks” that states were using to get as much Federal money as possible to fund Medicaid (which is, by the way, a funding requirement placed on the states by the Feds…). The new numbers may make it a little tougher for the Administration to push through drastic changes to Medicaid.
CMS is downplaying the change, noting that “the revision would not affect administration plans to reform Medicaid in the fiscal year 2006 budget proposal that President Bush is set to release on Monday.”
So, any euphoria over the new found savings may well be short-lived. If nothing else, it will make for entertaining Hill-watching, as Governors, battling low state revenues and rapidly rising Medicaid costs, seek to maintain Federal funding. According to California HealthLine reporting on Congressional Quarterly’s story,
“Virginia Gov. Mark Warner (D), chair of NGA, said, “The cuts cause grave concern because the states are still reeling from the budget woes of the last five to six years. To have a major cost shift that simply passes costs from the federal government to the states will really slow the recovery that most states have started to experience” (Adams, CQ Weekly, 2/7).
And it’s not just Democrats…
“Sen. George Voinovich (R-Ohio), a former mayor of Cleveland, is leading a coalition of Republican former governors and local officials in Congress who are prepared to contest Bush’s Medicaid proposals. “We’re going to look at what he proposes. But we are not going to just slash funding for states. We’re not going to rip up the safety net,” Voinovich said. ”

Joe Paduda is the principal of Health Strategy Associates



A national consulting firm specializing in managed care for workers’ compensation, group health and auto, and health care cost containment. We serve insurers, employers and health care providers.



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