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DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: derekb.lowe@gmail.com Twitter: Dereklowe

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February 17, 2011

Health Care Reform and the Drug Industry: How Goes It?

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Posted by Derek

We haven't had enough controversy and arguing around here this week, have we? Let's talk politics for the morning, then. Here's a piece from a former VP for public affairs at Pfizer, arguing that PhRMA got thoroughly snookered during the health care reform bill. He's looking over the current budget proposal:

For biotech and pharmaceutical companies, the president’s budget repudiates one of the most important benefits of their “deal” with the White House: the ability to market biotech drugs without generic competition for twelve years. The president would reduce that period to seven years, precisely the position of the generics industry and a position that the pharmaceutical industry had fought aggressively before it decided to make a deal with the president.

I worried about this sort of thing at the time, in the last post in which I had the nerve to bring up this issue. (In fact, if you go back and read some of the dissenting comments to that post, the twelve-year exclusivity provision was listed as one of the main reasons the bill was a good idea for the industry). Even I didn't think my last paragraph would start coming true quite this quickly, though. (I'll note in passing that my worries about the "doc fix" were justified, too). And yes, it's true that the President's budget proposal is a political football, put onto this earth to be kicked around by all parties, and that nothing in it will necessarily turn into reality. But still - isn't that a rather short time to be about-facing on this provision? Less than a year?

There's an alternate explanation: that the twelve-year provision was never really in there at all. We just thought it was! No, that wasn't marketing exclusivity at all, but data exclusivity. Or not - was it a mix of the two? What sort of mix? All sorts of people are writing to the FDA these days, telling them what they think the law actually means. Not that the agency is legally bound to listen to a word of it.

Even without any backtracking on exclusivity, the article maintains that health care reform was a loser for the drug industry. The author goes on on to detail the various other costs of the bill as it was passed, and then gets to the biggest structural problem:

While the healthy part of the pharmaceutical market will be pounded, the government-run segment of the market, Medicaid, will be expanded by 16 million patients. Medicaid has the worst pricing structure and the worst track record in paying for innovations of any sector in the United States market. Like government health-care systems around the world, Medicaid must be dragged to pay for medical advances. Unlike employers and seniors in Part D, Medicaid patients cannot vote with their feet if their health plan does not provide the new medicines they want. The incentives in Medicaid all run against paying for pharmaceutical innovations.

So, Obamacare significantly expands the worst sectors of the pharmaceutical market while degrading the best.

Well, fine, you may say, this are quotes from an opinion piece at National Review, and what else would you expect but that they're opposed to the bill over there? But these issues would be worth thinking about even if they were squawked out by flocks of crows. I really do worry that the drug industry made a serious mistake by agreeing to the health care reform bill - not only agreeing to it, mind you, but committing large amounts of money to beating the drum for it and seeing that it got passed. And that means that PhRMA made a serious mistake by putting Billy Tauzin in charge of that effort. Perhaps a backslapping deal-maker wasn't what was needed?

Okay, that gets politics out of my system for a bit. The whole health care reform bill is going to end up in the Supreme Court anyway, on commerce-clause grounds, so arguing about specific language may turn out to be a waste of time. But while I'm in the mood, though, I'll close with (what else?) a quote from Barry Goldwater. A government that's big enough to give you everything you want, he used to say, is big enough to take it all away. . .

Comments (63) + TrackBacks (0) | Category: Current Events | Regulatory Affairs


COMMENTS

1. SP on February 17, 2011 9:15 AM writes...

Although your point is mainly about the PhRMA deal, if you're going to bring up your old misguided arguments I'll rebut them again- I can't just let incorrect statements like "I was right about the doc fix" go by without a correction. Someone is WRONG on the internet!
voices.washingtonpost.com/ezra-klein/2010/04/one_more_time_with_the_medicar.html

"If we'd never passed the Affordable Care Act, we'd have still needed to pass the doc fix, just like we'd still have to pay for Medicaid and fund the continuing operations of the Department of Education. The government has its commitments, which are part of the baseline, and then there are new policies, which change the baseline. The doc fix is a baseline issue."
"What some Republicans are trying to do is add the doc fix into the Affordable Care Act. That is to say, they are trying to add the repeal of a Republican policy passed in 1997 into the cost of a Democratic bill being passed in 2010. But that's a bit like adding the cost of the Iraq War onto the bill, or maybe the Bush tax cuts. It's true that those were misguided, costly policies. But they're not part of the Affordable Care Act."

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2. Lester Freamon on February 17, 2011 9:25 AM writes...

I really don't understand the quote in italics. Is the claim that people on medicaid won't get "innovative" medicines covered? Is there any example of medicaid patients routinely getting denied a drug that was seriously proven to be a major medical advance? Gleevec is pretty well covered on medicaid; while I'm sure some of the $100k for 2 months life extension cancer drugs aren't. Which is how it should be, IMHO.

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3. juniorprof on February 17, 2011 9:35 AM writes...

A good portion of the posts here are related to the woes of pharma and biotech, in particular the massive job losses over the past years. These losses were well on their way under the old health-care model (prior to HCR). An offer of biotech exclusivity for 12 years is a very recent development. Whether or not it is rescinded, presumably bad for the industry means even more job losses due to lost revenue. Despite HCR and the fluidity of its regulation, it seems to me that pharma and biotech continues to operate under the same business model. Governments have their obligations to their people and they will have to pursue them (even a Republican administration would not be able to ignore the looming medicaid/medicare disaster). Pharma and biotech, it seems to me, should eventually have to realize that the business model is broken and that they have to develop a new one to face political and fiscal realities.

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4. Anon on February 17, 2011 9:55 AM writes...

The US needs to stop subzidizing drug development for the rest of the world. Hike up prices in Europe and other deveoped countries. If they cannot/will not pay, no drug for you.

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5. Hap on February 17, 2011 9:56 AM writes...

The Goldwater quote is nice, but the Republican Party doesn't seem to realize that companies that are big enough to give you what you want are also big enough to take it away. Relevant examples would be (in OH) Cleveland Clinic's refusal to hire smokers, and Scotts's firing of them. If you give business control over health care, you'll get that and more, something that gov't health care, with its monopoly power, has not done.

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6. Kay on February 17, 2011 9:59 AM writes...

I realize this post is focused on how the health care bill might affect the pharma industry. But I'd like to put in a comment about how it might affect the pharma worker, especially in a time of layoffs. I was laid off from my pharma job and a week later was diagnosed with cancer. (This sounds like an exageration but it really happened. It was a very, very bad week.) I was lucky enough to have some health coverage continuation from my company, but I ended up having to go on COBRA for 10 months while I had cancer treatments, and I ran up thousands in credit card bills doing it. (COBRA was $760 per month and I was laid off two weeks before the Cobra discount kicked in so I didn't qualify for it.) If I'd been working for a biotech that went under, I woudn't have even had COBRA, since there is no COBRA if the company goes out of business. Since we work in a field where layoffs are increasingly common, more of us are going to be in situations when we lose our health insurance. I'm not commenting on whether the health care bill is the best solution to this problem, just that it's an issue that may affect more of us personally than it did in previous years when pharma jobs were more stable.

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7. David P on February 17, 2011 10:09 AM writes...

Strangely, basing the health insurance system primarily by employer does not work out so well when increasing numbers are unemployed.

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8. Anonymous on February 17, 2011 10:29 AM writes...

Roads, bridges, national defense, strategic assets, a stable currency. That's all the federal government should be involved in. All the other crap has bankrupted us.

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9. Nate on February 17, 2011 10:42 AM writes...

Strangely, basing the health insurance system primarily by employer does not work out so well when increasing numbers are unemployed.

It doesn't work very well for individuals, but it's arguably even worse for our economy. It discourages economic mobility, which is essential for a dynamic, capitalist system, and especially for promoting entrepreneurship. People are terrified of losing their employer-sponsored healthcare or independently dealing with insurance companies, and thus reluctant to change jobs or careers, or to start their own businesses. How are we supposed to stay competitive with this mess? (No, allowing insurance companies to sell across state lines will not fix the problem, nor will tort reform.)

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10. Anon on February 17, 2011 11:03 AM writes...

Anon #8: National defence has been a huge contributor to the deficit as well (unpaid for wars anyone?). The lack of regulation lead to a huge bill for taxpayers from the latest recession. Please stop mistaking your a@@ for your head.

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11. ano on February 17, 2011 11:06 AM writes...

I would fully support a government sponsored "catastrophic insurance" plan. Bare basics, high deductible. This would, I thnk help with costs and increase mobility.

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12. Derek Lowe on February 17, 2011 11:08 AM writes...

SP, my problem with the Doc Fix was that the health care bill pretended that it didn't exist - in fact, pretended that it wouldn't be done at all. This was done to make the Congressional Budget Office scoring come out the right way. A great number of other things were done in the same spirit: to hocus the numbers.

It's worth remembering that the Medicare-reimbursement provisions were in the earlier version of the legislation, but were then specifically removed - again, as I contend, to massage the numbers and to try to buy the support of physicians. All the Ezra Klein sorts of arguments about how these things aren't related, not at all, seem to me to ignore the fact that they once were - and were then decided not to be, when it became politically necessary.

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13. Anonymous on February 17, 2011 11:09 AM writes...

The health care system is broken. The use of emergency rooms for standard medical care simply means that the insured need to subsidize the unreimbursed costs, and at a higher cost than if the care were provided in a regular setting. I has been clear to me for several years I am working for the medical insurance, not primarily for the salary.

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14. Anonymous on February 17, 2011 11:11 AM writes...

Kay's post is really gut-wrenching. It is increasingly confusing with all the details who is actually benefitting with these policies. It seems like no one is coming out on the top. I hope the proposed system takes care of people like Kay. I sincerely hope that this activist Supreme court does not interfere with legislative process. We saw how they behaved --- Gore versus Bush.

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15. anchor on February 17, 2011 11:26 AM writes...

Kay's post was indeed was very sobering! As the French saying goes ...when they talk of much changes, nothing changes and much remains the same. I predict that when it comes to health care plans, nothing is going to change when the smoke clears in 2014. Our political parties have taken turn to blame each other for this mess and neither party wants to anything meaningful. Meanwhile the insurance companies will have a field day!

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16. NoDrugsNoJobs on February 17, 2011 11:54 AM writes...

The idea that by covering folks with health insurance they will no longer to emergency rooms has been absolutely debunked in Massachussetts. It is so funny to hear all this discussion about the National plan will do and won't do when there is a plan in Ma very much like the national plan just passed. Tellingly, the people of Mass elected Scott Brown, a republican senator to take Kennedy's seat. first, you need to appreciate that Mass is a very liberal state. Secondly, you need to understand that Scott Brown ran specifically on the platform that he would vote against the national healthcare. All you need to do is look at Mass healthcare today where the premiums are among the very most expensive in the nation and are fast rising, where the emergency rooms are still being overused for all kinds of care and you will get just an inkling of what this thing will look like nationally. Seriously folks, there is no free lunch. Anything that takes spending decisions from individuals allocating their own resources and isolates those people from those costs will be a failure. When I have to pay for things I think about them differently then when I don't. we should all have health savings accounts and basic catastrophic insurance for the rest. Then each person decides how to spend their healthcare bucks. Do I want to go to the emergency room because they give me vicodin when I tell them about my back "hurts" and then pay the $750 bucks out of my own account or do I stay at home? People use services much more wisely when it comes from their own budget - basic fact of human nature. In Russia, bread was free but none of the stores had bread. Healthcare will be that way too - either it will be free and we won't have any or it will be very available and our country will be bankrupt - your choice.

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17. passionlessDrone on February 17, 2011 12:04 PM writes...

Hello friends -

I think the ideas on how to proceed best in this discussion part ways very early on; is quality health care a right, or a priviledge? You don't often see it articulated like that, and very infrequently will you get a Republican to out and say, 'If you can't pay for medical care, tough cookies', but until we agree that this is the underlying question, everything else is window dressing.

An insurance company has one primary goal, making money and other secondary goals; providing health care.

The story above is heartbreaking and terrible, and we all know that it happens every day, and worse. But the reality is that there is no fucking way a privately run company, a company whose job it is to make money first and foremost, would ever willingingly sign him up for coverage once his cancer diagnosis was made.

The people on this blog are especially well versed in the complexities, and therefore costs, of treating something like cancer. We've seen articles here about Avastin, something that may or may not help a small percentage of people with some forms of breast cancer; at a cost of 10K / month. How do you craft a policy and premium that makes sense for someone, if you know in advance they are going to be on Avastin, or a similarly priced drug for an unknown number of months?

Health insurance costs aren't like car insurance, while someone with a DUI might incur more costs in the future, there is absolutely no ambiguity with someone who has a diagnosis of cancer. There just is no way to structure a premium payment that is meaningful; it makes no financial sense at all to knowingly give insurance to someone you know has cancer. This isn't a moral question, its basic math.

A for profit model is inherently incompatible with quality health care, especially with how good we have become at making people less sick if we throw tons of resources at the problem. If we find an answer to the moral question, which is difficult, the mathematics become much more straight forward. No one has the guts to do this, however, though I'd place extra blame at the feet of conservatives in this regard. There are problems with socialized models of medicine we could learn from, but at least they've taken the first step, the courage to state on which side of the humanity they stand; as long as any kind of shared system is demonized as one step from Stalinesque gulags we shouldn't wonder why there hasn't been any progress. We've been too dumb to try.

- pD

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18. wcw on February 17, 2011 12:15 PM writes...

Ah, Barry Goldwater -- a man who looked at poor people eating dog food, and liked it. Good for him.

On topic, I do not think the Supreme Court is going to grant cert to a commerce-clause challenge, and if it does, it's going to be a carefully chosen case. The partisans on the right own commerce clause expansionism as much or more today than the partisans on the left owned it forty years ago.

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19. NoDrugsNoJobs on February 17, 2011 12:26 PM writes...

So passionless Drone, if the profit motive of health insurers is the problem, you should be happy to know that over 40% of health insurers are already non-profit. Over 60% of community hospitals are non-profit. If a person wants a non-profit insurer or hospital its easy they can get one. Most universities are non-profit, I guess that's why Harvard and Princeton's tuitions are so low (whoops!) I guess by your logic, the post office should be kicking fed ex's asses but for some reason the post office service sucks and they lose money and fed ex makes money and is way better. Facts are stubborn things.....

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20. Blue on February 17, 2011 12:30 PM writes...

@ 16 As someone who spent 5 years working my way through undergrad as a paramedic I can tell you your statements make no sense. 95% of 911 calls are from people not suffering from an emergency and who have no means to pay for any medical treatment. That means insurance or cash. The fact that they will run up a ~700$ bill for a taxi ride to the ER followed by another ~1000 or so means nothing to them. They have no credit rating to destroy nor would they care if they did. The fact is poverty is very rampant in all parts of the country whether educated researches see it or not. We already provide free health care to anyone who dials 911 or shows up at an ER. The fact is that this economic model is ridiculous. I don't claim to have all or even any of the answers, but when you are required by a medical director to transport everyone who calls 911 to the er (out of fear of lawsuits) and the er is required by law to treat anyone who comes through the door, it seems we might as well end this stupid charade and just provide health care for everyone. If you think someone who cannot feed themselves will hesitate running up a bill at the er you have not spent any time around people who live in poverty.

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21. pete on February 17, 2011 12:36 PM writes...

re: the misperception that the Obama proposal slashes marketing exclusivity from 12 years to 7 years, here's more good commentary on the subject:

http://holmansbiotechipblog.blogspot.com/2011/02/market-exclusivity-data-exclusivity-and.html

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22. anon on February 17, 2011 12:43 PM writes...

19.) We're looking for volunteers to away potential non-payers from emergency rooms in my town. Would you like the Friday 5pm or the Saturday 10am slot?

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23. DCRogers on February 17, 2011 12:44 PM writes...

As someone who has been holding onto health insurance through the skin of my teeth (first COBRA, then Cal-COBRA, then HIPAA high-deductable continuation coverage), I'll settle for any solution that guarantees me *some* coverage.

As a sign of the insanity, I actually got an offer of marriage -- kindly given to get me access to someone else's health plan. (I declined.)

Obamacare is like Churchill's democracy -- the worst option; except for any of the others on the table. Which, as of now, is none.

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24. wwjd on February 17, 2011 12:48 PM writes...

@ 20, proponents of universal coverage said emergency room visits would decline if we provided universal coverage to all citizens of Massachusetts. Well, Mass did that and the results are in: emergency room visits actually increased. They also said heathcare premiums would not go up as fast; Results: faster increases in premiums. Mass hasn't seen the savings promised yet.

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25. NoDrugsNoJobs on February 17, 2011 1:05 PM writes...

wwjd - that's what I pointed out but it seems folks prefer to believe what they want to believe! They think that if some knucklehead without insurance shows up at the emergency room everytime he bangs his head, that when he gets insurance that he suddenly will not do that! But the thing is, if you have indsurance, its still free to go to the emergency room! Why would their behavior cahnge you might ask? Well, it doesn't - thats the actual result of what happens, their behavior in Mass did not change despite the fact that we have "free healthcare" for poor folks.

Since many folks here like to speak by way of anecdotes and so on, let me tell you about a cousin. She is part of a family that doesn't work and their entire family is on state medicaid. She is 17 and has one kid and apparently thought she might be pregnant (again). Where did she go? To the emergency room to get a pregnancy test! But she has insurance, she can see a doctor but you see, dumb people do not get smarter when you give them stuff, they actually get dumber! Another anecdote: When I was in grad school (oh so many years ago), I did not have health insurance. To tell you the truth, I was not interested in health insurance. If you told me that I had to either get health insurance or pay into some kind of coverage, I would have been really pissed off. You say, "well if something would have happened to you, it would have become my problem then" - not really because first, I have paid my debts throughout my lifetime including many, many thousnads of dollars for education. Secondly, even if I did not pay the bills, how would it have been any different if I had "free" insurance? The other folks would still be paying my freight through my insurance.

I guess I forgot the benefits, the national healthcare bill will actually save the federal budget, kind of like medicaire and medicaid do I guess. Once a sucker always a sucker I suppose

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26. SP on February 17, 2011 1:26 PM writes...

I don't know of any insurance that makes it free to go to the ER- most have a copay of $50 to $500 unless you're admitted.
Derek @12- The initial bill tried to do the responsible thing and pass a permanent fix to the SGR. Really it should be a standalone bill but things are often bundled to expedite passage- as I excerpted, the doc fix will continue to happen every year whether or not ACA passed and whether or not SCOTUS overturns it. So as a result of the response by you and your party, we move ever further from anyone doing any responsible legislating out of fear that the other side will use it as an attack. We'll see how sustainable that strategy is.

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27. passionlessDrone on February 17, 2011 1:27 PM writes...

Hi NoDrugsNoJobs -

If a person wants a non-profit insurer or hospital its easy they can get one.

Unfortunately, the facts you refer to as "stubborn" tell us that being a non profit do not make it possible that you can operate in the absence of dollars. You can, in fact, still go broke while being a non profit. Did you know this?

Do you suppose I could open a 'non profit' insurance company whose only customers were people with cancer that had no insurance? What do you think my premiums would look like in this case? Do you think I could take in enough with these premiums to pay for hospital stays, radiation, oncologists, and Avastin? Seriously.

If your worldview is correct, maybe you could explain why Kay was so worried about then, seeing how easy it should have been for him to get insurance without COBRA? What's the big deal? For that matter, why doesn't everyone who has cancer and is uninsured just run out to these great not for profit insurers and not for profit hospitals for care? The best part is that it won't affect how much those same companies charge the rest of us, because, after all, they're non profit! What a relief!

I guess by your logic, the post office should be kicking fed ex's asses but for some reason the post office service sucks and they lose money and fed ex makes money and is way better.

There is no way, no way Federal Express could do the job that the post office does. Do you really think that Fed Ex could send a driver to every mailbox in the country, five days a week? Many times there isn't even anything to pick up, but the post office comes by just in case. The post office wasn't designed as a business, it was designed to facilitate communication.

If I want to mail my phone bill on Friday, instead of Monday, will Federal Express come to my house every day to pick up my mail for me, and deliver it for .40 when I do finally decide to mail it?

This blindingly obvious reality is consistently lost on the conservatives bent on painting every process as something that can be monetized in the quest for an extra 3%.

Facts are stubborn things

Indeed.

- pD

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28. NoDrugsNoJobs on February 17, 2011 1:33 PM writes...

I thought the problem with the doc fix is that the healthcare bill was sold as somehow helping the budget or at least being budget neutral and in order to do that it had to assume that medicaire docs would no longer get the yearly increases when everybody knew that was a sham.

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29. ex-Pfizerite on February 17, 2011 2:49 PM writes...

What everyone forgets is that there is still no way to get a biosimilar approved other that a 505b or two phase 3 clinical trials

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30. Andrew Ryan on February 17, 2011 3:11 PM writes...

"I thought the problem with the doc fix is that the healthcare bill was sold as somehow helping the budget or at least being budget neutral and in order to do that it had to assume that medicaire docs would no longer get the yearly increases when everybody knew that was a sham."

You are correct NoDrugsNoJobs. After the election of Scott Brown the Republicans had sufficient vote to filibuster Obamacare. As a consequence, the bill had to be passed via Reconciliation, which is used primary to deal with budgetary and deficit issues. Therefore, it enacted a cut in Medicare that would almost be immediately reversed by a separate bill (the "doc fix") to create the fiction it was a deficit reduction bill that could be passed by simple majority and avoid filibuster.

As to healthcare cost containment, my feeling is that physician salaries are the proverbial elephant in the room. Average physician salaries in the US are 5.5 times higher than in average OECD countries and comprised 22% of healthcare spending in 1999.

http://gregmankiw.blogspot.com/2009/06/physicians-incomes-and-healthcare-costs.html

Bringing physician salaries in line with, say, the UK (1.4X OECD average) would save 16% in healthcare costs in one foul swoop. Not a bad start.

My gut feeling is that the impact of physician salaries is significantly larger in 2011, but I'm still tracking down data.

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31. NoDrugsNoJobs on February 17, 2011 3:25 PM writes...

PD - Geez, I thought the post office was the only one that delivered letters because they are the only organization that is congressionally authorized to deliver letters but you seem to be telling me that they are the only ones that can get the job done. I stand corrected, your facts have trumped mine once again....please update the wikipedia, they seem to have it all wrong.

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32. SP on February 17, 2011 3:26 PM writes...

@30- Your narrative of what happened with reconciliation and the doc fix has almost no alignment with reality. Where are you getting your facts?

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33. Hap on February 17, 2011 4:27 PM writes...

Um, I was pretty sure that FedEx, UPS, and DHL could deliver letters, so long as you are willing to pay them. I don't know where this "not congressionally authorized to deliver letters" thing comes from.

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34. Anonymous on February 17, 2011 4:29 PM writes...

@30 The link you posted goes on to explain, at least in part, why physician salaries are so high in the US and why, in the opinion of the author, they are largely justified. I would be careful about suggesting a quick fix for any complex problem, and healthcare seems to qualify as a complex problem.

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35. GreedyCynicalSelfInterested on February 17, 2011 4:31 PM writes...

As someone who is uninsured and about a year or two from poverty, I have no hesitation about going to the emergency room and then just not paying the hospital. What are they going to do about it? Ruin my credit rating? Gosh, I'll never be able to buy a house! I don't own a house and probably never will. There are no high deductible insurance plans and even if I was offered one, without a high-paying job I could never afford one. If I had a job with benefits, I would not need to buy my own insurance.

Health care is not free, and it's not a right either people. Making it a right will only bring this over-leveraged welfare state closer to collapse...which it deserves.

To those who think that healthcare is a right, who is going to pay for your communitarian utopia?

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36. metaphysician on February 17, 2011 5:52 PM writes...

*cough* Just to butt in, the main reason the USPS is running in the red, is because of bad government policy. Specifically, the USPS gets all the downsides of being a government agency, while also suffering most of the downsides of being a private enterprise. This is because the Postal Service is, technically, a private business. . . but one subject to Congress for almost all its major decision making.

And yes, Fedex can deliver a letter to a house. What they can't do is deliver anywhere near the number of letters the USPS handles, at a cost that wouldn't beggar belief. There is a reason private companies handle packages and express mail, not standard or first class.

You want the USPS to stop losing money? Yell at your Congressman to let the USPS close and consolidate unneeded postal facilities.

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37. Kent G. Budge on February 17, 2011 5:59 PM writes...

A big part of the problem is that health insurance, for the most part, isn't.

Insurance pools the costs of low-probability, high-consequence disasters in order to reduce the cost of dealing with those disasters. Few of us will ever have our house burn down; however, the consequences if it happens are very expensive to deal with. Few of us can afford to put aside enough money to cover than possibility. So we make much smaller payments we can afford into a large pool that covers those few who are hit by disaster.

Death is not a low-probability event after a certain age. Every one of us is going to die and it's going to be expensive for a large fraction of us. Insurance is the wrong model for paying those expenses. Fortunately, we have a lifetime to save up against that time -- which is the right model.

Likewise, routine medical care is not a low-probability event. We all go to the doctor from time to time for checkups, vaccination, and relatively minor treatment such as antibiotic prescriptions, treatment of minor injuries, and the like. Again, insurance is the wrong model because these expenses are relatively small and occur with some regularity. Medical savings plans are more appropriate for non-catastrophic care, and they have the advantage that they impose an incentive to self-ration.

Preexisting conditions are definitely a bug in the ointment, since large medical costs are no longer low-probability once you have diabetes, cancer, or heart disease. They're yesterday's lottery ticket. You can only insure against such things before they develop. But that seems like the right model for me: You buy a policy somewhat resembling life insurance, but insuring against serious chronic conditions. It would be purchased early in life and would resemble life insurance, and might even be part of your life insurance policy. If you then develop Type I diabetes, for example, the insurance pays a large lump sum to cover some fraction of your likely lifetime expenses from the disease. Which probably goes into your medical savings account.

Insurance for catastrophic illness in the young; savings for routine and end of life care; life insurance that also insures against development of a chronic condition. I think this would be a much better model than medical insurance alone.

One problem is how to get there from here. I think we'd already be doing things differently if tax regulations were friendlier to innovation. It's too late for me to purchase chronic condition insurance, since I'm already diabetic, so there has to be some kind of grandfathering.

Whether chronic condition insurance/catastrophic medical insurance should come from the private sector or public sector is a separate issue. Insurance through government is certain to be redistributional. Some people don't have a problem with that. Others do. Both sides have arguments, and we're not going to settle it here.

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38. cliffintokyo on February 17, 2011 8:06 PM writes...

The President gave biopharma 12-year exclusivity for biotech products, in return for some financial relief to help the crisis.
Pharma acted in bad faith, by suddenly jacking up prices, slashing jobs, and creating drug shortages, which all exacerbated the crisis.
[Not to mention serious unethical practices, which are being deal with separately through $BB fines, (with jail-terms on the horizon?)]
The boss is a Politician, what would you expect him to do? Pat you on the back and say 'don't do it again'?
"As you sow, so shall ye reap"

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39. Anonymous on February 17, 2011 10:30 PM writes...

Derek,
You have posts under "Things I Won't Work With."

You need to put this post under:
"Things That Won't Work."

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40. Managed Care Pharmacy on February 17, 2011 11:36 PM writes...

#16 - I couldn't be more in agreement about HSAs and forcing people to make resource based decisions.
To go along with it I also believe that costs of medical care should, when possible, be required to be disclosed up front. No more hidden $300 new patient fees and the like.

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41. Anatoly on February 18, 2011 2:50 AM writes...

Every government is big enough to take it all away.

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42. RB Woodweird on February 18, 2011 7:35 AM writes...

16. NoDrugsNoJobs on February 17, 2011 11:54 AM writes...

"Tellingly, the people of Mass elected Scott Brown, a republican senator to take Kennedy's seat. first, you need to appreciate that Mass is a very liberal state. Secondly, you need to understand that Scott Brown ran specifically on the platform that he would vote against the national healthcare."

Ah, the smell of revisionism in the morning... Brown won because Coakley was 1. seen by independent voters as another Beacon Hill crony, 2. ran a lifeless campaign as though the seat were hers by right, and 3. was female.

If healthcare were the driving issue in Massachusetts, Patrick would not have won reelection in 2010 against Baker, the former Harvard Pilgrim (medical insurance plan) CEO.

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43. SP on February 18, 2011 9:01 AM writes...

Don't forget 4. Suggested that standing outside Fenway Park to meet voters and shake hands was a waste of her time. (Even if it's true, you don't SAY IT!)

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44. Vlad Konings on February 18, 2011 10:26 AM writes...

Woodweird,

You do have a point. Nevertheless, Brown ran against Obamacare in a very liberal state, and if his well-publicized opposition to Obamacare wasn't the reason he won, the fact he won in spite of it seems significant to me.

I would be very surprised if a large majority of voters in Massachusetts did not in fact favor some kind of government health insurance. I'd be equally surprised if a large majority of voters around the country, even among self-identified conservatives, didn't favor some kind of health insurance reform.

However, the issue of whether there should be health insurance reform can be separated from the issue of whether Obamacare is the right reform package; I think there is substantial evidence that an awful lot of people who favor the former disagree with the latter. Likewise, the issue of whether there should be health insurance reform can be separated from the issue of whether that reform should take the form of an explicit or de facto single payer plan.

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45. NoDrugsNoJobs on February 18, 2011 10:36 AM writes...

Hap - I thought the post office rules were fairly well known but heres a little cut and paste from the wikipedia.

"Competitors
USPS Terminal Annex building in Los AngelesFedEx and United Parcel Service (UPS) directly compete with USPS express mail and package delivery services, making nationwide deliveries of urgent letters and packages. Due to the postal monopoly, they are not allowed to deliver non-urgent letters and may not use U.S. Mail boxes at residential and commercial destinations. These services also deliver packages which are larger and heavier than what the USPS will accept. DHL Express was the third major competitor until February 2009, when it ceased domestic delivery operations in the United States."

There are many other sources for this, let me know if the wikipedia is wrong.

With regard to Mass, Coakley was considered a "shoe in" to replace the vacated Ted Kennedy's seat. Health care was the biggest issue and kennedy's dream was to nationalize healthcre the same way the government has nationalized letter carrying (see above). Brown ran specifically on that issue. For Pat and others who are stymied by their lack of healthcare, move to Mass! If you are a chemist, there are probably as many chem jobs here as anywhere and the unemployment insurance is great. Not sure how long it will last and its not so easy to find doctors now and it costs a fortune for those folks who do have to pay (or their companies) and their delivery rooms are more crowded than ever but nevertheless, if you don't have insurance and can't afford it and thats a cutting issue, you should take a look. Thats the beauty of states setting their own agendas, no one size fits all. You like certain things like healthcare for all, move to Mass. You don't, move somewhere else. No need to have just one way to do things.

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46. anon on February 18, 2011 11:07 AM writes...

#37 (Kent G. Budge): "Insurance for catastrophic illness in the young..."

And what about those born with congenital conditions? Do we insure fetuses against things like Down's syndrome, birth defects, autism...? Who's in a position to determine the lifelong costs to a family? Do you want insurance companies to approve procreation pending a genetic test?

Sorry for proposing something so silly, but I believe it matches the seriousness of your idea.

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47. RB Woodweird on February 18, 2011 11:19 AM writes...

45. NoDrugsNoJobs on February 18, 2011 10:36 AM writes...

"Brown ran specifically on that issue."

He ran on many issues. That was a minor one and was not the catalyst for his win. Like I said, if the Massachusett voter were so dead set against univeral healthcare, Patrick would not have been reelected.

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48. NodrugsNoJobs on February 18, 2011 11:40 AM writes...

Like I said RB - everybody who wants this should move here. My family's insurance is approximately 20k per year. Somebody has to pay for all the free healthcare I suppose. To say healtcare was a minor issue in the interim election is one of the funniest things I have heard today! Thanks for the chuckle....

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49. NoDrugsNoJobs on February 18, 2011 11:53 AM writes...

Last post, I promise. Just to clear the air so that nobody gets the wrong idea about the Mass interim election. RB says that healthcare was a minor issue. It certainly was when Obama was elected but that didn't stop the dems from ramming through an unpopular initiative (look at the polls, just look at the polls - if that doens't resonate, look at the midterm elections, look at the midterm elections - I don't make this stuff up) - With regard to healthcare being a minor issue when Brown was brought in...no, quite the contrary according to the surveys I'vbe seen. According to the Washington Post survey right after the election: (I know, a conservative shill paper :)) - here is what was said:

"8 out of 10 folks who voted for Brown were opposed to the healthcare initiative and 66% strongly so."


Its funny how once Brown was elected, the dems ran the legislation through so fast that people are still fighting about what the hell the bill means! Hey, its only like 1/7th of the economy so why waste time by relying on open democratic processes, bipartisanship and open debate?

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50. Vader on February 18, 2011 11:55 AM writes...

"And what about those born with congenital conditions? Do we insure fetuses against things like Down's syndrome, birth defects, autism...?"

Why not? We already have pregnancy "insurance" (really a savings plan) to cover normal pregnancy expenses, so I see nothing implausible about the idea of added insurance for congenital conditions.

In point of fact, anyone on a traditional employee insurance plan effectively has such coverage; if his kid is born sick, his insurance usually covers the expenses. my suggestion simply makes it easier to separate this coverage from your employment, so the consequences of losing your job and your coverage are less adverse.

"Who's in a position to determine the lifelong costs to a family?"

That's what actuaries do. They are actually quite good at calculating risks. The real question is, how much coverage are you willing to pay for? If you want your insurance to cover all excess costs if you develop diabetes, including insulin and testing equipment, the actuaries can doubtless work out the likely lifetime costs and the probability of incurring them, and compute a competitive premium. If you are willing to pay for your own insulin and test strips and want coverage only for the more expensive aspects of diabetes, the likely lifetime costs will be less and the premiums can be calculated to reflect that.

I suggested a lump sum, but there's no reason an insurance company couldn't pay smaller sums annually for each year you remain alive. If you live unexpectedly long, the insurance is obligated to continue paying, but if you die prematurely (even for a diabetic) they don't pay the years you don't live. It will likely come out costing the insurance company the same either way, so the two approaches would likely have the same premiums. But I don't see why the market can't work out the best approach here.

"Do you want insurance companies to approve procreation pending a genetic test?"

Straw man. Why would an insurance company expect to have any customers if they did this?

Obamacare already prohibits insurance rates based on genetic testing, IIRC. Whether or not you think that's a good idea, I see no reason why the same prohibition could not apply to prenatal chronic illness insurance.

But I don't know that that prohibition is a good idea. I expect an insurance company would bump up the premiums, regardless of genetic testing, when you discover you are pregnant. Why should this alarm us? When you add a new driver in your household, your car insurance rates go up, don't they?

I suspect some insurance companies would offer insurance without genetic testing. Others would offer cheaper insurance to those who show no serious genetic risks. Is it such a bad thing if those parents who carry adverse genes have to pay more for insurance for their pregnancies?

"Sorry for proposing something so silly, but I believe it matches the seriousness of your idea."

I'm sorry you choose to reject it out of hand. I suspect your response is more visceral than rational.

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51. Hap on February 18, 2011 1:16 PM writes...

How do you determine "non-urgent"? If I can sell the service, to people that are willing to pay, then obviously I'm not banned from delivering it.

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52. anon on February 18, 2011 3:23 PM writes...

"Why not [insure fetuses]?...I suggested a lump sum, but there's no reason an insurance company couldn't pay smaller sums annually for each year you remain alive."

You do realize that functionally you're arguing for cradle-to-grave socialized medicine for some very high-cost patients, right? It doesn't seem profitable to most developed nations who have taken it upon themselves, but maybe a well-paid CEO and legal department is all they've been lacking.

"That's what actuaries do."

Oh, they're very good at calculating risk. However, as anyone who's dealt with an insurance company knows, damage assessments aren't their strong suit.

"Straw man. Why would an insurance company expect to have any customers if they [performed genetic testing]? "

When I buy life insurance, they send out a nurse to get my vitals, blood, and family history. When I buy car insurance, they check my driving record and my credit record. If I were to insure a fetus against a congenital condition, don't you think they'd want a cheek swab? It's no more intrusive than any of the other data the industry collects.

"Is it such a bad thing if those parents who carry adverse genes have to pay more for insurance for their pregnancies?"

You really want to argue that insurance companies need to get involved in human evolution? Really?

The free market does not have all the answers, which is why we have a mixed economy. Sorry if that screws with your neat little worldview...

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53. Vader on February 18, 2011 4:42 PM writes...

"You do realize that functionally you're arguing for cradle-to-grave socialized medicine for some very high-cost patients, right?"

How so? It looks a lot like whole life insurance to me, but insuring against chronic illness instead of death.

"It doesn't seem profitable to most developed nations who have taken it upon themselves, but maybe a well-paid CEO and legal department is all they've been lacking."

The incentive structure is significantly different. The patient has an incentive to select an insurance plan that matches whatever his own salary and aversion to risk are. The insurer has an incentive to give coverage that matches a lot of people's salaries and aversion to risk. When an insured person develops a chronic condition, he gets either a lump sum or annual sums that he is free to use as he sees fit. Presumably he'll use them to pay part or all of his medical expenses, but he has an incentive to ration his own medical care. None of these incentives are present in the usual socialized medicine systems.

Given the right incentive structure, it doesn't take geniuses to make a system work. Given a messed-up incentive structure, even considerable genius is insufficient. It's not a reflection on the itelligence of the people running the system.

"Oh, [actuaries are] very good at calculating risk. However, as anyone who's dealt with an insurance company knows, damage assessments aren't their strong suit."

I suspect you misunderstood the proposal. You are buying a plan that promises, for example, a lump payment of (wild guess) $150,000 if you are diagnosed with Type I diabetes, or perhaps (another wild guess) $5000 a year every year once you are diagnosed with Type I diabetes. Little damage assessment is involved once a doctor confirms the diagnosis.

Actuaries may not be able to compute how much it should actually be costing you to treat your diabetes. But they can quite accurately compute the likelihood of developing type 1 diabetes, and determine the premium required to cover a liability of $150,000 per insuree who developed type 1 diabetes.

"When I buy life insurance, they send out a nurse to get my vitals, blood, and family history. When I buy car insurance, they check my driving record and my credit record. If I were to insure a fetus against a congenital condition, don't you think they'd want a cheek swab? It's no more intrusive than any of the other data the industry collects."

And I would find giving such a cheek swab fairly unobjectionable, though I would prefer to enroll in the plan before the fetus is conceived, have my genes tested, and then be given a guaranteed rate for the insurance when the fetus is conceived. Better for planning ahead.

But that wasn't how you phrased it. You phrased it as the insurance company dictating whether parents procreate, or so I read it. That's a whole lot different from an insurance company taking a swab, then coming back and telling you your premium will be x$$ per month for each fetus from the time conception is confirmed.

"You really want to argue that insurance companies need to get involved in human evolution? Really?"

Well, we've not had a lot of luck with governments getting involved in human evolution, either. And when a government subsidizes parents who are poor genetic risks, either through direct provision of medical services or by forbidding companies to base rates on your genetic profile, that's what they're doing.

The Nazis were evil, while a government subsidizing bad genetic risks is merely stupid; but when you have a competitive insurance market, the insurers' involvement in human evolution is very likely to be based on the actual economic risks of your genetic profile rather than any weird notions about racial superiority.

"The free market does not have all the answers, which is why we have a mixed economy. Sorry if that screws with your neat little worldview..."

No human institution has all the answers. That's why we have a network of institutions meeting various needs. Government is a pretty good institution for a limited number of things -- among them, regulating the free market -- but governments have a poor track record at actually making the economic decisions, rather than regulating them, compared with independent market institutions. Sorry if that screws with your exquisitely nuanced worldview...

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54. Vince on February 18, 2011 6:05 PM writes...

#27, passionlessDrone: "There is no way, no way Federal Express could do the job that the post office does. Do you really think that Fed Ex could send a driver to every mailbox in the country, five days a week? Many times there isn't even anything to pick up, but the post office comes by just in case. The post office wasn't designed as a business, it was designed to facilitate communication."


And therein lies the problem with large statist solutions and those who advocate them; they are inefficient, bureaucratic and prone to thinking in a box.

Why anyone, in 2011, is celebrating the idea that the government is sending a postman to every residence "just in case" a package is there to be picked-up is a source of antipathy for me.

Explain to me why we're using an antiquated system whereby we're literally sampling every node, daily, at great cost when it's unnecessary.

Under 2% of US households lack telecommunications (2010 census). $20M buys the rest of them a pre-payed cellphone. Yet, we're sending some unionized guy with a fat pension to every node, checking to see if the mail is there for a third of his shift and then reading JWOWW's new book for the rest.

Or, more conservatively if you're worried about 'disenfranchising' the kids, elderly and poor who can't send a txt, incentive those who can text message to switch over to the above model by reducing rates and lets make the USPS more efficient.

Yet, we'll never see this type of solution or thinking. Instead, well see the types of legacy policies and thinking that will destroy our industry as well.

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55. passionlessDrone on February 18, 2011 8:56 PM writes...

Hi Vince -

Explain to me why we're using an antiquated system whereby we're literally sampling every node, daily, at great cost when it's unnecessary.

I'm not celebrating anything, I'm just stating facts, the two entities aren't built to do the same thing. If it ticks you off so much, send all of your outbound mail via federal express. If the post office could charge what fed ex does, we wouldn't be worried about them losing money, that's for sure.

Explain to me why we're using an antiquated system whereby we're literally sampling every node, daily, at great cost when it's unnecessary.

Well, for one thing, you apparently don't know much about getting mail; it isn't just about picking up, it is mostly about delivery. Those of us savvy enough to think this blog is interesting have probably moved to electronic billing a few years ago, but lots of people haven't; especially the poor. I wonder, what suggestion do you have such that poor people get things like their power bill, or bank statements without a person to deliver it? In fact, 95% of my mail related activities are inbound only.

Until the digital revolution, this system was absolutely essential to the transfer of dollars necessary for a modern lifestyle.

Do you ever check your mailbox, or does your wife do it? Because there is something in mine every day. Mostly it's crap, but about one piece a day are bills, statements from whatever credit card, retirement plans, health insurance plans, or business related. They're still sending paper out like crazy; one things for sure, nobody in those industries is interested in paying fed ex prices to deliver every piece of mail to us.

We could, presumably, only deliver to houses that have daily mail, and then skip homes that don't have anything to deliver. From my experience, that's around zero percent of houses.

I have no idea what good you think having a cell phone and the ability to send a text message might do to solve these problems. Mailboxes come with a flag that you are supposed to raise in order to tell the postman to get your outbound mail, considering every damn house gets mail damn near every day the truck is going to go right by your house anyways; and yet, you'd like to implement a national text messaging system to tell the postman to come to your house.

You've clearly put lots of thought into this 'solution'. Would every post office have it's own text number you could send a pick up request to? Or one number for the whole country? If I mistyped my address, would my neighbors mailbox get picked up, and mine get skipped? The greatest part about this solution is that it would afford no availability for pranks. What could go wrong?

Your characterization of people in the post office as uniformly lazy and stupid says a lot about you, and not in a good way.

Yet, we'll never see this type of solution or thinking. Instead, well see the types of legacy policies and thinking that will destroy our industry as well.

LULZ

- pD

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56. passionlessDrone on February 18, 2011 9:05 PM writes...

Hi Vader -

Actuaries may not be able to compute how much it should actually be costing you to treat your diabetes. But they can quite accurately compute the likelihood of developing type 1 diabetes, and determine the premium required to cover a liability of $150,000 per insuree who developed type 1 diabetes.

I like the approach with incentives, but I don't think it would work because of how unpredictably rapidly medical costs are increasing. If you had a heart attack twenty years ago, you went to the hospital, either lived or died, and went home a while later and were told to stop smoking, stop drinking, and lose some weight. Maybe take an aspirin.

Today, you get a full diagnostic work up, and you leave with a prescription that costs $10 / day that you're supposed to take every day you want to not have another heart attack. I don't see how actuaries trying to figure out costs well into the future are going to determine how much things are going to cost.

Using your diabetes example, how will the actuary determine how much a synthetic pancreas will cost twenty years from now?

- pD

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57. Anonymous on February 18, 2011 10:49 PM writes...

passionlessDrone,

Innovation tends to reduce costs, not increase them. You can now get a (perhaps not terribly accurate) home A1C test kit for under $30, good for two tests, in spite of a considerable number of disincentives for such innovation. I'm not convinced that an artificial pancreas (for example) would be much more expensive, in the long run, than the present standard of care (continuous glucose monitor plus insulin pump.)

In other words, I suppose it's possible that someone will come up with a treatment that genuinely gives years of healthy living that no present treatment does, but at a much higher cost than the present standard of care; but I don't think it's very likely.

Real breakthroughs don't tend to stay expensive, unless there are market distortions holding up the price.

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58. Anonymous on February 19, 2011 1:27 AM writes...

PassonlessDrone: I have no idea what good you think having a cell phone and the ability to send a text message might do to solve these problems. Mailboxes come with a flag that you are supposed to raise in order to tell the postman to get your outbound mail, considering every damn house gets mail damn near every day the truck is going to go right by your house anyways; and yet, you'd like to implement a national text messaging system to tell the postman to come to your house.

I was responding to the specific case of outbound mail that was being discussed and using it as a proxy for noting government reliance on outdated thinking, nothing more. I wasn't proposing a global solution and am sorry if it was interpreted as that?!

As you noted, "Until the digital revolution, this system was absolutely essential to the transfer of dollars necessary for a modern lifestyle."

And the problem is that these government solutions are fundamentally the same. The world has changed, yet you're still proposing a system that's basically a message-passing implementation predicated on raising a little flag on your mail-box: this is ridiculous!!


I'll give you an example closer on topic as it has strong analogy to healthcare consumption patterns. Bill Simon, head of Walmart US, has noted the paycheck cycle/effect whereby the sales in the early hours of the beginning of the month peak as people come into the store at 11pm on the final night of the month, load up their carts and check out after their government electronic benefits cards are activated at 12. Obviously, people shopping at midnight for baby formula are in need, no doubt.

Government response is typical, more of the same. Increase funding and allowances, it's obvious they need more money to live. Except, when you do the data indicates that the cycle persists. It seems as though it's fundamentally a budgeting and educational problem.

Yet, this problem can be helped by smarter allocation, not larger allocation. So, distributions on the 1st and 3rd weeks; distributions based on spending patterns and seasonal inputs, etc. We have the information and statistical tools to find better solutions; it just seems as if the state is more interested in it's own power and self-preservation than finding the optimal solutions.

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59. metaphysician on February 19, 2011 10:32 AM writes...

I'm not entirely sure what relevance that has to the USPS. In particular, again: *the USPS is not a government agency.* The Postal Service doesn't need crazy cellphone based pickup plans ( which wouldn't do anything for reasons already described above ). What it needs is for the government to let it make decisions in how to operate without constant meddling. Trust me, the people at the post office *know* the problems they have, and even have some good ideas about the solutions. They just can't implement those solutions, because Congress doesn't like job losses in their districts.

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60. MIMD on February 19, 2011 7:02 PM writes...

#5 Hap

If you give business control over health care, you'll get that and more, something that gov't health care, with its monopoly power, has not done.

In fact, we have a government-business industrial complex in medicine; the two might be hard to separate.

Right now, business is doing well fleecing the government, which in turn thinks it's getting the upper hand (such as here), but the pendulum may swing...

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61. provocateur on February 20, 2011 8:25 PM writes...

Hi Dr. Lowe
I have one comment.I have seen everybody including you say that the health care wont work.How public financing may be ruining it.But you guys forgot to criticize when Mr. Bush forgot to pay for his Medicare Bill and all of you sat silent.Thts why you end up with this bill.The present guy has gotten to pass a health care bill which is a big achievement and I think the only way is to improve it as subsequent govts roll in.There is no perfect way to do it but you improve it as you go along.You criticize anybody who is not fiscally conservative and be honest in your opinions all through..not pick and choose any particular party to criticize..thats how we ended up here now.

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62. Anonymous on February 22, 2011 8:34 AM writes...

Screw all of this. The country is bankrupt.

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63. Not really insurance on March 14, 2011 4:26 PM writes...

#37: There's a very similar point explored at length by David Goldhill in the September Atlantic. Note the somewhat inflammatory title:

http://www.theatlantic.com/magazine/archive/2009/09/how-american-health-care-killed-my-father/7617/2/

"...health insurance is different from every other type of insurance. Health insurance is the primary payment mechanism not just for expenses that are unexpected and large, but for nearly all health-care expenses. We’ve become so used to health insurance that we don’t realize how absurd that is. We can’t imagine paying for gas with our auto-insurance policy, or for our electric bills with our homeowners insurance, but we all assume that our regular checkups and dental cleanings will be covered at least partially by insurance. Most pregnancies are planned, and deliveries are predictable many months in advance, yet they’re financed the same way we finance fixing a car after a wreck—through an insurance claim."

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