The Three Pillars of the Medical-Industrial Complex and the Physician. Part I. The Financials.

Posted on | June 24, 2016 | 1 Comment

Mike Magee

Despite the fact that last week Paul Ryan, on behalf of the Republican party, unveiled their alternative to Obamacare, the likelihood that the President’s signature legislation, and the cascade of transformative changes it has unleashed, will be overturned is slim to none. This is because it has pointed America in an appropriate direction, appears to have dampened health care consumption, and is popular among US citizens.

It has also been embraced by the three pillars of the Medical-Industrial Complex – pharmaceuticals, insurers, and hospitals. A look back at the 2009 administrative negotiations and “givebacks”, well documented by New York Times columnist, Steven Brill, is revealing in that it reflects what each industry had to gain financially in moving toward universal coverage.

When President Obama elected to pursue, as his primary legislative objective, health care reform in 2008, he knew that he would have to co-opt the support of the pharmaceutical industry, the health insurance industry, and the hospital industry. His goals were two-fold. First, he needed to neutralize the potential impact of well-funded opposition to his plans. He recalled the speed with which the Clinton Health Care initiative had collapsed 14 years earlier when these sector lobbyists, reinforced by the famous “Harry and Louise” campaign, attacked what was an eminently reasonable plan. His second goal was to proactively negotiate “givebacks” from each of these sectors as part of a plan to fund new benefits for the uninsured.

The size of those “givebacks”, negotiated with the help of a former Lehman Brother’s health care analyst, Tony Clapsis, and based on the projected 10-year profits that each sector would accrue as a result of near universal health insurance coverage, provided a glimpse into each sector’s financial stake in the health and welfare of the Medical-Industrial Complex. The pharmaceutical industry profit over 10 years was pegged at $200 billion. They ultimately settled on concessions amounting to $120 billion, along with assurances that Medicare Part D drug prices would remain unchallenged, and that drug importation from other countries would continue to be prohibited.

The insurance industry agreed to contribute $102 billion, while negotiating wiggle room in the Medical Loss Ratio (MLR) which defined what percent of a premium could go to administrative costs (read, profits), as well as how large the premium price variance could be between healthy “young invincibles” and older, sicker patients with complex chronic diseases. Insurers wanted a 5:1 spread. The administration insisted on a 2:1 spread. They settled for 3:1. Insurers also received assurances that Medicare Advantage plans would be preserved, along with their profitability profiles. Finally, the hospital industry’s predicted profit was between $200 and $250 billion. They ultimately settled on a “giveback” of $155 billion, with assurances that federal research dollars would continue to flow, and various formulas to financially support medical education and the care of poor, sick patients would stand.

Screen Shot 2016-07-17 at 7.30.10 PM

The size and similarities of these 10 year profitability figures underscore the fact that the the Medical-Industrial Complex is supported by three powerful pillars, who share and exchange, and compete for resources. And at the center of all this commerce is the physician – the one who writes the prescription, who orders the tests, who admits and operates and treats the patients, and who accepts the insurance payments. In fact, various studies have confirmed that over 70% of all costs incurred by the American health care system are at the direction of a physician.

Now, five years later, the administration, after a rocky start, has met or exceeded its goals for enrollment and cost savings. In short, the public has responded positively to the Affordable Care Act, which the President insists he is more than proud to see labeled “Obamacare”. Although Republicans have finally suggested an alternative, which would include turning back the clock, and repealing the law, this is highly unlikely. What is more likely is that some of the original pieces of the legislation, which were deleted in order to get the law passed, will be added in the future, especially if the Democrats win Congressional control. These include: 1) Increases in the financial penalties as part of mandated insurance, which have been delayed. 2) A fresh look at an original proposal to expand access to Medicare for those age 55 to 64. 3) Comparative effectiveness research, designed to prove the utility and added value of new pharmaceutical or medical device treatments, which Zeke Emanuel had fought for and lost, will be required in the future. 4) Medicare Part D prices will be re-visited. 5) A comprehensive investigation of conflict of interest in clinical research and the value and integrity of double-blind human trials in the future.

And what of the pillars of the Medical-Industrial Complex, and the physicians entangled in the maze. Clearly, the most vulnerable, at the moment is the insurance industry, which will be dogged by public support for government sponsored health insurance, which is standard fare in every other developed nation. While the Affordable Care Act, in design and execution, has been far from perfect, it has signaled the end of the status quo. 30% Medical Loss Ratio’s, coverage denials, and massive profits by an industry with twice the number of employees as physicians but none of the caring power, is fading in its’ usefulness to society. In its’ place will emerge hospitals with their own insurance arms, self-insured employers with direct contracts with regional health system networks, a few insurers that run nuts and bolts health delivery systems, or public option plans, modeled on Medicare, but with more risk and responsibility for American patients.

The day of reckoning is also on the near horizon for the pharmaceutical industry. 2015 was a year of controversy and bad publicity for the sector. Pfizer and others willingness to seek an inversion and exit America to avoid taxes; unconscionable pricing for biotechnology drugs by brazen venture capital profiteers; and over-exposure of direct to consumer advertising with continued questions about the integrity and transparency of research, all suggest a reversal of their good fortune. First to go will likely be the hands-off negotiations on Medicare Part D pricing. Then will come restrictions on DTC advertising, and tougher standards on underwriting America’s continuing medical education apparatus. And finally, more dramatic exposure of compromised physician “thought-leaders” and their professional associations and institutions who industry has relied upon to endorse and promote over-consumption of products with marginal usefulness, or dangerous consequences like the current opioid epidemic.

Finally, there is the hospital industry. What will become of it – now 5700 or so institutions, of varying quality; rural, suburban and urban; non-profit and for-profit; integrated into expansive systems or free-standing; teaching and research institutions with massive technologic capacity and those with far more modest offerings; all increasingly dependent on federal dollars for survival. What will the future hold for them, and for the physicians who increasingly are in their employ?

The answer to that question will follow in Part 2, next week.

Comments

One Response to “The Three Pillars of the Medical-Industrial Complex and the Physician. Part I. The Financials.”

Janice
June 24th, 2016 @ 9:53 am

Excellent & informative review…and depressing. Sounds like a case of “selling one’s soul to the devil.” I eagerly await Part 2, not that I expect a happy ending.