Everything Your Doctor Touches Turns To Gold (For Someone)
How healthcare providers rake in profits and drive up already exorbitant costs
This is Part Four of David Chen’s ongoing series How Drug Pricing Works.
In 2009, Dr. Atul Gawande wrote The Cost Conundrum, a clinical examination of how distorted incentives were dramatically increasing costs, along with profits to hospitals and physicians. The journey he takes through McAllen, Texas, is a case study in how oddities in our healthcare system have evolved into a nightmarish system of over-billing and unnecessary care, even as actual health outcomes in America stagnate. Applied broadly, it’s part of the reason why the US famously spends more on healthcare, with worse results, than other countries.
I’ve previously covered how big pharma and various middlemen manipulate drug prices, as well as how high drug prices can incentivize bad behavior. But on the provider side, the scene isn’t always much better. Maximizing the volume of procedures, scans, and tests — necessary or not — allows care providers to drive up revenue. In these cases, a reimbursement system of fees for services, combined with the evolution of an entire industry of medical billing and coding to maximize returns on reimbursements, create the means for stark wealth generation.
The story is different for drugs. In normal scenarios, physicians serve as independent agents when prescribing drugs for patients to pick up at a pharmacy. There, the patient pays a co-pay and the doctor is mostly left out of the transaction. Doctors typically do not have high awareness of drug costs and prescribe with a focus on clinical attributes, although at times this can result in physicians prescribing expensive branded products, like EpiPens instead of cheaper generics. Sometimes, doctors can get involved by providing information about patient assistance programs to help with affordability, but in most cases, there’s a disconnect between drug-prescribing and provider revenue.
With an important exception: medical benefit reimbursement, either from private insurance or from Medicare Part B reimbursement. Not all drugs are obtained at the pharmacy; some, particularly those that require physician administration like many injectables or infusions, will be covered under these medical benefits, documented here. Physicians purchase these drugs directly and are compensated by insurers or Medicare directly: Medicare will reimburse based on a drug’s Average Sales Price (ASP) plus a margin of six percent, while private insurers will typically reimburse at ASP plus 12 percent or some similar amount or with a similar method. This process is known as buy and bill.
There are a variety of technicalities to ASP — in simplified terms, it’s the gross revenues of a drug divided by total volume — but what’s important here is that the higher the ASP, the bigger that margin of six to 12 percent. Just as we’ve seen before, the higher the price of a drug, the bigger the reimbursement. (Six percent of $200 is more than six percent of $100).
Buy-and-bill is particularly common with oncology, where the reimbursement process has been a significant driver of dollars: on the order of 70 percent of the revenues of a typical oncology practice and 40 percent of Medicare Part B costs in 2014 ($7.8 billion). It’s easy to see how such a system can be influential.
In 2016, the Obama administration and the Center for Medicare and Medicaid Services (CMS) made a controversial effort to reform these payment policies, attempting to shift reimbursement to a more fixed fee approach: instead of ASP plus six percent payment, it would be a flat fee plus a 2.5 percent markup, reducing the incentive to use costlier drugs. CMS would also have eliminated or reduced the copays that patients currently face in cost-sharing for more expensive drugs.
Strong pushback emerged from physician groups, the drug industry, and patient organizations. They claimed the new regulation was biased against newer and more effective (and more costly) drugs, and that it would hurt the ability of smaller oncology practices to provide these drugs, since they lack the volume to negotiate lower prices with manufacturers. The American Society of Clinical Oncology, the Pharmaceutical Research and Manufacturers Association, the Cancer Support Community, and more than 100 other groups sent a letter opposing the changes. In the end, CMS acquiesced and halted the initiative due to concerns.
While the 2016 payment changes were scrapped, other payment reforms are still occurring, and there have been other initiatives to try to alter the current models of payment and healthcare delivery, from an oncology care model to the payment of drug manufacturers based on clinical outcomes to a variety of Obamacare initiatives. Change is needed: as our current spending trends show, the status quo is unsustainable.
Still, episodes like the CMS payment changes show why healthcare reform can be so fundamentally hard: it means potential trade-offs between value and efficacy, and it can mean taking away money. Perhaps that’s why the most talked-up changes for healthcare revolve around buzzwords like “value” and “bending the cost curve.” It implies a win-win for everyone, no sacrifices needed. But change is hard, and inertia makes it harder; as Gawande noted in more recent pieces, and as the latest data shows, things have not yet significantly shifted since 2009 when Gawande covered those curious discrepancies. That includes medical benefit reimbursement, another case where high prices mean more profit for someone other than the patient.
David Chen is based in Boston.
