Posts Tagged ‘Health Care’
Thursday, September 23rd, 2010
Six months after President Obama signed the Affordable Care Act, the first set of reforms take effect today. These consumer protection provisions include, among others, banning insurance companies from excluding children with preexisting conditions or imposing lifetime benefit limits.
Other reforms will take effect in the coming years, and according to Smeal’s Keith Crocker, the biggest change is on its way in 2014. In an interview on Smeal’s Research with Impact website, Crocker explains his belief that the Affordable Care Act will destroy the private insurance market:
The big issue here is that the recent health care reform legislation will eliminate medical underwriting beginning in 2014. This will be implemented through the elimination of the preexisting condition exclusions and the result will be to destroy the individual market for insurance. The argument is that “an insurance company shouldn’t be allowed to reject you just because you’re sick, ” and everyone says, “Oh yeah. They shouldn’t be able to do that.” The problem here is that if you don’t allow insurance companies to tailor the premium to the cost of the risk that they are assuming, then the result will be adverse selection where only the sickest people will buy insurance.
As an example, think about life insurance. Suppose there was a prohibition of preexisting conditions on life insurance, meaning the insurance company had to accept all applicants for the same premium, no matter what they looked like. Well, as it turns out, one preexisting condition is age, so, in this setting, insurers would have to charge everyone the same price for life insurance independently of how old they were. Young folks would find the insurance to be too expensive and would exit the applicant pool, while older folks (for whom the chances of their heirs collecting on the policy are higher) would go ahead and purchase the insurance. As a result, the applicant pool would end up consisting of older high-risk individuals and the premiums would have to increase to reflect that high-risk pool. The only way to get younger folks to buy life insurance would be to charge them a lower premium that reflected their lower actuarial cost. But, then, insurers would be classifying applicants based on a pre-existing condition—their age.
It’s the same with medical insurance. If insurers have to take everybody, then only the sickest people will find it useful to get insurance, so the premiums will have to rise to reflect the costs associated with the sickest people. When the premiums go up, the young and healthy and the smaller businesses will drop out of the insurance market because they cannot afford the premiums, and they will join the ranks of the uninsured.
Prohibiting pre-existing condition exclusions destroys an insurance market because risk classification through medical underwriting is what eliminates adverse selection and adverse selection is the poison that kills insurance markets.
Wednesday, March 31st, 2010
U.S. District Court ruled this week that seven patents related to two genes linked to breast and ovarian cancer held by Myriad Genetics are invalid. The court sided with the ACLU and the Public Patent Foundation in ruling that the patents were “improperly granted” because they involved a “law of nature.”
What is dramatic about this decision (a copy of which can be downloaded from the ACLU Web site) is that U.S. District Court Judge Robert Sweet based his determination on a finding that claims drawn to purified DNA are mere products of nature that are not patentable. If it were to stand on appeal, the decision would have a significant impact on the biotechnology industry, which has invested much in DNA patents.
Last year on this blog, Cahoy, a patent lawyer and associate professor of business law, outlined the case, saying that it highlights “aspects of our innovation system that many believe should be reformed”:
In the end, it is possible that this case will spark a change in the law regarding human gene patents. In fact, it has gotten progressively harder to patent genes, but for reasons different than advanced in this case. … Whatever the outcome of this particular case, it’s yet another battle being fought over an innovation system that has been under attack for some time. Intellectual property legal reform is a notoriously slow process, but this case may have pressed the accelerator down just a little bit more.
Wednesday, March 24th, 2010
The Financial Times reports that “a proposal backed by President Barack Obama that would have banned multibillion-dollar deals between big pharmaceutical companies and their generic rivals was stripped out” of the health care legislation days before it was passed by the House. “The agreements have come under scrutiny from antitrust officials in the United States and Europe because they say the arrangements essentially allow branded drugmakers to pay off potential generic competitors, thereby keeping them out of the market,” according to FT.
Below, Smeal’s Daniel Cahoy, a patent lawyer and associate professor of business law, explains the special circumstances of these deals and why it was a good idea to remove this seemingly logical provision from the legislation:
Among the many provisions added to the health care reform bill was one that seemed eminently sensible and extremely popular: preventing branded pharmaceutical companies from paying generic companies to delay entry into the market. Yet this provision was excised before the House of Representatives’ historic vote on Sunday. What possible objection could anyone outside of the pharmaceutical industry have to precluding this behavior, known colloquially as “pay-for-delay”? In fact, the situation is a bit more nuanced than many news reports suggest. Even a skeptic of these arrangements might conclude that a total ban is a bad option.
The so-called “pay-for-delay” deals arise in the context of a very narrow and complex set of cases known as ANDA (Abbreviated New Drug Application) litigations. Essentially, generic companies file such cases to obtain the right to market their drugs early by establishing that a branded pharmaceutical company’s blocking patent (or patents) is invalid or not infringed. Commonly, the branded company vigorously opposes these assertions, as early generic entry can cause a significant reduction in expected profits. Unless there is a settlement, a court must sort it out. But this is where the confusion often begins, as ANDA settlements are different than those in most patent cases. Most importantly, the generic company has usually sold no product and would suffer no damages if it lost the case—it would simply be prevented from entering the market before the patent expires. To encourage settlement, the branded company may be compelled to offer the generic company something more than the option of simply walking away. So, reverse payments or some other kind of inverse incentive may be exchanged.
Wednesday, December 16th, 2009
After meeting yesterday with Senate Democrats regarding health care legislation, President Obama remarked to reporters, “You talk to every health care economist out there and they will tell you that whatever ideas are—whatever ideas exist in terms of bending the cost curve and starting to reduce costs for families, businesses, and government, those elements are in this bill.”
Smeal’s own health care economist, Keith Crocker, however, said in a video last month on Research with Impact that the health care proposals currently on the table will not reduce health care costs. As he has stated before on this blog, Crocker contends that there is only one way to truly reduce the cost of health care, and that is by reducing its utilization. And to do that, people must voluntarily accept less treatment or care must be rationed.
Wednesday, September 16th, 2009
In the cover story of September’s The Atlantic, David Goldhill, president and CEO of The Game Show Network, offers the story of his father’s death as a cautionary tale about what Goldhill believes is ailing the U.S. health care system. Smeal’s Dan Cahoy responds to the article on his personal blog, Incentivize!:
[Goldhill's article is] a discussion of the wildly misaligned incentives in the U.S. health care system. Essentially, the article asserts that a lack of transparency in costs and reimbursement have allowed costs to skyrocket while providing generally poor care.
… On the topic of health care markets, the underlying conclusion of the article is that many health care costs (at the very least, routine costs) should be paid directly by consumers who can exercise choice and encourage competition. According the the author, this would solve existing incentive misalignment through a traditional market approach. The market for LASIK surgery, which is generally not reimbursed by insurance, is used as an example, where costs have significantly decreased since the procedure was introduced.
Total consumer control may not be as attractive as it sounds, as basic health care is not like other markets. The most important difference is that in many cases we do not want people to choose to forgo treatment, and this may happen if they had to completely internalize the costs. LASIK is clearly an optional procedure, and people who could benefit from it (like me) lead perfectly happy and healthy lives without it (like me). But prenatal care, hypertension treatments, cancer screening and the like can be demonstrated to positively impact the quality of life and should not be promoted as optional. Many consumers may not be sophisticated enough to make decisions on heath care spending in every case (like me). In truth, we want a system that encourages people to attain some preventative care and treatments that they might not pay for themselves. A pure market approach in this context may lead to some undesirable outcomes.
Tuesday, July 21st, 2009
The Economist reports that drugmakers GlaxoSmithKline, Novartis, and Roche are relaxing patent restrictions on their pharmaceuticals to allow for greater access to the drugs in poorer countries. “Health care activists have long maintained that the system for granting patents on drugs denies the poor access to essential medicines and discourages pharmaceutical firms from collaborating to develop new ones for neglected diseases.”
According to Smeal’s Daniel Cahoy,the international rules outlining when and how governments may “break” pharmaceutical patents also reduce incentives for innovation, in addition to failing to increase access to medicines in poor nations. In his 2007 paper “Confronting Myths and Myopia on the Road from Doha,” Cahoy proposes a new, compensation-based approach to drug patent compulsory licenses, which force drug patent holders to relinquish their property rights during a time of crisis.
Cahoy’s proposed licensing regime keeps innovation incentives intact, but also ensures that developing countries have access to pharmaceuticals.
During public health crises, he argues for a three-tiered arrangement, in which remuneration is based on the economic status of the country issuing the compulsory license. Industrialized nations will be required to pay full market price, even during a pandemic. Developing countries would be allowed a limited free ride, with royalties based on the individual country’s ability pay. Finally, the world’s least developed countries would be granted the ability to issue royalty-free compulsory licenses during health emergencies.
More on Cahoy’s plan is online here.
Friday, July 17th, 2009
The Congressional Budget Office warned legislators yesterday that the proposals currently being considered to reform the U.S. health care system “would fail to contain costs—one of the primary goals—and could actually worsen the problem of rapidly escalating medical spending,” according to The Wall Street Journal.
Smeal’s Keith Crocker explains that there is really only one way to lower the costs associated with health care—reduce its utilization:
There is no mystery about how to reduce health care costs. You reduce costs by withholding care. Period. Having said that, nobody wants to make that policy because when you talk about withholding care, we all get a bit nervous. Everybody wants to withhold somebody else’s unnecessary care; but if you or someone you know is sick, you want the best care on the planet, and because it’s free for you, you’re not constrained at all by what you demand.
I think the elephant in the room is the fact that there has to be some way of reducing the utilization of health care services to bring costs down. To do that, there are two options: We can either get people to voluntarily choose less or we can put a structure in place that withholds treatment using rationing, administrative rules, or something like that. As an economist, I believe in markets and I believe in consumer sovereignty; that is, consumers are the best judge of what’s in their best interest. I think the best way to solve a problem like this is to have well-educated consumers guarding their own pocketbooks. The other option is a public plan that has government employees telling us what services we can and cannot utilize.
Thursday, June 25th, 2009
In a letter to U.S. senators released this week, the heads of America’s Health Insurance Plans and the Blue Cross Blue Shield Association argue that a government-run health insurance plan, like the “public option” promoted by President Obama, would spell the end for employer-based coverage while greatly increasing insurance costs for those who retain private insurance.
Smeal’s Keith Crocker, Elliott Chaired Professor of Insurance and Risk Management, explains the economics behind the insurance industry claims:
On the surface, President Obama’s “public option” health insurance plan sounds innocuous and perhaps desirable, and I think his goals are laudable. The question that has caused a lot of the opposition is, “How will this public insurer work in practice?”
Private insurers are forced to, at a minimum, break even. They can’t afford to lose money promiscuously. A public insurance company, on the other hand, faces no such constraints. Look at Medicare, which is hemorrhaging money in terms of its future liabilities. In an attempt to reduce these future liabilities, Medicare is reducing the reimbursements rates that it pays to hospitals and doctors for providing services.
The problem with this approach is that a big chunck of health care expenses are fixed costs, and if Medicare, or this new public insurance option, chisels down what it’s going to pay doctors, somebody else has to pay those costs. They end up getting pushed onto private insurance companies, which will see their rates have to go up as a consequence, making them eventually unable to compete with the public option.
In a nutshell, forced under-reimbursements from the public option will cause health care providers to look for remuneration elsewhere, forcing them to charge higher rates to private insurance companies, and ultimately driving these private insurers out of the market. That’s the fear, and given what’s happened with Medicare reimbursements over the last decade or so, it is a legitimate one. If there’s a government plan that doesn’t have to break even, it’s going to ultimately torpedo private insurance coverage.
Thursday, May 21st, 2009
A patent lawsuit filed this month by the ACLU and the Public Patent Foundation at Benjamin N. Cardozo School of Law (PUBPAT) on behalf of scientific organizations, researchers, and individuals has garnered a great deal of attention due to its unusual approach and controversial subject matter. According to an ACLU news release, the lawsuit charges that “patents on two human genes associated with breast and ovarian cancer stifle research that could lead to cures and limit women’s options regarding their medical care.”
Smeal’s Dan Cahoy, a patent lawyer and associate professor of business law, says the case appears to be a long shot, legally speaking, but that it could accelerate reform in intellectual property law.
Below, Cahoy explains the case and the legal arguments in greater detail:
If successful, this lawsuit would alter the balance between intellectual property ownership and public access. At the very least, it serves to highlight aspects of our innovation system that many believe should be reformed.
The case involves patents owned or exclusively licensed by Myriad Genetics related to the gene fragments known as BRCA1 and BRCA2. Screening tests for mutations in these genes can identify an increased risk of breast and ovarian cancer. Because it is not possible to conduct the screening tests without infringing the patents, they have generated controversy since issuing. Adding fuel to the fire is the fact that Myriad does not license the technology, but rather offers its own screening test for what some consider a premium price. The ACLU/PUBPAT suit is merely the latest attempt to tame this limited monopoly.
One reason this dispute has evoked a strong emotional response outside of the intellectual property legal community is certainly the fact that some of the patent claims at issue cover fragments of human DNA. Casual observers wonder, “How can you patent existing human genes?” The legal explanation is that that DNA patents actually cover only the isolated, purified genetic material, which does not exist in nature. This is the same rationale for granting a patent on a chemical compound or enzyme isolated from a plant. But even with this explanation in mind, people are still skeptical; this case seeks to channel some of that discontent to foster a change in the rules permitting such patents. (more…)