Mylan Settles, Merck KGaA Pays the Fine

The parade of legal settlements involving large health care organizations accused of wrong-doing just gets more and more crowded.  Here is the latest, courtesy the Pittsburgh Tribune-Review:

Mylan Inc., a generic-drug manufacturer in Cecil, agreed to a $280 million settlement of allegations that its Dey Inc. specialty-drug subsidiary cheated the government out of millions of dollars by reporting falsely inflated payments for several drugs, the Justice Department said.

'The government paid millions of claims for far greater amounts than it would have if Dey had reported truthful prices,' the Justice Department said.

Mylan acquired Dey when it purchased Merck KGaA's generic-drug business in October 2007 for $6.8 billion. The government's action began before Mylan acquired Dey.

Dey said in a statement that Merck KGaA is responsible for paying the full amount of this settlement as well as all costs and other expenses associated with pending and future related Medicare and Medicaid reimbursement lawsuits involving Dey.

It all gets so tiresome, doesn't it. However, before one starts yawning, remember how such settlements are markers of the prevalence of bad behavior by major health care organizations. The continuing parade of settlements thus is a big clue that there is something very rotten going on in health care, that the leadership of health care is increasingly amoral, greedy, and lawless.

Here again is our generic statement on the phenomenon:  As in many previous cases, note that the monetary cost of the above settlement, while it seems large to normal humans, would be just slightly more than round-up error for a large multi-national company.  As I have said repeatedly,  penalties that only appear to be (relatively small) costs of doing business are unlikely to deter future bad behavior. Until the people who actually authorized, directed and implemented the bad behavior have to suffer some negative consequences, expect the bad behavior to continue.  As long as the bad behavior continues, expect health care costs to continue to rise, while access falls, and quality suffers.  True health care reform requires accountability, integrity, and transparency of health care organizational leadership.

High Heels, Short Skirts, and Recruiting Bone Marrow Donors

Once again, you just can't make this stuff up.  Here is the New York Times description of new state of the art in recruiting donors for bone marrow transplant.

On its face, it seemed reasonable enough: a bone marrow registry sending recruiters to malls, ballparks and other busy sites to enlist potential donors.

But the recruiters were actually flirtatious models in heels, short skirts and lab coats, law enforcement officials say, asking passers-by for DNA swabs without mentioning the price of the seemingly simple procedure. And the registry, Caitlin Raymond International, was paying up to $60,000 a week for the models while billing insurance companies up to $4,300 per test.

In New Hampshire, where prosecutors say thousands of people appeared to have provided swabs, the attorney general is investigating the registry’s marketing and billing practices. The registry is a nonprofit subsidiary of UMass Memorial Medical Center in Worcester, which said Thursday that it had stopped seeking donors in New Hampshire and using models altogether.

James T. Boffetti, the state’s senior assistant attorney general, said the registry had hired models based on their photographs and had given them 'explicit instructions' to wear heels and short skirts.

The recruitment seemed to be based more on in-your-face sex appeal than an appeal to altruism:

'The models worked the crowds, if you will,' he said. 'We were told basically they would engage a lot of younger men with some sort of flirtatious thing: ‘Hey, don’t you want to be a hero? Come on, do this!’ '

What the models did not tell their, um, prospects was that apparent acts of charity would result in a hefty bill to the volunteers' health insurance:

They got people to do this without telling them it could be a charge of $4,300 against their insurance

To put that charge in perspective, as reported by Liz Kowalczyk in the Boston Globe:

In the last decade, Massachusetts, New Hampshire, and Rhode Island became the only states where legislators mandated insurers pay for bone marrow testing.

Nationally, most hospitals and other donor-recruitment organizations do not charge for the testing, said Michael Boo, chief strategy officer for the National Marrow Donor Program. The test typically involves a DNA analysis to determine whether the donor is a match for anyone on the bone marrow transplant waiting list.

Boo estimates it costs the organization about $100 to test and recruit each potential donor, although he said that, as the largest bone marrow donor registry in the United States, the program gets a volume discount from labs for the DNA analysis. The organization has about 8 million registered donors. (The Caitlin Raymond registry has 185,000 potential donors.)

But in New Hampshire, UMass Memorial charges self-insured employers, like the city of Manchester, that do not have a negotiated rate upwards of $4,000 per person for testing. It generally has charged insurers like Blue Cross and Harvard Pilgrim $700 to $1,500 person for testing, said James Boffetti, senior assistant attorney general in New Hampshire and chief of the consumer protection bureau.

'We haven’t been able to get a clear explanation from UMass about the reasons for the costs,' he said. As for the unusual recruiting, he said, 'they’re doing it because they are making money on this test.'

Finally, although the medical center sent initial bills for the tests to volunteers' insurers, sometimes the volunteers got stuck with part of the bill. As reported by National Public Radio:

Marc Ferland, a 45-year-old father of two in Bow, N.H., stopped at a registry booth after giving blood at a Red Cross drive. A month later, he received a bill that said he owed more than $2,000 to cover the costs of the test. When he complained, the amount was cut to $760, which he paid out of a health care account offered by his employer.

'When you take money out of my spending account, that's a cost to me,' Ferland said.

So here is an almost unbelievable example of how the a culture of marketing gone amok has taken over an academic health care institution. It seems darkly humorous now that the UMass Memorial Medical Center includes in its stated values:

Staff members of UMass Memorial Medical Center are committed to:

* Excelling at patient-centered care
Achieving patient-focused excellence through the highest standards of quality care, patient safety and patient satisfaction
* Acting with integrity
Dealing honestly, fairly and responsibly with each other
* Respecting one another
Valuing the contributions, ideas and opinions of our coworkers, colleagues, patients and partners
* Contributing to the community
Partnering with the community at large and with other health care and social agencies in meeting the health needs of the community
* Improving through teamwork and systems thinking
Working to continuously improve ourselves, our processes and our patient services through cooperation and thinking as an integrated health care system
* Embracing accountability
Holding ourselves, our coworkers and our leaders to the highest standards of performance

Integrity? Partnering with the community? - maybe that is what some of the recruits were hoping for, in a sense.   Embracing accountability?  Maybe the new vision statement should be "a sucker is born every minute."

Again, it would be funny if it were not so tragic.  Here we see a major academic medical institution debased into something that a Las Vegas casino might frown upon.

As we have noted ad infinitum, however, previous attempts at health care reform have not dealt with how the "greed is good" culture of Wall Street, run by amoral financiers and fueled by cynical marketers, has taken over health care.  Until we get health care leaders who really do care about patients, and about the integrity of teaching and research, the show will go on.  Meanwhile, the suckers better watch out.

History Repeats, and Repeats: McKesson Settles

Here a settlement, there a settlement, everywhere a settlement....  And the march continues, as reported by the New London (CT) Day,

Pharmaceutical distributor McKesson Corp. will pay Connecticut $15 million for 'illegal and deceptive practices' that inflated drug costs for both individual consumers and state-funded programs, Attorney General Richard Blumenthal announced Tuesday.

The settlement calls for $9 million to be used for reimbursing Connecticut's Medicaid program and $3 million for ConnPace, a state program that provides drug coverage for seniors. In addition, $2.3 million will be paid as a civil penalty and $700,000 will go into the state's drug-assistance program for AIDS patients.

Blumenthal had charged in a lawsuit that San Francisco-based McKesson conspired with First DataBank - which publishes average wholesale prices of drugs - to increase the amounts Connecticut paid for brand-name remedies by about 25 percent over usual wholesale costs. Previously, the prices had been 20 percent above wholesale.

McKesson used the increase to sweeten the 'spread' - the amount of profit - that could be taken by pharmacies, thereby increasing its share of the market, he said.

'McKesson manipulated the drug market - conspiring to inflate costs for hundreds of drugs and exploiting public programs that serve our most vulnerable citizens,' Blumenthal said in a statement.

Having been posting on this blog for nearly five years, it is interesting that viewed over time, patterns emerge suggesting that certain organizations have chronic problems with bad behavior. Last year, we noted that a former McKesson Chairman of the Board was convicted of five counts of securities fraud arising from actions occurring in the early part of the 21st century. Five former McKesson executives had already pleaded guilty to related crimes. Last year, Bloomberg called this scandal "one of the largest white-collar crimes."

This pattern may go back a lot longer that the turn of the last century.  Amazingly, the same company, McKesson, was involved in one of the biggest frauds of the great depression era. From the Wikipedia entry,

The McKesson & Robbins, Inc. scandal of 1938 was one of the major financial scandals of the 20th century. The company McKesson & Robbins, Inc. (now McKesson Corporation) had been taken over in 1925 by Phillip Musica, who had previously used Adelphia Pharmaceutical Manufacturing Company as a front for bootlegging operations. Musica, a twice-convicted felon, used assumed names to conceal his true identity in taking control of the two companies: Frank D. Costa at Adelphia Pharmaceutical and F. Donald Coster at McKesson & Robbins. Although he was successful in expanding the company’s legitimate business operations, Musica recruited three of his brothers, also working under assumed names, one outside the company and two inside it, to generate bogus sales documentation and to pay commissions to a shell distribution company under their control. Eventually, McKesson & Robbins treasurer Julian Thompson discovered the distribution company was bogus. It was eventually determined that about $20 million of the $87 million in assets on the company’s balance sheet were phony.

In December 1938, the Securities and Exchange Commission (SEC) opened an investigation and Musica was arrested. Only after he was booked, fingerprinted and released on bond did the authorities realize that 'Coster' was in reality Musica. His bond was revoked and he committed suicide before he could be rearrested.

The McKesson & Robbins scandal led to major corporate governance and auditing reforms. The SEC required that public companies have audit committees of 'outside' directors and that the appointment of auditors be approved by the shareholders. The American Institute of Accountants (now the American Institute of Certified Public Accountants) adopted audit standards requiring that auditors verify accounts receivable and inventory.

So I guess in some ways it should not be a surprise that a company involved in one of the biggest financial scandals of the depression era, and then one of the biggest white-collar crime of the early 21st century, should now be involved in a comparatively small settlement involving allegations of over-charges for drugs.

Given that in this latest case, the settlement was small, and there were no negative consequences for any individual who authorized, directed, or implemented the alleged market manipulation, it seems doubtful that it will have any lasting effect on corporate leadership of the corporate culture.

McKesson's long and chequered history suggests some sort of chronic affliction of its corporate culture.  It also suggests a rationale for requiring heath care organizations to have ongoing, active organizational ethics policies.  

More on Hospital Market Dominance, Enabled by Secret Pricing

This week two more articles appeared describing how large hospital systems use market dominance to charge more.  Naturally, both were in news publications, not scholarly health services research journals.

San Francisco

Kaiser Health News (via the Contra Costa [CA] Times) discussed hospital market dominance in the San Francisco area.  The article documented how particular systems can command higher prices. Consider the example of John Muir Health vs San Ramon Medical Center:

Often, a hospital's dominance in an area helps determine how much it can charge, experts say. Consider John Muir Health, a two-hospital nonprofit system in the East Bay. With campuses in Concord and Walnut Creek, John Muir has the biggest footprint in the local hospital market, accounting for 54 percent of all the acute care inpatient stays in 2009, more than any other hospital group, according to state data.

The hospital with the weakest market penetration is San Ramon Medical Center, a Tenet-owned, for-profit hospital, with 10 percent of the acute care inpatients.

The least the insurer Aetna paid John Muir for an outpatient colonoscopy was $3,185, according to Aetna's website, which tracks two years of payments. Aetna paid $1,483 to San Ramon Regional Medical Center for the same service. The least Aetna paid John Muir for an uncomplicated birth was $7,722, while its lowest price for a birth at San Ramon was $5,278.

Yet on broad quality measures, John Muir's hospitals generally score no better than San Ramon's, according to the California Hospitals and Reporting Taskforce, a nonprofit that produces hospital report cards published at Calhospitalcompare.org.

San Ramon ranks equal to John Muir's Walnut Creek campus in most major measures, including mortality rates in the intensive care units, overall patient satisfaction and maternity care. John Muir's Concord campus ranks below San Ramon on several measures, including mortality rate and patient experience, though John Muir was rated better in avoiding complications for patients on ventilators.

Then there is Sutter Health:

[Stanford University associate vice president for Benefits Les] Schlaegel says so many employees like to see doctors at the Palo Alto Medical Foundation, a doctors' organization affiliated with Sutter with a clinic near the Stanford campus, that the university feels obliged to keep offering insurance networks that include Sutter.

'Sutter basically has a stranglehold on Northern California,' says Schlaegel. 'They are strategically situated, both for hospitals and medical groups. They know purchasers need them. When you are strategically located, you can say 'this is our price and you can pay it.''

Secret Pricing
The ability of dominant hospitals to charge higher prices is facilitated by secrecy in which hospital pricing is cloaked

The hospitals haven't made it easy for consumers to comparison shop. State law requires hospitals to reveal their charges for specific services. But those charges don't reflect the lower negotiated rates insurers actually pay - rates hospitals usually insist be kept secret. The California Hospital Association has opposed legislation to ban such 'gag clauses'; the most recent of these bills died in the state Assembly in August.

Hospitals have also resisted a four-year campaign by the Pacific Business Group on Health, an employer coalition, and CalPERS to create a 'hospital value initiative' that would allow hospital comparison based on cost and quality of care.

Summary

In many cases, hospitals are able to keep raising prices beyond inflation because their sizes or reputations give them clout in negotiating rates with insurers, researchers say. Yet high prices don't always equate with superior care.

Quality measures for some of the Bay Area's most prestigious hospitals, including Stanford and John Muir, show that in some instances, less expensive competitors perform as well or better in their basic responsibilities, such as avoiding infections and high death rates for patients in intensive care.

'Some hospitals are able to charge higher prices than the market normally would bear, even without providing higher quality,' says Dr. R. Adams Dudley, a professor of medicine and health policy at the University of California, San Francisco. 'That means they're getting those higher prices without really offering more to patients or the rest of society.'

New York City


Meanwhile, a long feature story in New York magazine about the demise of St Vincent's hospital (see our post here) also discussed the market power of its competitors as one factor in its decline:

The city’s largest and most powerful hospitals, which are crucial to an insurer’s customers, exert their leverage to secure deals that are believed to pay well above the average margin; smaller hospitals, which are often located in low-income neighborhoods, have little choice but to accept the dismal rates dictated by insurers if they want to remain in the insurers’ plans. 'When the big players take their cut, there are only scraps left for everyone else,' says the CEO of an outer-borough hospital. “'United HealthCare couldn’t care less about having my hospital in their network. They tell me to take it or leave it.

Secret Prices

Like in California, market dominance is enabled by secret pricing:

the rates negotiated between hospitals and insurance providers are withheld from public scrutiny—even state health and insurance regulators are denied the information

Free Markets?

Secret prices determined by market power hardly sound like characteristics of a free market. Yet in New York, at least, they seem partially to be the result of the free market ideology of previous political leaders:

Then George Pataki took office in 1995, determined to allow hospitals to test their mettle in the free market by negotiating their own terms with insurers. It turned out to be an exercise in shock-therapy capitalism. Inexperienced at the bargaining table, hospitals engaged in intramural rivalry with each other, cutting unfavorable deals with insurers in order to hold on to patients in the short term. With their already thin margins pared down further by deregulation, many hospitals soon built up paralyzing debt loads. Even the largest and seemingly least vulnerable facilities decided that their best hope for survival was to get bigger. A flurry of mergers and buyouts ensued, and by the end of the nineties, the hospital system began to assume its current bewildering patchwork of partnerships and affiliations. Columbia Presbyterian and New York Hospital, both attached to elite medical schools, joined forces. NYU and Mount Sinai forged a deal (it later came undone). On the eastern edge of the city, North Shore hospitals merged with nearby Long Island Jewish, staking out an enormous swath of the hospital market on Long Island, Queens, and Staten Island. Beth Israel and St. Luke’s–Roosevelt, debt-ridden and left on the sidelines by the major academic hospitals, decided to try making a go of it together. It was unclear if bigger was actually better—for patients or the bottom line—but size seemed to offer hospitals a buffer against collapse.

By 2005, less than a decade into its dalliance with free enterprise, the city’s hospital system had taken on something of a post-Soviet tinge, with winners ruling the roost like oligarchs and losers reduced to a state of grim dependency. A pecking order emerged, with elite academic centers at the top, well-regarded independent hospitals like Lenox Hill in the middle, and community hospitals on the bottom.

Summary

We have previously written (for example, here and here) about how increasing market dominance by large, sometimes strategically located, and sometimes politically well-connected (e.g., see here) hospital systems run by conflicted leaders. This seems like another unintended consequence of the "free markets solve all problems" ideology, possibly fueled by conflicts of interest that has done so badly in our financial arena (see here). What some of these free market enthusiasts seem to forget, their forgetfulness perhaps fueled by payments received from the large corporations that have profited from this movement, are that true free markets are hard to maintain. This is particularly so in health care, in which knowledge is asymetric, outcomes are uncertain, and sick and anxious patients have trouble making cool, rational choices (as per Arrow, see this post.)

But if the free market enthusiasts really believe in free markets, why have they not been out campaigning to prevent the "unfree" characteristics, like secret pricing, of current health care markets?  Of course, ending secret pricing might compromise the ability of their financial sponsors to keep earning their millions

Oh, the Prices We Pay, Reloaded - Celgene Balks at Explaining High Price of Thalidomide

A brief article on Bloomberg.com implied that Celgene has been fighting efforts by the Canadian Patented Medicine Prices Review Board to get pricing data about the drug Thalidomid (thalidomide):

Celgene Corp., the biotechnology company specializing in blood-cancer medicines, will get a hearing before Canada’s highest court over the country’s demands to provide pricing information for the drug Thalomid.

The Supreme Court of Canada today agreed to hear Celgene’s appeal of a Federal Court of Appeal ruling that said Canada’s Patented Medicine Prices Review Board was entitled to information about the pricing of the drug. The high court gave no reason for its decision.

Celgene’s two top-selling drugs are Revlimid and Thalomid, for a form of blood-cancer called multiple myeloma. They brought in more than 80 percent of the company’s total $2.25 billion in 2008 revenue.

It should be no surprise that Celgene may be sensitive about the price of Thalidomid. We posted back in 2005 about the stratospheric prices of new drugs that seemed disproportionate to manufacturing and development costs on one hand, and the value of the drugs for patients on the other. We noted that thalidomide, a very old drug that notoriously was found to cause birth defects when it was given to pregnant women, but that then showed promise as an anti-cancer drug, was being marketed in the US for $29 per capsule (approximately $25,000 a year), while a generic form sold in Brazil for $0.07 per capsule.
 
The amount Celgene manages to make from this very old (and demonstrably cheap to produce) molecule is vivid, albeit anecdotal evidence about what has gone wrong with health care prices in the US.  Despite health care insurance companies' protestations that their goal is to provide reasonably priced health care, they seem utterly incapable of negotiating down the prices of even the most obviously over-priced drugs.  And the US government Medicare program so far is prohibited by law from negotiating prices.  How our supposed free market health care system has tilted so far in favor of pharmaceuticals is a reason to wonder, but ought to be reason to investigate. 
 
Meanwhile, Celgene's 2010 annual report shows that the company has sold more than $400 million worth of Thalidomid yearly since 2007. The company's total sales in 2009 were $2.567 billion, while it spent $795 million on research and development, and $754 million on general, sales, and administrative expenses. According to the company's 2009 proxy statement, in 2008 its CEO received over $8.5 million, its COO over $5.1 million, its CFO over $2.1 million in compensation, and a senior vice president over $3.0 million. The total compensation of its five highest-paid hired managers (compare to a total of 2813 full-time employees in 2009), approximately $20.5 million 2008, was was approximately 2.6% of the company's net income in 2009, and just under 1% of its total sales.
 
As we have said previously, so the health care bubble continues to inflate.  One cause is"compensation madness," including "insiders hijacking established institutions for their personal benefit."  Another is the amazing acquiescence of those who pay bills at all levels, from the individuals who ultimately fund health care through salary dollars not earned, health insurance premiums, co-pays and the like, and tax payments, through the health care insurers and government agencies who did not balk at paying $25,000 a year for thalidomide in 2005.  If we really want to provide accessible health care of good quality and a reasonable cost, we will need to develop mechanisms to pay more reasonable amounts for health care goods and services. This will require some courage facing down the corporate and organizational insiders who have made themselves very rich from the current craziness.

More Settlements: Christ Hospital, Teva Pharmaceutical Industries

For the end of the week, a round-up of the latest legal settlements involving large health care organizations, in alphabetical order....

Christ Hospital (Cincinnati, Ohio)

As reported by the Business Courier of Cincinnati:

Christ Hospital and the federal government have reached a settlement agreement on a whistleblower lawsuit that accused the hospital of defrauding federal health-care programs.

The suit alleged that Christ Hospital and the Ohio Heart Health Center cardiology practice, which Christ Hospital has since bought, 'devised a scheme that provided cardiologists improper financial incentives in exchange for generating revenue for the hospital,' according to the U.S. Department of Justice.

Potential liability was reported to be as high as $424 million across the Health Alliance and its former members in an October 2007 document from VMG Health, a consultant hired as part of the separation of Christ Hospital from the Health Alliance.

Christ faced potential liability of as much as $123 million in the case, according to the report, and the St. Luke Hospitals, which also left the Health Alliance, faced exposure of $51 million.

The focus of the suit is an outpatient cardiology testing unit within Christ Hospital known as the Heart Station, where patients receive non-invasive heart procedures such as electrocardiograms, echocardiograms and stress tests.

The action was originally filed in the U.S. District Court in Cincinnati under the whistleblower provisions of the False Claims Act by Dr. Harry Fry, a cardiologist who had provided services to Christ Hospital and Ohio Heart.

The lawsuit alleges that, between at least 1999 and 2004, cardiologists were allocated time at the Heart Station based on the number of coronary arterial bypass graph procedures and catheter lab revenues they or their group generated for Christ the previous year.

Many of the procedures were billed to federal benefit programs, including Medicare and Medicaid, according to the government. It’s against federal law to exchange financial incentives for patient referrals.

Teva Pharmaceutical Industries

As reported by Reuters,

Generic drugmaker Teva Pharmaceutical Industries Ltd ... said on Friday it plans to settle lawsuits alleging it caused governments to pay inflated prices for its drugs under Medicaid and other programs.

Teva, which denies the charges, said it will record a charge of about $315 million in its fourth quarter, 2009. The charge includes the settlement in principle and a reserve for the remaining drug pricing lawsuits to which Teva is a party.

Israel-based Teva is one of a number of drug companies named in civil lawsuits that relate to drug price reporting by manufacturers in about 15 states. The cases are pending....

The march of settlements continues. To repeat, seemingly ad infinitum, these are just the latest in a now long parade of settlements that serve as reminders of poor behavior by myriad health care organizations. As we have previously noted, these settlements seem to have little deterrent effect on future bad behavior. Usually, the companies involved only need to pay fines, and no individual who performed, directed or approved unethical or illegal acts will suffer any negative consequences. I submit once again that such fines are viewed merely as costs of doing business by the affected companies, and do not deter future bad behavior. Until the people who approve, direct, and perform unethical or illegal acts pay some penalties, expect such acts to continue.  I again suggest that to truly reform health care, we need rigorous regulation of health care organizations that has the power to deter unethical behavior that may risk patients' health.

The Price is What?

Many in the US believe that a free market in health care is a good idea.  Some actually assert that the US health care system amounts to a free market. 

More evidence against that assertion was provided this week by an article in our local paper, the Providence Journal, by Felice Freyer. For the first time ever, the Rhode Island state health insurance commissioner published a report comparing what insurers pay different hospitals for the same services:

If you had surgery at Kent Hospital, your insurer would pay Kent significantly more than if you had the exact same procedure at South County Hospital –– even if the same doctor did the work.

On average, Kent is getting paid nearly twice as much as South County for inpatient care, according to a new report from the health insurance commissioner that is causing a stir across the state’s health-care industry.

It is well-known that hospitals get paid different amounts for the same services. But the report, for the first time, reveals the winners and losers, and quantifies the disparities –– with numbers showing the differences to be greater than many people thought.

The factor determining which hospitals are paid the highest rates, according to the report, is whether the hospital is part of a group. Such hospital systems have the clout to negotiate higher prices than independent hospitals.

'We’ve never had this kind of data [before],' said Christopher F. Koller, state health insurance commissioner. 'The results and analysis show that higher payments to hospitals are associated with system affiliation, and the current contracting method does not appear to encourage the fair treatment of providers.' There is no evidence connecting higher pay to higher quality, he said.

What is striking is the reason why such a comparison has never appeared up to now:

Koller’s report shines a flashlight beam into the murky world of hospital finance. Hospitals negotiate privately with insurers to establish how much they will be paid for each service. These talks are largely unregulated, and always private, so that no hospital knows exactly what its neighbor is being paid. All are forbidden by contract to reveal their rates.

Koller collected data from Blue Cross & Blue Shield of Rhode Island and UnitedHealthcare of New England concerning payments to 11 acute-care hospitals in 2008. He is the first public official to obtain this confidential information, saying he was entitled to it because a 2004 law requires him to promote the affordability of health care and ensure the fair treatment of providers.

Thus, the prices of commonly used medical services provided by hospitals were largely secret.

On obvious requirement for the function of a free market is price transparency. When making a purchasing decision, one needs to know what prices different sellers charge.

In a recent commentary in the Wall Street Journal, Alan S Blinder, a Princeton economics professor, and former Vice Chairman of the Federal Reserve Board, described the basic requirements of a free market:

When economists first heard [movie character Gordon] Gekko's now-famous dictum, 'Greed is good,' they thought it a crude expression of Adam Smith's 'Invisible Hand' — which is one of history's great ideas. But in Smith's vision, greed is socially beneficial only when properly harnessed and channeled. The necessary conditions include, among other things: appropriate incentives (for risk taking, etc.), effective competition, safeguards against exploitation of what economists call 'asymmetric information' (as when a deceitful seller unloads junk on an unsuspecting buyer), regulators to enforce the rules and keep participants honest, and—when relevant—protection of taxpayers against pilferage or malfeasance by others. When these conditions fail to hold, greed is not good.

Clearly, one cannot have appropriate incentives when prices are secret. Secret prices are also a glaring example of "asymmetric information." (Hospitals know what different insurance companies pay them for specific services, but not what the companies pay other hospitals for those services. Insurance companies know what they pay to different hospitals for the same services, but not what other companies pay. Patients, physicians, policy-makers and the public heretofore had no idea what any hospital was paid by any insurance company.)

The question begged is why neither hospitals nor health insurance companies wanted to make the prices public. One wonders if it were fears of looking incompetent (by paying to much, or charging to little), or worse, of revealing collusion. One also wonders if it were fears of revealing how anti-competitive is the current way of doing business.  At the time of data collection, Rhode Island had only two health insurers.  As noted above, large hospital networks got the highest prices.  Price differences did not obviously relate to quality of care, or costs of teaching programs. 

Note that we previously discussed secret agreements between a dominant health care insurance company and the largest hospital system in our northern neighbor, Massachusetts, and how these agreements resulted in payments to that system far greater than those paid to any other hospital.  I suspect that secret deals resulting in wide pricing discrepancies are the rule, rather than the exception in the US, and that such deals overwhelmingly favor the largest organizations, but not the best care. 

As we have been saying repeatedly since we started Health Care Renewal, the leadership of the large organizations that now dominate health care lacks accountability and transparency, and often fails to exhibit integrity and honesty.  Deliberately concealing price information obviously is an example of failing to be accountable and transparent. 

Now that the events have conspired to slow the US health care reform juggernaut, maybe we can reconsider whether meaningful health care reform can be accomplished without improving accountability, integrity, transparency and honesty of health care oganizations and their leaders.

More Air Into the Health Care Bubble: the $30,000 a Month Cancer Drug

Over four years ago, we posted about the stratospheric prices of new drugs that seemed disproportionate to manufacturing and development costs on one hand, and the value of the drugs for patients on the other.  For example, back then we noted that thalidomide, a very old drug that notoriously was found to cause birth defects when it was given to preganant women, but that then showed promise as an anti-cancer drug, was being marketed in the US for $29 per capsule (approximately $25,000 a year), while a generic form sold in Brazil for $0.07 per capsule.

That was then, and this is now.  This week, the New York Times reported on a $30,000+  per month cancer drug. 

A newly approved chemotherapy drug will cost about $30,000 a month, a sign that the prices of cancer medicines are continuing to rise despite growing concern about health care costs.

The price of the new drug, called Folotyn, is at least triple that of other drugs that critics have said are too expensive for the benefits they offer to patients. The colon cancer drug Erbitux, for instance, costs $10,000 a month and the drug Avastin about $8,800 when used to treat lung cancer.

So what could be the rationale for this breathtaking price?

Drug Effectiveness

Could it be that the drug is extremely effective? Not according to the NY Times:

Folotyn has not yet shown an effect on longevity. In the clinical trial that led to approval of the drug, 27 percent of the 109 patients experienced a reduction in tumor size. The reductions lasted a median of 9.4 months.

But considering all the patients in the trial, only 12 percent had a reduction in tumor size that lasted for more than 14 weeks. The trial did not compare Folotyn to another drug or a placebo

A PubMed search revealed no sign that this trial had been publsiehd, and no publications reporting any controlled trials of this drug.

So at best, this drug at best may temporarily shrink tumors, although that assertion is based on evidence that has not yet been published or subject to peer-review. It does not seem that the tremendous price of the drug could be justified by tremendous benefits to patients.

Research, Development and Manufacturing

So, perhaps the drug was very difficult and expensive to create, manufacture and develop?  That does not seem to be the case, either.

Folotyn's generic name is pralatrexate. As the name suggests, it is a chemical compound very similar to the much older anti-cancer drug methotrexate. [See O'Connor OA. Pralatrexate: an emerging new agent with activity in T-cell lymphoma. Curr Opin Oncol 2006; 18: 591-597.]  It was first developed not by Allos Therapeutics, but by Memorial Sloan-Kettering Cancer Center, Southern Research Institute, and Stanford Research Institute.  The Allos Therapeutics 2008 annual report noted that the company's total research and development expenses for the drug from 1992 through 2008 were $26.8 million (so much for the urban myth that the average drug costs $1 billion to develop.)  Based on the estimate that the drug would cost roughly $30,000/ month from the NY Times, the company could recover all the development costs of this drug after 893 patient-months of use.

Allos Therapeutics does not actually make pralotrexate, but outsources its production, according to the company's .  The firm's total yearly manufacturing costs (for several experimental drugs as well as pralotrexate) in 2008 were $6.7 million.

So it does not seem that the tremendous price of the drug could be attributed to the costs of discovering, developing, or manufacturing it.

So where would the money go?

General and Administrative Costs, Executive and Board Compensation

Allos Therapeutics seems to spend a disproportionate amount of money on marketing, general and administrative costs.  According to the 2008 report, "marketing, general and administrative expenses include costs for pre-marketing activities, corporate development, executive administration, corporate offices and related infrastructure."  In 2008, these expenses were $23 million, in one year, almost as much as the company spent over 16 years to research and develop Folotyn.

Allos Therapeutics has enriched its corporate insiders.  According to the company's 2009 proxy statement, in 2008, CEO Paul L Berns received $2,091,600 in total compensation; Chief Commercial Officer James V Caruso received $1,259,700; and Chief Medical Officer Pablo J Cagnoni received $1,408,700.  The total compensation of the five highest paid executives of the company in 2008, $5,945,500, was over 10% of the entire company's budget, $53,639,000. 

Mr Berns, who has only been with the company since 2006, owned 994,606 shares or equivalent (at a price of $6.62 per share on 4 December, 2009, worth $6,584,292).  Mr Caruso owned 272,072 shares or equivalent,and Dr Cagnoni owned 386,245.   Although two board members, Stewart Hen and Jonathan S Leff seemed to be serving by virtue of their positions with Warburg Pincus & Co, whose Private Equity VIII LP owns over 29% of Allos Therapeutics stock, Mr Hen and Mr Leff received $120,700 and $119,400 to sit on the board.

These amounts should be considered in light of the fact that the company is comparatively tiny.  Its 2008 report disclosed that it only has 81 full-time employees, of whom fully 31 "are involved in marketing, corporate development, finance, administration, and operations."  The company has never made money.  Its 2008 report noted losses of over $20 million a year in the past five years, and a total loss of over $289 million.

So one wonders if the real reason pralatrexate was priced so high was to justify the millions that top company leaders have reaped from a company that lost money over the 16 years?

Summary

The NY Times reported that people outside of Allos were not pleased with the price of Folotyn:

Dr. Lee N. Newcomer, senior vice president for oncology at the big insurer UnitedHealthcare, called the price of Folotyn 'unconscionable.' He said that Folotyn alone would cost as much as UnitedHealthcare now typically spends in total to treat a lymphoma patient from diagnosis until death. That median expenditure now, he said, is $87,000 for a little over a year of treatments.

But Dr. Newcomer said insurers would be obligated to pay for Folotyn because there were no alternatives.

Furthermore,

'This drug is not a home run,' Dr. Brad S. Kahl, a lymphoma specialist at the University of Wisconsin, said during a meeting of an advisory committee to the F.D.A. on Sept. 2. 'It’s not even a double. It’s a single.'

Saying that even a single was helpful, Dr. Kahl was part of a majority on the panel that recommended approval of the drug, 10 to 4.

But after recently learning what Allos planned to charge for Folotyn, Dr. Kahl said he was 'disappointed' by the 'excessive' price.

'It dampens my enthusiasm for using that drug,' he said. 'It creates these huge ethical quandaries about trying a drug that has a modest benefit for the average patient at enormous expense.'

So the health care bubble continues to inflate.  I suggest that the case of the ridiculous pricing of Folotyn shows how this bubble is in part generated by "compensation madness," not only "insiders hijacking established institutions for their personal benefit," but also insiders able to become rich at the expense of even tiny, money-losing corporations.   But the bubble is also generated by the amazing acquiescence of those who pay bills at all levels, form the individuals who ultimately fund health care through salary dollars not earned, health insurance premiums, co-pays and the like, and tax payments, through the health care insurers and government agencies who did not balk at paying $25,000 a year for thalidomide in 2005, and seemingly will not balk at paying $30,000+ a year for pralatrexate in 2009.

If we really want to provide accessible health care of good quality and a reasonable cost, we will need to develop mechanisms to pay more reasonable amounts for health care goods and services.  This will require some courage facing down the corporate and organizational insiders who have made themselves very rich from the current craziness. 

NOTE (21 December, 2009) - See also comments on the Postscript blog.

The Role of the RUC in Medicare's Price-Fixing and Rationing Remains Anechoic

An important part of the noisy and contentious debate about health care reform in the US centers on the role of the government as a provider of health insurance. Some on the left want a government "single-payer" plan to be the only health insurance available. Some left of center want a government "public option" health insurance plan to be available, particularly to those who have trouble obtaining commercial insurance. Some on the right want none of it, and sometimes note that the existing government single-payer plan for the elderly and disabled, Medicare, has important faults that would only become more significant if the plan is extended or duplicated. Yet even critics of Medicare on the right do not seem to want to talk about what may be its worst fault.

The latest example, an op-ed piece by Dr Scott Gottlieb, appeared in the Wall Street Journal yesterday. Dr Gottlieb's main point was that health care rationing by either government or private insurers is inevitable, but that "government does it in far more byzantine and arbitrary ways." In particular,

Consider the $450 billion Medicare program. It provides a model for—indeed its bureaucracy could well end up running—the 'public option' health plan that Mr. Obama wants to offer all Americans under the age of 65. In recent years, Medicare's staff has been aggressively restricting coverage for costly treatments.

This often means limiting access to the costliest technologies. To do this Medicare relies on its rationing and pricing systems.

Gottlieb then cited several examples, "tortured decisions concerning the use of implantable defibrillators," and "the travails of the pharmaceutical company Spracor and its drug Xopenex, an innovative respiratory medicine that competes with the chemically distinct and much cheaper generic albuterol."

Finally Gottlieb decried Medicare's decision making processes applied to costly technologies as "impenetrable." His summation was

There's nothing inherently wrong with a program like Medicare seeking value for taxpayers. But it shouldn't make up the rules as it goes.

Let me first say that I actually agree with Dr Gottlieb's main points. Any government or private health insurance plan ought to seek value for its money. However, how it does so ought to be rational, based on understanding of medicine and the clinical context, and transparent and accountable to the patients on whose behalf such plans pay. "Covert rationing" (as has been well discussed in the Covert Rationing Blog) raises worries that decisions are being made just to save money, not to improve value, and even that decisions are being made without informed consideration of the clinical context, or based on the self-interest of the decision makers, or even that decisions may result from bribery and corruption.

But if Dr Gottlieb is so concerned about Medicare rationing care as a result of opaque and unaccountable decision making, why is he not more concerned about how Medicare controls the prices of physicians' services than about its decisions about a few expensive, high-tech and infrequently used treatments?

We have written again and again about how Medicare has allowed decisions about what physicians are paid for providing various services to be made de facto by an opaque private committee run by the American Medical Association. This decision-making process has lead to relatively generous payments for procedures, versus miserly payments for "cognitive services," (that is, "evaluation and management services," or for physicians interviewing, examining, and counseling patients, making diagnoses, predicting prognoses, and making decisions about treatment.) The resulting perverse incentives are a major reason that primary care has become increasingly unavailable, and for our expensive patterns of care dominated by high-technology and invasive procedures. More detail quoted from a previous post appears below.

As we have discussed, the US Medicare system determines what it pays physicians using the Resource Based Relative Value System (RBRVS). This system determines the pay for every kind of medical encounter according to a complex formula that is supposed to account for physicians' time and effort, physicians' practice expense, and the cost of malpractice insurance. The components of physicians' effort assessed are, in turn, technical skill and physical effort; the required mental effort and judgment; and stress due to the potential risk to the patient.

To keep the system, which was started in 1990, current, requires addition of new kinds of encounters, which means encounters involving new kinds of procedures, and updating of the estimates of various components, including physicians' time and effort. To do so, the Center for Medicare and Medicaid Services (CMS) relies almost exclusively on the advice of the RBRVS Update Committee (RUC). The RUC is a private committee of the AMA, touted as an "expert panel" that takes advantage of the organization's First Amendment rights to petition the government. Membership on the RUC is allotted to represent specialty societies, so that the vast majority of the members represent specialties that do procedures and focus on expensive, high-technology tests and treatments. However, the identities of RUC members are secret, as are the proceedings of the group.

This opaque and unaccountable process has resulted in increases outstripping inflation in fees paid for procedures, while fees paid for 'cognitive" medicine,' i.e., for primary care, and for services that involve diagnosis, management of acute and chronic disease, counseling, coordination of care, etc, but not procedures, have lagged inflation. The effects of the RUC have been amplified by the unexplained tendency of commercial managed care and health insurance to track the RBRVS system when making their own payments to physicians.For further details about the RUC, see these posts on Health Care Renewal (here, here, here, here, and here) and important articles by Bodenheimer et al,(1) and Goodson.(2) By the way, why the US Center for Medicare and Medicaid Services (CMS) relies de facto exclusively on the RUC to control the RBRVS system, and why the AMA made the RUC into a secret organization apparently beholden only to the organization's proceduralist members are unanswered questions.

Our most recent posts about the RUC are here, here, and here. Other bloggers, notably including Dr Robert Centor on DB's Medical Rants, have criticized the RUC. The Society of General Internal Medicine seems to be the only medical society that has criticized the RUC (see this post). Yet even ostensibly conservative and libertarian pundits who decry price-fixing and rationing by Medicare have ignored this vivid and important example of opaque and unaccountable price-fixing and rationing. And ostensibly liberal proponents of public options and single-payer systems have not explained how they would make their rationing more rational, transparent, and accountable, or how simply insuring more patients under Medicare-like programs would not result in even higher costs, poorer access, and worse quality.

The lack of discussion of the RUC remains one of the more striking examples of the anechoic effect. Failing to address why our costs are so high, are access is so poor, and our quality is so challenged will make it likely that any supposed reform effort will only make these problems worse.

References

1. Bodenheimer T, Berenson RA, Rudolf P. The primary care-specialty income gap: why it matters. Ann Intern Med 2007; 146: 301-306. Link here.
2. Goodson JD. Unintended consequences of Resource-Based Relative Value Scale reimbursement. JAMA 2007; 298(19):2308-2310. Link here.

Sanofi-Aventis Settles

Here is another addition to the parade of multi-million dollar legal settlements by health care corporations. As reported by the AP:

Drugmaker Sanofi-Aventis has agreed to pay nearly $100 million to settle allegations it cheated Medicaid on the cost of nasal sprays.

The Justice Department said Aventis Pharmaceutical Inc., a wholly owned subsidiary of Sanofi-Aventis U.S. LLC, has agreed to pay the government $95.5 million to settle the charges.

The government charged that between 1995 and 2000, Aventis and its corporate predecessors did not offer Medicaid the best prices for the sprays Azmacort, Nasacort and Nasacort AQ.

In reaching the settlement, Sanofi-Aventis U.S. did not admit any wrongdoing. The company, based in Bridgewater, N.J., issued a statement saying it believed the old pricing system was legal.

Under the law, the company was required to tell Medicaid the lowest price that it charged companies for those products, and offer state Medicaid programs rebates based on those prices.

Prosecutors contend that in order to dodge that obligation, Aventis entered into a private deal with the HMO Kaiser Permanente that repackaged Aventis drugs under a new label, allowing them to overcharge Medicaid programs for the same product.

It seems that scarcely a week goes by without a settlement of charges of unethical behavior by some major health care organization. The ongoing parade of such cases ought to inspire some worry about the ethics of the leaders of such organization. Given the current very public discussion of how expensive health care has become, one would think that there would be some discussion of how much of this expense is due to various kinds of deceptive and unethical behavior by some of the biggest, richest, and most powerful health care organizations. But perhaps that would be too upsetting for those who make so much money running these organizations.

As we have said before, most recently here, while human beings authorized or committed the acts that got the organization in trouble, rarely do these people seem to suffer any negative consequences. At most, the organization may pay a fine. In this case, the fine was, in corporate terms, of modest size. However, even a large fine, may come out of dividends or the stock price, dispersing the cost to stock-holders, or out of salaries across the board, dispersing the cost to all employees. Thus, those who got the organization into trouble are unlikely to feel pain from it. Perhaps because of reverence for all organizations related to health care, and fear that the bankruptcy of any health care organization will leave patients in the lurch, prosecutors do not seem inclined to actually prosecute such organizations. The net effect, though, seems to be that dishonest executives of health care organizations can continue to act with impunity.Until bad leadership of health care organizations leads to negative consequences for those practicing it, health care leadership can be expected to continuously degrade.

ADDENDUM (2 June, 2009) - See these comments on the Effect Measure blog.

Merger Mania Redux: the Case of the Carilion Health Care System

The Wall Street Journal published an article on how one not-for-profit hospital system came to dominate its market, and the effects of that domination on local health care.

How the System Became Dominant

The WSJ article documented how a hospital merger created a vertically-integrated health care system. Note that in the old days of "merger mania," there was a lot of buzz in the health care research and policy circles about how creating such integrated systems to benefit quality and access, and lower costs. This rationale appears below.

In 1989, the U.S. Department of Justice tried but failed to prevent a merger between nonprofit Carilion Health System and this former railroad town's other hospital. The merger, it warned in an unsuccessful antitrust lawsuit, would create a monopoly over medical care in the area.

After the 1989 merger, Carilion continued to operate Roanoke's two hospitals separately. It later consolidated the hospital boards and in 2006, transferred most of Roanoke Community Hospital's staff and services to a renovated and enlarged Roanoke Memorial Hospital.

The moves eliminated any hospital competition in Roanoke proper....

[Carilion CEO Dr Murphy] was convinced that the cost and quality of care in Roanoke could be improved if doctors worked in a more centralized system. In June 2006, he announced a seven-year, $100 million plan to transform Carilion into a multispecialty clinic, like the Mayo Clinic.

Carilion began approaching private physician groups, offering to buy their practices and pay their salaries.

We shall see what effects CEO Dr Murphy's advocacy of more centralization had.

Effects on Costs

The domination by a single vertically integrated health care system apparently lead to rising costs.

Nearly two decades later, the cost of health care in the Roanoke Valley -- a region in southwestern Virginia with a population of 300,000 -- is soaring. Health-insurance rates in Roanoke have gone from being the lowest in the state to the highest.

That's partly a reflection of Carilion's prices. Carilion charges $4,727 for a colonoscopy, four to 10 times what a local endoscopy center charges for the procedure. Carilion bills $1,606 for a neck CT scan, compared with the $675 charged by a local imaging center.

Alan Bayse, founder of a local benefits-consulting firm who has sold health insurance in the area for 30 years, says health-insurance rates in the Roanoke Valley used to be 20% lower than in Richmond, Virginia's capital, and the lowest in the state. Today, he says, they are the highest in the state and 25% higher than in Richmond, citing rate information from insurer Cigna Corp. Anthem, another health insurer, says its rates are 6% higher in Roanoke than in Richmond.

Mr. Lionberger, whose construction company has about 100 employees, says his health-care costs have risen 50% over the past three years, hampering his ability to compete with contractors from other parts of the state.

While the increasing domination by the system been associated with increased health care insurance rates, its leadership has aggressively pursued patients who failed to pay their share of its exaggerated bills.

The Roanoke City General District Court devotes one morning a week to cases filed by Carilion. In its fiscal year ended Sept. 30, Carilion says it sued 9,888 patients, garnished the wages of 5,478 people and placed liens on 3,920 homes. Carilion says the people it takes to court have the means to pay their bills.

When some patients don't pay their bills, Carilion places liens on their homes. Carilion says it doesn't track how many liens it has outstanding, but the close to 4,000 it filed in 2007 'is representative of a typical year,' Mr. Earnhart says. Carilion doesn't foreclose on homes and only collects when properties are sold, he says.

Dr. Murphy says Carilion only sues patients and places liens on their homes if it believes they have the ability to pay. 'If you're asking me if it's right in a right-and-wrong sense, it's not,' he says. But Carilion can't be blamed for the country's 'broken' health-care system, he says.

Ah, yes, the "broken" health care system made me do it, says CEO Dr Murphy.

Decreasing Access

One effect of the merger seems to be a squeeze on physicians who are not part of the integrated system, which presumably will decrease, not improve access to health care.

Some doctors who chose to remain independent say the number of patients referred to them by Carilion physicians plummeted. Carilion controls a large proportion of Roanoke's referrals because it employs a majority of doctors who make them, such as family practitioners, pediatricians and emergency physicians.

Joseph Alhadeff, an orthopedic surgeon who is a member of a private practice called Roanoke Orthopedic Center, says the number of joint replacements he performed dropped off sharply after he stopped getting such referrals from Carilion doctors, prompting him to plan to relocate to Pennsylvania. 'I spent seven years building up a practice and watched it evaporate in six months,' he says.

In fact, it appears that the integrated system was out to decrease the business of physicians not in the system.

Geoffrey Harter, an ear, nose and throat doctor at another Roanoke private practice, Jefferson Surgical Clinic, says Carilion-employed colleagues told him the hospital system asked them not to refer patients to doctors it didn't employ, calling such referrals 'leakage.' Keeping referrals within Carilion is lucrative for the hospital system because it ensures tests and procedures performed on patients take place at Carilion facilities.

Dr. Murphy says Carilion uses the term 'leakage' in internal marketing discussions and that he would rather see its doctors refer patients to other Carilion doctors to optimize their care. But he says Carilion doesn't require its doctors to keep referrals in-house even though it would be legal to do so.

Meanwhile, as the integrated system grew more powerful, its leadership appeared to use other tactics that have become all too familiar to readers of Health Care Renewal

Silencing Criticism

As tension between Carilion and Roanoke's independent doctors grew in 2006, a group of 200 doctors formed an organization called the Coalition for Responsible Healthcare to protest the Carilion Clinic plan. The group posted a petition on its Web site and put up billboards around Roanoke that read: 'Carilion Clinic. Big Dream. Big Questions.' The local newspaper, the Roanoke Times, covered the controversy in a series of articles written by its health-care reporter, Jeff Sturgeon.

A few months later, in March 2007, the Roanoke Times moved Mr. Sturgeon off the health-care beat after Carilion complained repeatedly about his coverage. Carilion says it communicated its displeasure to the paper's editors, but never asked that Mr. Sturgeon be reassigned. Carilion withdrew most of its advertising from the paper, but says it did that as part of a reallocation of its ad budget.

Follow the Money

As the system became more dominant, and more profitable, more money accrued to its top leaders, particularly, of course, its current and former CEOs.

In 2001, Dr. Murphy took the nonprofit hospital system's helm. Dr. Murphy, ... has a medical degree from Harvard but doesn't practice medicine....

Fueled by large, untaxed investment gains, Carilion's profits have risen over the past five years, reaching $107 million last year. Over the same period, the total annual compensation of its chief executive, Dr. Murphy, nearly tripled to $2.07 million. His predecessor, Thomas Robertson, received a lump-sum pension from Carilion of $7.4 million in 2003, on top of more than $2 million in previous pension payouts.

Carilion says Dr. Murphy's compensation is in line with comparable health-care organizations and notes he doesn't receive car allowances, a spousal allowance or club memberships. It says Mr. Robertson's pension accrued over a 32-year career at Carilion.

Members of Carilion's board of directors also seemingly profited from their relationship with the hospital system. The WSJ documented some major financial relationships among the hospital and companies in which board members had an interest.

A large part of the clinic conversion's costs have involved the construction of a new medical campus around Roanoke Memorial Hospital that began several years earlier.

The lead contractor building the site is Swedish construction giant Skanska. But one of the project's biggest beneficiaries has been J.M. Turner & Co., which is owned by Carilion board member Jay Turner. Carilion says it paid J.M. Turner a total of $14.9 million in direct contracting work from 2004 to 2007.

Dr. Murphy says Carilion's board authorized 'arm's length work' with J.M. Turner, but adds that "a case could be made that we shouldn't award work to J.M. Turner to avoid the appearance of impropriety."

Mr. Turner isn't the only Carilion board member with a financial stake in the new medical campus. Another board member, Warner Dalhouse, has invested in a hotel being built on the campus to accommodate patients and their families. HomeTown Bank, a local bank Mr. Dalhouse founded and of which he was until recently chairman, is financing the hotel's construction. Dr. Murphy and Mr. Turner sit on HomeTown Bank's board.

Carilion and Mr. Dalhouse say he didn't make his $130,000 investment in the hotel until after Carilion sold the parcel to Texas developers in early 2006. 'I wasn't dealing with Carilion. I was dealing with the new owners of that land who had paid fair market value for it,' Mr. Dalhouse says.

Management versus Mission

The Carilion Health System's statement of mission and vision are as follows

Mission Statement

Carilion Health System exists to improve the health of the communities it serves.

Vision

- Assure accessible, affordable, high quality healthcare that meets the needs of the community
- Motivate and educate individuals to improve their health
- Champion community initiatives to reduce health risk

Yet, the investigative reporting by the WSJ has shown how the increasing domination of local health care by the Carilion Health System has made health care less accessible and less affordable, despite its leaders' proclamations to the contrary. It has "educated" the local newspaper to reduce its critical coverage of the system's activities. Thus, the bigger and more dominant the health care organization, the more mission-hostile its leadership is likely to be. Meanwhile, increasingly mission-hostile leadership tends to become increasingly lucrative for its practitioners.

I submit that if we really want better quality, more accessible, more reasonably priced health care, we need to bust the new health care "trusts." We need smaller health care organizations with ethical leadership truly devoted to the health care mission. We need organizations whose governance is representative of key constituencies; accountable to patients, health care professionals, and the public at large; open and transparent; and which upholds clear ethical principles.

Can We Fix Medicare While Pretending the RUC Does Not Exist?

There has been much media discussion of how the US Congress just forestalled an across-the-board cut in Medicare's payments to physicians that threatened to markedly decrease access to care. There was some discussion that this was just a temporary fix, but more fundamental solutions would be difficult. Some of the media discussion made some points that previously went unsaid, including:

• Medicare fixes payments to physicians - For example, a Wall Street Journal editorial noted, "As a virtual monopoly, Medicare uses a complex formula to set reimbursement rates for thousands of services. In short, it controls prices. That's why doctors are supposed to eat a pay cut, even though everyone knows this would prompt more doctors to stop seeing Medicare patients."
• Changing the system would be difficult, because it might mean some people would make less money - For example, a New York Times article noted, "lawmakers are pleading with physicians’ groups to come forward with a comprehensive proposal. But that could be difficult because any new formula would almost surely produce winners and losers among doctors."

Those are two good points that start getting at some basic parts of the problem. But even this new clarity seems to miss other fundamental questions, most notably: how did the current Medicare system of fixing prices end up doing so in a way that is so unfavorable to primary care and other cognitive physicians' services, and so favorable to surgery and other procedures?

How the current system arose is no longer a mystery, and was certainly a work of mankind, rather than the supernatural.

As we have discussed before (here, and see this post with links backward), based on several key published articles,(1-4) it is the RBRVS Update Committee (RUC) that seems most responsible for the current state of affairs. Medicare payments to physicians are based on the Resource Based Relative Value System (RBRVS). RBRVS was put in place in the early 1990s, mainly to try to restore then present imbalance in payments that already favored procedures over primary care and cognitive services. Medicare apparently gave the RUC de facto authority over how the system would be updated. The updates the RUC put in place over the years generally involved increasing payments for specific procedures over time, even though most procedures actually get easier to do in the years after their development, and the volume of procedures was increasing much faster than that of office visits. This probably was related to how representatives of specialties that emphasize procedures dominate the membership of the RUC, (although the names of individual members of the RUC, and its deliberations are kept secret). Since the Medicare payment system requires that the overall payments to physicians grow no faster than inflation and the increase in the elderly population, increases in costs due to increasing prices and volume and procedures lead to across-the-board cuts of all payments, which mainly hurt payments for office and hospital visits.

What is mysterious is why Medicare relies on the RUC to the exclusion of any other input; how the AMA can claim the RUC is merely an "advocacy group," rather than the de facto controller of payments to physicians; what individuals are currently RUC members and what goes on during its proceedings; why do managed care organizations and health care insurers base their payments to physicians so slavishly on the RUC governed Medicare fee schedule; and why, outside of a few academics and bloggers, is discussion of the RUC so scanty?

Any real attempt to reform the fundamental inequities in what we pay for health care, inequities which have driven our over-use of procedures and high-technology and devalued thoughtful compassionate, continuing, comprehensive, and continuous care, must address the bizarre and mysterious way payments are fixed. To do so, health care policy makers and the public at large will first have to acknowledge and publicly discuss the problem. It should not be only a few academics and bloggers who are willing to talk about it.

References

1. Bodenheimer T, Berenson RA, Rudolf P. The primary care-specialty income gap: why it matters. Ann Intern Med 2007; 146: 301-306. (link here)
2. Maxwell S, Zukcerman S, Berenson RA. Use of physicians' services under Medicare's resource-based payment system. N Engl J Med 2007; 356: 1853-1861. (link here)
3. Newhouse JP. Medicare spending on physicians - no easy fix in sight. N Engl J Med 2007; 356: 1883-1884. (link here)
4. Goodson JD. Unintended consequences of Resource-Based Relative Value Scale reimbursement. JAMA 2007; 298(19):2308-2310. (link here.)