No, Zeke, You’re Not Paying For My Medicine

Zeke Emanuel is tired of paying for your expensive medicine.

Dr. Emanuel, who served in a senior position at the Office of Management and Budget where he contributed to the recurring nightmare known as ObamaCare, recently complained in the New York Times [“I Am Paying For Your Expensive Medicine”] that his insurance rates are high because the medicines you’re taking cost too much.

“We all need to care about not only our own health care bills but also those of our neighbors,” he writes.  And by caring about your neighbors’ bills, he means finding a way to avoid them.

What evidently provoked Dr. Emanuel to fret about your medical bills was something called a PCSK9 inhibitor, a recently approved class of biologics that, according to a preliminary study, reduces the risk of heart disease and stroke by half.

If you are prone to cardiovascular disease, you might think this is good news.  Dr. Emanuel does not.  He cites press accounts indicating that the medicine will cost more than $14,000 per patient per year, though no insurer or government agency will pay that price because they negotiate discounts.

So why is Dr. Emanuel worried?  He cites a recent New England Journal of Medicine article, which estimates that the drug might raise everyone’s insurance premiums by $124 per year.  Despite uncertainty around that estimate, the new drug will be costly, and Dr. Emanuel clearly doesn’t think the benefit it could produce for millions of people is worth $124 to him.

His solution goes beyond price controls.  They are, he writes, “a good start and necessary” but they “will not solve the systemic problem of super-high drug costs.”  Instead of controlling prices, Dr. Emanuel wants to control access.

He sings in what he calls “a growing chorus” that wants to require insurance companies and government programs to “pay for value.”  Value-based purchasing is not a cutting-edge idea.  It’s what you do every time you go to the supermarket and decide whether to pay $13 for an organic roasted chicken or $5 for the non-organic alternative.  “In the rest of the economy,” he writes, “we let individuals determine value.  They decide whether a new gadget is worth the expense.”

But that won’t do in health care, Emanuel informs us.  Letting doctors and patients make medical decisions is a dangerous thing.  “It is not just patients’ perspectives we need to take into account.  Patients get the benefit, but all of us are paying the bill.”

Decisions about clinical value should not be made in the clinic, Emanuel argues.  “Because we all pay, all Americans have to have a voice in determining value.”

By “all Americans” he means government, guided by people of his academic pedigree.

Dr. Emanuel offers a formula, borrowed from the U.K.’s National Health Service (NHS), for “determining value” and thus for deciding whether your medicine, surgery or treatment is worth the price.  The NHS calculates “Quality-Adjusted Life Years” [QALY], a metric that takes into account both the quantity and quality of life generated by medicines and other treatments.

“In England, they have a flexible target,” he writes, “wherein above $45,000 per QALY require an increasingly strong case for coverage.”  The PCSK9 inhibitor, as you may have guessed, misses the target.  Indeed, Emanuel estimates that the biologic would cost “as much as $300,000 for every quality-adjusted life-year they add.”

Ethical concerns aside (should government determine how much an additional “quality-year” of life is worth?), government policies have so distorted medical prices as to render the sorts of calculations Emanuel favors suspect.  Before considering whether to import England’s algorithm for determining value, policymakers would do well to reflect on the wreckage that previous government forays into the health care marketplace have wrought.

The government, for example, imposes price controls in the VA system.  It also operates a Medicaid “rebate” program, which requires drug makers to mark down the price of medicines in that burgeoning program.  It mandates similar price concessions to a growing list of clinics and hospitals.  Manufacturers also must slash prices by 50 percent for Medicare beneficiaries who have fallen into the drug benefit’s “donut hole.”

When the government requires manufacturers to provide steep discounts to such a broad swath of the market, they predictably charge higher prices to everyone else.

Then there are the limitations that government enforces on the intellectual property rights of pharmaceutical companies.  Disney still holds exclusive rights to Mickey Mouse (introduced in 1928), but knock-off versions of the drug Abilify (first approved to treat schizophrenia in 2002) hit the shelves this year.  That means manufacturers have to recoup all of the development costs of a product (and sustain ongoing research and development efforts) in a very short period of time, putting further upward pressure on prices.

Emanuel doesn’t just overlook the distorting effect government actions have had on drug prices, but he also fails to see how government has deformed health insurance markets.  Federal programs have long divorced premiums from risk.  ObamaCare has extended that practice into the individual and small group markets, creating a program in which people who wait until they are sick to buy insurance pay the same rates as those who maintained continuous coverage when they were healthy.

It has thus made insurance a good deal for people who have pre-existing medical conditions and a bad deal for people who don’t.   That is a major reason why the vast majority of uninsured people in reasonably good health who don’t qualify for government premium and cost-sharing subsidies have so far chosen to remain uninsured.  It also helps explain how insurance companies have managed to lose money under the program, even after pocketing billions in corporate welfare payments.

The accretion of government intrusions into the health care marketplace has distorted medical prices beyond recognition.  Good intentions have motivated every intervention, each of which has engendered a new round of problems that, in turn, have inspired further well-meaning interventions.  The result is a costly and inefficient system where prices are unhinged from value.

Government is bad at paying for value.  For consumers, it is a core competency.  Instead of smoldering over other people’s medical bills, Emanuel would do well to devote his considerable intellect to scraping away regulatory barnacles that prevent price discovery.  Instead of more government, we need a health care system that functions like the rest of the economy where, as Emanuel put it, “individuals determine value.”

In a system like that, he wouldn’t have to worry so much about other people’s medical bills.