New Incentives

A new survey by Watson Wyatt and the National Business Group on Health finds that employers are having success in controlling health costs by providing new incentives to get employees involved in decision making.

The survey said that 8% of 555 large employers surveyed now offer Health Savings Accounts and another 18% plan to offer them next year, with 47% considering them.

Other consumer-directed care options also are helping: 69% of companies are using disease management programs, up 50% from last year. And 40% offer lifestyle programs, like weight reduction classes – double last year’s numbers. There are an endless number of ways to engage employees as partners in managing health costs. This is only the beginning.


The Senate voted down an amendment yesterday that was another attempt to get Washington into the business of imposing price controls on prescription drugs. The proposal by Republican Sen. Olympia Snowe of Maine and Oregon Democrat Ron Wyden would have modified the Medicare Modernization Act by giving HHS the power to “negotiate” (read: “dictate”) prices for prescription drugs. It was defeated 50-49.

Senate Finance Committee Chairman Charles Grassley said he does not want to make changes to the Medicare drug benefit before it goes into effect next January. He also argued that direct negotiations with manufacturers by government won’t save money, as validated by studies by both the Congressional Budget Office and the Centers for Medicare and Medicaid Services. Yesterday’s vote may be a sign that the message is getting through.


Medicaid clearly is moving to the top tier of health policy issues for this Congress, with the Senate now in a budget showdown with the House and the White House over whether to whittle $14 billion from this wasteful, dysfunctional program.

There’s clearly some political expediency here with senators who want to make headlines in fighting the spending reductions, but the Medicaid program is in serious need of attention. As we’ve reported, several governors, including Mark Sanford of South Carolina and Jeb Bush of Florida, are offering a carrot rather than a stick approach to restructuring incentives for patients. What’s needed most is rethinking the program and providing incentives not only for patients, but also for other states to get more creative in bringing real market forces into the program.


The problems of lawsuit abuse have been ratcheted up again, according to an article in The Wall Street Journal by Phil Howard of Common Good, a legal reform coalition.

“First it was diving boards that disappeared, then seesaws. Businesses stopped giving references, and doctors started quitting?The latest casualty is volunteerism,” Howard writes.

“Last month, a jury in Milwaukee found the Catholic Archdiocese liable because a volunteer for a Catholic lay organization, driving her own car, ran a red light and caused an accident while delivering a statue of the Virgin Mary to an invalid,” he reports.

“Although the church does not direct the activities of this group, called the Legion of Mary, its meetings are held on church property. The jury decided the Archdiocese should pay $17 million to the paralyzed victim, an 82-year-old semi-retired barber.”

Howard concludes: “Sooner or later, Americans will realize that sue-for-anything justice erodes their freedom.”


Speeches recently have taken me to Santa Monica, San Jose, Maui, and Breckenridge, Colo.

We almost never miss our Friday newsletter deadline without alerting you in advance, but the Colorado trip last week forced an exception. The combination of 9,500 ft. altitude and getting some kind of flu bug, plus the importance of still participating in the conference, caused me to miss last week’s issue. It takes a lot to keep me down, but that did it – at least for a day or two. But I’m back as busy as ever, with an extremely active speaking schedule over the coming weeks. I’ll continue my reports to you.

Grace-Marie Turner



? Health policy on a budget

? Medicare prescription drugs: Medical necessity meets fiscal insanity

? Saving Pfennige, costing lives

? Vancouver Institute details dangers of government control

? Putting profits ahead of patients

? The quality cure?


Author: Joseph Antos, Ph.D.

Source: American Enterprise Institute, 03/10/05

Joe Antos of the American Enterprise Institute examines the “health budget tightrope” facing Congress in three key health policy areas: Medicare, Medicaid, and the tax treatment of health insurance. Antos describes the challenges facing Medicare, including the reintroduction of competing private plans and the payment cuts scheduled for physicians next year, and notes that the prescription drug benefit is not the sole cause of Medicare’s financial instability. Instead, Medicare’s “fiscal crisis is a product of its own design?Until we come to grips with the defects of a program that rewards providers for more services, not more results, we will see unnecessary costs mount inexorably.” Antos also writes “that business as usual in Medicaid is unacceptable?we must revamp the way Medicaid services are financed and revisit which level of government should be responsible for what costs.” Finally, the president’s 2006 budget affords Congress the opportunity to “become creative” by reforming the tax treatment of health insurance, which “generously subsidizes employer-sponsored health insurance, amounting to some $760 billion that will not be collected over the next five years in income taxes.”

Full text:,pubID.22097/pub_detail.asp


Authors: Joseph Antos, Ph.D. and Jagadeesh Gokhale

Source: Cato Institute, 02/09/05

“Medicare is facing severe financial strains that threaten its future viability,” write Joe Antos of the American Enterprise Institute and Jagadeesh Gokhale of the Cato Institute. “On a per capita basis, Medicare spending is increasing at twice the rate of the gross domestic product and?the program is facing a breathtaking funding shortfall of $62 trillion.” The authors calculate the impact of hiking the Medicare payroll taxes to finance the new drug benefit. “Workers born before 1965?would receive a net gain of about $20,000 per capita. Younger workers and all future generations, however, would suffer losses of between $2,500 and $4,000 per capita.” They conclude that Congress should revisit the Medicare prescription drug program and “insist on significant market-based reforms.”

Full text:

Ed Haislmaier of The Heritage Foundation analyzes demographics of who will benefit from the prescription drug benefit and concludes that “the odd coverage design of the new Part D benefit is likely to achieve Congress’s intended effect of creating a large number of ‘winners.’ However, the data also indicate that a significant share of enrollees are [sic] likely to be less than thrilled with the effects of that coverage design.”

Full text:


Author: Doug Bandow

Source: The Wall Street Journal, 03/16/05

“Germany’s newly tightened therapeutical reference-pricing program is an unfortunate example [of how] countries that impose drug-price controls are degrading the health of their citizens while raising other treatment expenses,” writes Doug Bandow of the Cato Institute. “For instance, three out of four people with high cholesterol were not receiving a statin,” according to a study which “found severe undertreatment of many illnesses across Europe, including in Germany.” Bandow writes, “Treatment for high cholesterol demonstrates how Germany fails to balance lower cost with better treatment ? [Pfizer’s] Sortis is being bundled with generic statins, which would impose a price cut of 38% this year and a cumulative reduction of 63% next year.” Studies indicate that Sortis works better than the generics, but Germany’s regulating body would not postpone implementation of the reference pricing for statins. “Germany’s system hurts patients, reduces industry funding for R&D, and may even hike medical costs,” concludes Bandow.

Full text (subscription required):


Two papers from the Vancouver-based Fraser Institute demonstrate the dangers of government control over the health sector. Nadeem Esmail writes, “Rationing health care in Canada through ever-growing queues for medically necessary health services imposes direct costs on those waiting for care.” During 2004, waiting in a health care queue cost Canadian patients slightly more than $732 million, or “roughly $9,150 per patient.” In a separate paper, Jean-Luc Migue says that government-set price controls, as well as frivolous lawsuits and excessive regulations, have forced many companies to pull out of the vaccine business. There were at least five vaccine producers ten years ago; today there are only two and “the cost of each dose has risen 100-fold since 1981.”

Full text of Fraser Institute article on Canadian wait lists:

Full text of Fraser Institute article on the vaccine shortage:


Author: Scott Gottlieb, M.D.

Source:, 03/15/05

An industrial policy regulated by price controls, which “favors local generics businesses while intentionally free-riding on U.S. drug consumers” is forcing branded pharmaceutical companies to enter the generics business, writes Scott Gottlieb of the American Enterprise Institute. “European and Canadian health authorities set higher-than-market prices on the oldest medicines and lower than necessary prices on the newest ones,” writes Gottlieb. As a result, “continued business growth favors squeezing pennies out of known chemicals far more than squeezing medical miracles out of the mysteries of science” and “profits can be eked out only by selling low-priced, lower-cost, older medicines.” Gottlieb concludes, “I would be hard-pressed to devise an industrial policy more effective at discouraging innovation.”

Full text:


Author: Roger Lowenstein

Source: The New York Times Magazine, 03/13/05

The Times devotes 5,000 words to describing a shift in thinking by Harvard professor David Cutler, “a seriously modified lefty.” Cutler says policymakers should change their focus from controlling costs to improving incentives for the delivery of quality health care. Cutler “envisions a system in which everyone could get insurance while free-market incentives would motivate health-care providers to be more effective as well as more efficient.” The article describes groundbreaking work that Cutler did with Dr. Mark McClellan that concluded that spending more on health care produces measurable benefits. “The evidence shows clearly that spending more has been good; we get a lot more out of the medical system than we put in,” Cutler says. He proposes a $6,000 tax credit for poor families, tapering off as income rises, redeemable for health insurance so “access to care would no longer depend on either employment status or age.”

Full text:

[The article takes a swipe at “right-wingers” who “go for a market approach.” Here’s our letter-to-the-editor of the Times in reply.]


Is America’s Hospital Sector Open to Competition?

Cato Institute Policy Forum

Tuesday, March 22, 2005, 12:00 PM (Luncheon to follow)

Washington, DC

For additional details and registration information, go to:

Time for Change? The Outlook for Medicare and Social Security

AEI Health Policy Discussion

Friday, March 25, 2005, 9:00 a.m. – 1:30 p.m.

Washington, DC

For additional details and registration information, go to:

Is There a Crisis in Medical Malpractice? New Evidence from Texas

AEI Health Policy Discussion

Thursday, March 31, 2005, 9:15 a.m. – 11:30 a.m.

Washington, DC

For additional details and registration information, go to:


Short vs. Long Term Thinking: Incorporating the Long-Term Fiscal Outlook into the Myopic Budget Process

Cato Institute Capitol Hill Conference

Wednesday, April 6, 2005, 8:30 a.m. – 12:30 p.m.

Washington, DC

For additional details and registration information, go to:


Health Policy Matters is a weekly newsletter containing summaries of timely and informative studies and articles on free-market health reform. It features research and writings by participants in the Health Policy Consensus Group, articles of interest from the health policy world, and announcements of coming events. Health Policy Matters is published by the Galen Institute, a not-for-profit public policy organization specializing in information and education on health policy. For more information about the newsletter and our organization, please visit our website at

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Elizabeth Lamirand, editor