Academia
Some Background Information:
Important: This document reflects the original Loyola class deliverable and is not yet the final 'web-version'.
There will be additional material added later, primarily related to research on important Macro-Economic variables which are based on the World Bank database.
More articles:Book Review T. Friedman 'The World is Flat'
Some Lessons to learn about Trade
Marketing Case 'IKEA Invades America'
Sarbanes Oxley - Good or bad for Corporate Governance?
Stephan Kroker-Bode
A search for answers in healthcare (June 2007)
GB 795.53: Advanced Topics in International Business, Trade and Finance; Professor Michael L. Unger Ph.D.
Introduction
Healthcare in the United States is not the first issue which comes in mind when dealing with International Finance. And once the mental link is established, the economic role of multinational medical and pharmaceutical companies and their support through international trade organizations seem to be the topic of choice to talk about. Quickly the ongoing outsourcing debate is scratched, questions of foreign FDI become important and matters of political governance and ethical concerns might be discussed as well.When I started to work on this paper I thought it would be most efficient to concentrate on a single part of the larger picture, the role of one medical association (like the AMA) and its quest for influencing politics. Soon it became clear that there was no real international or macroeconomic connection (but only the simple task of lobbying for specific economic interests of one influential part of one industry).
But while researching it became also clear how important healthcare as a macroeconomic topic really is for the United States. It became obvious that my last work on analyzing major elements of globalization had opened a direct path to what I was starting now.
I had finished with the conclusion that the current budget deficit of the United States is the most imminent economic danger we are facing today (or at least a significant problem in the long run).
Now I noticed that exploding healthcare costs are an important part of this problem. And I noticed something else - how few I really knew about the American healthcare system. So I changed the plan and started to get a better overview about the whole problem. Obviously the goal of this paper is not to give a 'summary' about healthcare. But there is an opportunity to get at least some elements of the complex matter being 'puzzled' together.
I shifted my focus more to the pharmaceutical industry with getting more information about current Medicare D events. And I spent some time dealing with 'medical tourism' (which will be the background for the preparation of a hypothetical business plan in an ongoing entrepreneur's class at Loyola College).
The paper is structured into the following sections:
This document is not short of numbers and recent data. Sometimes qunatitative information might be a little overwhelming - but the paper was also written as a collection of basic information for further discussions of this fascinating and complex issue.
I highlighted parts I think are decent summaries or significant data. 'Flying' over it can provide a first overview.
The 'State of the Union' in Healthcare
What is the current state of the US healthcare system?In 2006 the United States had a $2.1 trillion annual health care bill. Healthcare spending in 2006 was the equivalent of $7,000 for every women, man and child in this country [Lohr 2007]. The US government estimates that healthcare spending will grow at an average of 9.6% a year until 2016, when the annual $4.1 billion will represent 19.6% of gross domestic product [Financial Times, May 23, 2007]. While the United States will spend one of every five dollar of its GDP on healthcare, still more than 1 in 4 workers will be uninsured [Kher 2006].
In 1960 the United States spent only 5.2% of its GDP on healthcare - by 2004 that number had risen to more than 15%. At this point a larger amount
of money was spent for healthcare than on food. In some way this can be considered as a sign of progress. In a modern society there are worse
things to use national resources for than providing health for its citizens. Richard Cooper, a professor at the Pennsylvania School of Medicine,
states: "When you get richer, you aren't going to triple your food expenditures. But there's much more that can be done to improve health."
[Mandel/Weber 2006] Nevertheless healthcare is an increasing cost burden with significant macro-economic implications.The Congressional Budget Office writes in the latest edition of its annual publication The Long-Term Budget Outlook:
"Growth in health care spending has outstripped economic growth regardless of the source of its funding .... The major factor associated with that growth has been the development and increasing use of new medical technology .... In the health care field, unlike in many sectors of the economy, technological advances have generally raised costs rather than lowered them ." [Krugman/Wells 2006]
There are several things important in this quote (see the bold font and different color): Rising healthcare costs are not only a problem of runaway government spending, private spending is rising at a similar rate. Secondly, we spent more on medicine because medicine can do a lot more today. And finally we have to notice that cost savings through technology are more than compensated by the expansion of medical possibilities.
Unfortunately the US healthcare system is extremely inefficient - and this inefficiency will be an even increasing problem as the healthcare sector becomes a larger fraction of the economy. With the share of healthcare having more than tripled since 1960, so has the waste.
Additionally the system tends to divide the American population into insiders and outsiders. It's like a modern caste system many other developed nations have abandoned already. Insiders with good insurance receive whatever modern medicine can provide (no matter how expensive). Outsiders with poor or non-existing insurance receive very little. And the trend is going into the wrong direction with compensating for higher spending on insiders by consigning more people to outsider status.
How can we measure 'Inefficiency'?
The United States are among the nations with the highest expenditure on health as a percentage of GDP
[Endnote 1]. In 2004 the rate was 15.4% - with a total
per capita expenditure (at average exchange rate) of $6,096 [Endnote 2]
. Canada for example spent only 9.8% of its GDP for healthcare (a per capita
expenditure of $3,038).The number of physicians in the United States was 730,800 in 2000. But the total amount doesn't give a lot of information (it was 1.36 million in China - but that's a country with 1.3 billion people). Relevant is the density of medical personnel (which is measured at a rate per 1,000 citizens). Here Cuba not only leads the list of 25 selected countries (5.91 physicians per 1,000 people in 2002, while the U.S. has 2.56 and Canada 2.14). They rank as No. 1 among all countries listed in the WHO database. The United States are on position 45.
The comparison looks better for the United States when it comes to nurses (9.37 per 1,000 people = Rank 16 - here Ireland has the highest number worldwide with 15.2), pharmacists (0.88 = Rank 17, Jordan is leading with 3.14) and dentists. At least in this category the USA are worldwide at the pole position with 1.63 per 1,000 citizens. The number of hospital beds per 10,000 citizens was 33 in 2003 for the United States (Canada 36, Cuba 49). Here the US ranks 71 (Canada 64).
Life expectancy at birth reflects the overall mortality level of a population. In 2005 it was 75 years for a male and 80 years for a female American - compared to similar rates in Cuba and 78 years / 83 years in Canada. Japan has very good numbers (79 years and 86 years respectively).
A second important indicator is the 'Under-five mortality rate' - which is together with the infant mortality rate a leading measurement of child health and overall development of a country. In 2005 it was 8 per 1,000 live births in the United States, slightly higher than Cuba (7) and Canada (6).
The comparison also doesn't look very favorable for the United State with other indicators like the standardized mortality rate for non communicable diseases, cardiovascular diseases, injuries, or HIV prevalence (see Appendix B). The US is only leading in the Category 'Prevalence of tuberculosis' and is doing very well in cancer treatment. Unfortunately the country is also on top in another health related category: the prevalence of adults (15 years and older) who are obese males is 31%; females are doing even worse with 33.2%. In Canada the obesity rate is less than half of that (15.9% and 13.9% respectively).
So a personal analysis of the latest WHO data confirms information found in several articles used for this paper. Ezra Klein of The American Prospect might be correct with her "well-we-eat-more-cheeseburgers" argument - that the effects of superior care are more than offset by unhealthy U.S. lifestyles [Krugman/Wells 2006]. Employers are the principal source of health insurance in the United States, providing coverage for 177 million (60%) of Americans in 2005. There is an excellent report available with up-to-date numbers, published by the Kaiser Family Foundation. The following quote might be lengthy but the data can't be better composed as done in the original. Here are the most important findings:
"Between spring of 2005 and spring of 2006, premiums for employer-sponsored health insurance rose by 7.7%, a slower rate than the 9.2% increase in 2005 and 11.2% increase in 2004. Despite this slowdown, premiums continued to increase much faster than overall inflation (3.5%) and wage gains (3.8%). Premiums for family coverage have increased by 87% since the year 2000. […]
Average annual premiums for employer-sponsored coverage are $4,242 for single coverage and $11,480 for family coverage. Preferred provider organizations (PPOs) continue to cover a majority of workers (60%) with HMOs covering 20%.
[…] 61% of firms offer health benefits to at least some of their employees. Since 2000, the percentage of firms offering health benefits has fallen from 69%. As we have seen in prior years, health benefit offer rates vary considerably by firm size, with only 48% of the smallest companies (6-9 workers) offering health benefits, compared to 73% of firms with 10 to 24 workers, 87% of firms with 25 to 49 workers, and over 90% of firms with 50 and more workers. The likelihood that a firm offers health benefits also varies with other firm characteristics, such as the proportions of lower-wage and part-time workers in the firm and whether the firm has union workers.
[…] Despite the cost pressures, relatively few employers offering health benefits report that they are very likely or somewhat likely to drop coverage (6%) or limit eligibility (6%) in the next year, although larger percentages report that they are very or somewhat likely to increase what employees pay for coverage (49%), increase plan deductibles (39%), increase co-payments or coinsurance for office visits (39%), or increase worker payments for prescription drugs (39%)." [Kaiser Family Foundation 2007]
Let's summarize these findings: During the last years healthcare premiums have risen significantly. This puts a lot of pressure both on employees
and companies. Average annual expenditures for a family coverage equal the price of a car (or half the salary of a minimum wage worker).
The smaller the size of a firm, the more likely it gets that an employee is not offered health benefits at all. And companies will continue
to reduce their coverage or try to push workers towards a greater financial participation.
In 2003 only 16% of healthcare spending consisted of out-of-pocket expenditures by consumers - the rest was paid for by insurance, public or
private. This leads to the wrong assumption that doctors and patients fail to make rational decisions about spending because a third party bears
the cost of the treatment. Advocates of this theory don't recognize that by its very nature, most of health related spending must be covered by
insurance.In 2003, health spending roughly followed the '80-20 rule': 20 percent of patients accounted for 80 percent of expenses. While more than half of the population had almost no medical expenses, a mere 1 percent of Americans accounted for 22% of expenses [Krugman/Wells 2006].
If people would have to pay for medical care like they pay for everything else, the majority would have to forego the advantages of modern medicine in a serious crisis - simply because they would quickly run out of funds.
Healthcare insurance suffers from the well-known economic problem of adverse selection. What does that mean? Let's assume that an insurer offers a policy for everyone with an annual premium that covers the average person's healthcare expenses (plus overhead costs and a fair profit). Who would sign up? Not a representative sample of the population! Healthy people who do not expect high medical bills would shun the policy while unhealthy people would find it very attractive. The insurance company would quickly notice that the actual costs per customer were much higher than those of the average population. It would have to raise premiums to cover these costs - making it even less attractive for the healthy person. The end of this rising premium spiral is obvious.
One way for insurance companies to deal with this problem is by carefully screening applicants to identify those with a high risk of needing expensive treatment. This screening is itself expensive - and it tends to screen out exactly those who most need insurance. Most developed countries have dealt with the defects of private insurance in a simple and straightforward way: they made health insurance a government service.
The United States has done the same for its seniors through Medicare. And Medicaid provides health insurance to many of the poor and near-poor (both is covered later on). But most non-elderly, non-poor Americans get insurance - if at all - through their employers.
Employer-based insurance is more the result of an 'historical accident' rather than deliberate policy. During the labor shortage in World War II, employers were not allowed to attract workers by offering higher wages. Health benefits were not controlled and soon became a way to compete for men- and women-power. Employers realized that these benefits were a highly appreciated compensation, minimizing risk for the employee and thus building loyalty. Additionally the tax law favored employer-based insurance because employer's contributions were not considered part of the employee's taxable income. This form of 'tax subsidy' is estimated to be around $150 billion a year today [Krugman/Wells 2006].
In 2004, according to census estimates, 61.1% of Americans under sixty-five received health insurance through their employers or family members' employers. But the percentage is decreasing - it was 67.7% in 2000.
There are several reasons why employer-based healthcare is under severe strain. The most significant issue is cost. Health insurance was a great way for companies to reward their employees when it was a small part of the whole package. But today the annual cost of coverage for a family of four is more than $12,000 (which is roughly half the annual earnings of the average Wal-Mart employee). So more and more companies try o force workers into new plans with higher co-payments - or stop offering health benefits at all. And firms that can't cut benefits enough to stay competitive (GM would be a good example) find their very existence at risk. To make the situation even worse - rising health care costs have pushed employer-based insurance plans closer to the problem of adverse selection. Workers with health problems actively seek out jobs with companies still offering generous benefits while employers make hiring decisions based on likely health costs.
The result: more and more people are thrown into the world of uninsured. In 2006 the Center for Disease Control and Presentation reported
that 54.5 million people were uninsured for at least part of the year [Endnote 3].
Current numbers from the Census Bureau are lower. On March 23, 2007, the Bureau announced that it had detected an error in its current and
previous population surveys. The original number of 46.6 uninsured people in 2005 (15.9%) was corrected to 44.8 million (15.3%). The number had
nevertheless increased by 1.3 million from 44.8 million in 2004 [Center on Budget and Policy Priorities]. The Kaiser Family Foundation estimates
that the increase from 2001 to 2005 was nearly 6 million [Leighton 2007, Repasky 2006].
Professors Todd Gilmer and Richard Kronick project that the number of non-elderly uninsured Americans will grow to 56 million by 2013. According to these authors, by now the number of non-elderly uninsured would be nearly 50 million [Gilmer / Kronick 2006]. But as high - and unacceptable - these numbers are the very alarming one is this: According to the Institute of Medicine, the lack of health insurance causes roughly 18,000 unnecessary deaths every year in the United States. "Although America leads the world in spending on health care, it is the only wealthy, industrialized nation that does not ensure that all citizens have coverage." [Institute of Medicine 2004]
'Consumer-directed' diversion
As the healthcare sector grows, its inefficiency becomes increasingly important. While almost everybody agrees that the US health care system is extremely inefficient, there are wide disagreements about the nature of that inefficiency. The neo-liberal view that insurance makes people consuming too much healthcare leads to a 'consumer-directed' approach. The main idea is that people should pay more of their medical expenses out of pocket. Reformers from the political right wing believe that the way to reduce public reliance on insurance is to remove the tax advantages that currently favor health insurance over out-of-pocket spending. Instead of the original idea of taxing some employment-based health benefits, the Bush administration decided to cut taxes on out-of-pocket spending.But making out-of-pocket medical spending tax-deductible might very well lead to an enforcement nightmare. As Douglas Holtz-Eakin, a former head of the CBO, points out: "If you want to have a personal relationship with the IRS do that [i.e., make all medical spending tax deductible] because we are going to have to investigate everybody's home to see if their running shoes are a medical expense." [Krugman/Wells 2006]
What else is wrong with consumer-directed healthcare? Paul Krugman and Robin Well write in their excellent article The Health Care Crisis and What to Do About It: "One immediate disadvantage is that health savings accounts, whatever their ostensible goals, are yet another tax break for the wealthy, who have already been showered with tax breaks under Bush. The right to pay medical expenses with pre-tax income is worth a lot to high-income individuals who face a marginal income tax rate of 35 percent, but little or nothing to lower-income Americans who face a marginal tax rate of 10 percent or less, and lack the ability to place the maximum allowed amount in their savings accounts. A deeper disadvantage is that such accounts tend to undermine employment-based health care, because they encourage adverse selection: health savings accounts are attractive to healthier individuals, who will be tempted to opt out of company plans, leaving less healthy individuals behind." [Krugman / Well 2005]
The belief that Americans have too much health insurance is misdiagnosing the real problem. There is the implication that health costs are too high because people who don't pay their own medical bills consume too much routine dental care and are too ready to visits the doctor about a sore throat. But a routine checkup or sick visit with the primary care doctor are not a major source of healthcare inefficiency - simply because they don't account for a major share of medical costs. According to the 80-20 rule the greatest amount of health related costs come form a small number of patients requiring very expensive treatment (like coronary bypass operations, dialysis and chemotherapy).
Nevertheless big companies such as General Electric, Ford Motor or Boeing are rolling out a variety of approaches aimed to increase more 'consumerism' into the healthcare system. They encourage workers to use the most efficient hospitals and physicians. The goal is to make employees more discriminating consumers of health services.
Oshkosh Truck Corp for example switched in January 2004 to a 'consumer-driven' plan. Annual physicals and preventive tests like mammograms and prostate cancer screenings are fully covered. After that, employees and their families receive a $1,000 annual health-care account. Unspent money can be rolled into the following year. Once the account is tapped out, beneficiaries are responsible for the next $1,500 of their medical expenses. The company steps back in with covering 90% for any costs beyond $1,500. Oshkosh hopes that the gap will discourage wasteful spending while still covering their workers for serious illness [Barrett/Arndt 2005].
Medicaid and Medicare
The US healthcare system is still the most privatized one related to all other developed countries. Nevertheless nearly half of total health care spending already comes from the government! Most of it is accounted for by two great social insurance programs: Medicare and Medicaid.Medicaid
Medicaid is a joint federal-state program that pays for medical assistance to cover low-income individuals. Interesting enough, Medicaid was also a sort of an 'historical accident'. As President Lyndon Johnson made his push to create Medicare, the AMA (American Medical Association) tried to discourage this so-called 'socialized medicine' by claiming that it would not help the truly needy. Johnson responded to this argument in a clever way by adding a second program, Medicaid - targeting specifically the poor and near poor.Medicaid has grown rapidly in recent years. Between 2000 and 2004 the number of Americans covered by Medicaid rose by 8 million. Over the same period the number of uninsured rose by 6 million. Without Medicaid, the uninsured population would have exploded - and the crisis of healthcare we face today would be a much severe one.
Nevertheless the program is increasingly becoming vulnerable to political attack. This reflects at least partially the political weakness of its clientele. Medicaid recipients are poor and poorly educated, with low voter participation. Support depends on society's sense of decency and fairness - and that's for a politician not necessarily a strong foundation to build on. The program is challenged especially by state representatives facing an increasing cost pressure. States provide on average about 40% of the funds. But these governments, unlike the federal one, can't engage in open-ended deficit financing.
Medicare
Medicare is a federal health insurance program for 44 million elderly and disabled American, providing coverage for acute and post-acute care. It was signed into law on July 30, 1965, by President Lyndon B. Johnson as an amendment to Social Security legislation. The Centers for Medicare and Medicaid Services (CMS), a component of the Department of Health and Human Services administers Medicare together with Medicaid and the State Children's Health Insurance Program (SCHIP). Medicare is partially financed by payroll taxes imposed by the Federal Insurance Contributions Act and the Self-Employment Contributions Act of 1954. For employees the tax is equal to 2.9% - one-half of it being withheld from the worker and a matching 1.45% paid by the employer.
Medicare is a large component of the federal budget and national health spending. In 2006, Medicare benefit payments totaled $374 billion - which
was 12% of the federal budget and 20% of the nation's total healthcare spending. In 2004, Medicare paid half of the average amount of $12,763
in total medical expenses per beneficiary. But this number covers the fact that spending is highly skewed with 10% of beneficiaries accounting
for two-thirds of total Medicare spending.
Medicare consists of four parts:
Unlike employer-based insurance and Medicaid, Medicare faces no imminent threat of large cuts. The Federal Government, while running a huge deficit,
has not yet any difficulty borrowing to cover the gap. And the political constituency behind Medicare remains powerful - for very different reasons
as we will see later on.
The projected rise in costs is a crushing burden - about 10% of GDP will be spent over the next 25 years. In the long run - so the Kaiser Family
Foundation - the aging of the baby-boom generation, a decline in the number of workers per beneficiary and increasing life expectancy will increase
fiscal pressure for Medicare. From 2000 to 2030, the number of people on Medicare is projected to rise from 39 million to 79 million - while the
number of workers to support one beneficiary will fall from 4.0 to 2.4.
Prior to January 1, 2006, the traditional Medicare program did not provide coverage for outpatient prescription drugs. As a result, about
one-quarter of seniors age 65 and older and one-third of poor and another 33 percent of near-poor seniors had no drug coverage in 2003.The Medicare Prescription Drug, Improvement and Modernization Act of 2003 established a voluntary Medicare outpatient prescription drug benefit better known as 'Medicare Part D'. Effective January 1, 2006, 44 million Medicare beneficiaries can enroll now in private drug plans.
Financing for Part D comes from beneficiary premium payments (an average annual cost of $328 in 2007), state contributions (the so-called 'clawback') and general revenues.
Data from the Department of Health and Human Services (HHS) shows that as of January 17, 2007, approximately 90% of all Medicare beneficiaries had drug coverage. But that's only good news as long as elderly don't get seriously sick (unless they don't get really sick which is called 'catastrophic coverage' for a reason). The talk is about the so-called 'Doughnut Hole'. For all patients, Medicare covers 75 percent of the first $2,400 worth of drugs. But after that, coverage drops to zero - and doesn't resume until the patient hits $5,451 in expenses. Then Medicare kicks in again, paying 80 percent of costs. 15% are covered by an additional plan, 5% remain for the Enrollee.
It it's this gap of almost $3,100 that many sick and disabled seniors call unaffordable [Andrews 2006]. The elderly could end up paying more for their prescription drugs than they did before under Part D - and a majority of senior citizens could still pay over $2000 a year.
About 600,000 poor people are losing the guarantee of extra assistance that covered nearly all their drug costs in 2005. Pharmacists and insurance counselors say many of the 600,000 beneficiaries will not discover the change in their status until they show up at pharmacies. Then they could be charged $25 to $50 or more for drugs that cost them only $3 or $5 before.
So - what's the catch with Medicare Part D? The answer is simple - it is one of the cleverest moves for the pharmaceutical industry. While the
plan will hand over $800 billion of tax dollars in 2006 alone to the drug and health insurance industry, the government is not allowed to
negotiate for lower drug prices.
Rising expenditures here - a windfall there
Spending in the United States for prescription drugs was $200.7 billion in 2005, almost five times more than the $40.3 billion spent in 1990.The share of prescription drug expenses paid by private health insurance companies increased substantially from 26% in 1990 to 47% in 2005 - contributing to a decline in out-of-pocket spending. But co-payments for nonpreferred drugs (those not included on a formulary or preferred drug list) more than doubled from an average of $17 in 2000 to $38 in 2006 (while co-payments for preferred drugs increased by 84%).
Prescription drug spending increased from 1994 to 2003 at double digit rates compared to single digit rates for hospital and physician services.
From 1994 to 2005, the number of prescriptions purchased increased 71% (from 2.1 billion to 3.6 billion), compared to a US population growth of 9%.
The average number of retail prescriptions per capita was 12.4 in 2006. The percent of the population with a prescription drug expense in 2004 reached 59% for those under age 65 and 92% for those 65 and older. The increase in retail prescription prices almost triple the average annual inflation rate (an average of 7.5% a year from 1994 to 2006 compared to 2.6%).
This is partially related to increased advertising expenses - consumer advertising in 2005 was with $4.2 billion over 5 times the amount spent in 1996. From 1995 to 2002, pharmaceutical manufacturers were the nation's most profitable industry. In 2006 they ranked 2nd with profits of 19.6% - compared to 6.3% for all Fortune 500 firms [Kaiser Family Foundation 2007].
The Medicare Part D drug benefit shifts spending from the private sector and Medicaid to Medicare - making Medicare the nation's largest payer of prescription drugs in 2006. While it was only 2% of total US prescription spending in 2005, the percentage significantly increased in 2006 to 22%.
These numbers can be synthesized in the following statement: The market for pharmaceutical companies in the United States is better than ever
- with increasing rates of consumption of double digit growth rates. While the total volume is still significantly lower than expenditures for
hospitals and physician services, the profit margins are extraordinary.
For the pharmaceutical industry this is a significant windfall they continuously lobbied for during the last years. The new market - drugs for poor
and elderly people - could reach $2 billion or more in 2007. Under Medicare Part D, the prices paid by insurers, and eventually the taxpayer,
for the medications given to those transferred are likely to be higher than what was paid under the federal-state Medicaid programs earlier.About 6.5 million low-income elderly people or younger disabled poor people were automatically transferred into the Part D program for drug coverage. Because their other health needs are still covered by Medicaid, they are called dual eligibles.
Since Part D went into effect, the pharmaceutical industry has raised the wholesale prices of its brand-name drugs an average of 3.6 percent. Reports by drug companies show double-digit sales increases of certain drugs that are heavily used by Medicaid patients in 2006. For example, sales of Lamictal, an antipsychosis drug from GlaxoSmithKline, were up 33 percent ($305 million in the first quarter of 2006); sales of Seroquel, an antipsychotic from AstraZeneca, were up 29 percent ($590 million) and sales of Plavix, a blood thinner from Bristol-Myers Squibb, were up 26 percent ($850 million).
The windfall for the drug makers was made possible by a provision of the 2003 Medicare law that exempts Part D drugs from ''best price' rebates that
the drug makers have been required to give to the state Medicaid programs since 1991. Those rebates are meant to make sure that state Medicaid
agencies pay no more than the best prices drug companies offer to any big commercial insurer.
Under Medicaid, the federal government and state agencies paid more than $14 billion annually for the drugs of the 6.5 million dual eligible
transferees. Without the best-price rebates, the cost would have been 25 percent higher, or about $17.5 billion, said Stephen W. Schondelmeyer,
a professor of pharmaceutical economics at the University of Minnesota. In early 2007, the 110th Congress considered - but did not pass -
legislation to allow or require Medicare to negotiate drug prices with drug makers.
Some experts consider importation of pharmaceutical products from Canada through Internet sales and travel across the border to be an alternative which could partially compensate the current situation. But the total volume is insignificant! In 2003 sales totaled $700 million. That was a mere 0.3% of total US prescription sales [Kaiser Family Foundation 2007].
US prescription drug spending is expected to increase from $200.7 billion in 2005 to $497.5 billion in 2016 - a 148% increase in 11 years.
Higher drug cost - physicians play their part
When Medicare cracked down two years ago on profits that doctors made on drugs they administered to patients in their offices, it ended another windfall worth hundreds of thousands of dollars a year for specific specialists. The change, which mainly affected drugs to treat cancer and its side effects, had an immediate effect. In all, cancer doctors billed about $4.4 billion for chemotherapy and anemia medications in 2005, down from $5.6 billion in 2004, with Medicare covering 80 percent of the bills in each year. The difference mostly represented profit that doctors had made on the drugs. Instead of writing prescriptions that patients filled at pharmacies, cancer doctors bought drugs themselves. Then they administered them to patients and billed Medicare or private insurers for reimbursement.Today, the drugs range from relatively inexpensive treatments like Taxol, a breast cancer drug that costs about $150 a dose, to a new wave of biotechnology therapies like Avastin, a drug for colon and lung cancer with a price tag as high as $8,800 a month. Before 2005, Medicare paid between 20% and 100% percent on many drugs, and private insurers paid even more. Doctors pocketed the difference, after certain expenses, as profit. Because the profits on drugs varied enormously, doctors had an incentive to prescribe medications with the highest margins.
Medicare requires a 20% co-payment by patients on chemotherapy medicines, but before 2005 doctors sometimes forgave patients those bills because their profits were so great.
These profits boost the amounts doctors billed Medicare for injectable drugs, which soared to $10.9 billion by 2004 - from $2.9 billion in 1997. Though chemotherapy and anemia medications were the largest categories, the figures include also injectable drugs for arthritis and other diseases.
After Medicare discovered and stopped these questionable practices, drug reimbursement for the medicines mentioned above amounts to only 6 percent more than the average price of the drug paid by all doctors. Because of the change, the overall amount that doctors billed Medicare for injectable drugs fell 6 percent from 2004 to 2005 [Berenson 2007].
The cancer drug industry is a very special field - where critique in excessive spending is often silenced because of the tough situation patients are facing. It is unquestionable that the first priority for every medical entity (be it a physician or drug producer) is to save life or at least to try everything possible to increase the life span (as long as it is in the interest of the patient - but that's a complete different story).
It is also obvious that any measurements to quantify the value of a life in monetary terms are extremely tricky. Is a year of life "worth at least $100,000" [Berenson, June 2007]? Is it more, is it less? When dealing with cost issues related to a persons life, the painful discussions during the Ford Pinto trials in the late 1980s come into one's mind: When Ford willfully decided not to install a $30 item in its Pinto cars to avoid gas tank ruptures after a rear impact - and several people burned to death - it was the first time that a company was charged for murder.
In the context of this paper it should be clear that cost issues can never be put above the value of a life (or even a month, week or day of it). But what if significantly more expensive medicine does not really help to buy some time?
One typical case is documented in the NY Times article "Hope, at $4,200 a dose". It is about the huge profit margins related to a new drug called Abraxane - which costs about 25 times as much as a generic version of the older medicine, known by its brand name Taxol. Sales of Abraxane were close to $200 million in 2006 and are expected to reach $1 billion by 2010. Unfortunately the new medicine does not help patients live longer - and the old and new medicines have similar side effects. An independent review of the drug published in a cancer research journal in December 2006 concluded that the Abraxane is "old wine in a new bottle" [Berenson 2006].
Cancer Drugs are still a tiny part of total medical spending - but these costs are rising even faster than overall healthcare inflation. The spending on cancer drugs worldwide is expected to more than double from $24 billion in 2004 to $55 billion in 2009 (with the bulk being spent in the United States) - making oncology treatments the biggest drug category. [IMS Health - see Berenson 2006]
A partially related problem is the typical medical reimbursement system in the United States, under which doctors and hospitals are paid mainly for delivering more care - not necessarily better care. Incorrect procedures in a hospital might result in two different outcomes - which are both not very favorable. If the incident is really significant, the hospital or involved physician might face a malpractice lawsuit (another increasing cost driver within the US healthcare industry which only makes one single profession happy). But in most cases it ends in a strange reward for the hospital: to bill the patient again for more treatment.
"As a result, doctors and hospitals have little incentive to ensure they consistently provide the treatments that medical research has shown to produce the best results. Researchers estimate that roughly half of American patients never get the most basic recommended treatments - like an aspirin after a heart attack, for example, or antibiotics before hip surgery." [Abelson 2007]
Wide variation in treatments can translate into big differences in death rates and surgical complications. According to the Pennsylvania Healthcare Cost Containment Council, a state agency, the mortality rate during a hospital stay for heart surgery varies from zero in the best performing hospitals to nearly 10 percent at the worst performer. There are also huge price differences within the United States. Stephanie Saul is correct in asking: "Why does healthcare for the average Medicare patient cost nearly twice as much a year in New Jersey, at $8,076, as it does in Hawaii, at $4,529?" She continues: "The differences are one example of perplexing geographic variations in medical expenses and quality. And in a study that has important implications for the nation's $2 trillion healthcare tab, researchers have found that more intensive and expensive care does not necessarily mean better outcomes. In fact the opposite may be true." [Saul 2007]
In a Pennsylvania government survey of the state's 60 hospitals that perform heart bypass surgery, the best-paid hospital received nearly $100,000,
on average, for the operation while the least paid got less than $20,000. At both, patients had comparable length of stay and death rates.
Among the 20 hospitals serving metropolitan Philadelphia, two of the highest paid actually had higher-than-expected death rates.
The Dartmouth Atlas of healthcare, a research group that studies variations in medical care, analyzed the costs and type of care patients receive in their last six month of life. Those in Oregon spend an average of eight days in the hospital while those in New York spend 35 days. In Oregon, the patient is seen by an average of 14 physicians during that period. In New York, 35 doctors see the patient. In the last two years of life, the average Oregon patient costs $25,500 - and the New York patient $38,300 [Endnote 4]. These differences cannot be explained by rates of illness or cost-of-living deviations.
Much of it seems to be related to what experts call 'supply sensitive care', meaning the number of doctors visits and hospitalizations expand to the
system's capacity. Higher spending areas have more hospital beds per capita and more highly specialized physicians [Saul 2007]. "For most consumers,
the fact that there is no connection between quality and cost is one of the dirty secrets of medicine", says Peter Lee, the chief executive of the
Pacific Business Group on Health (a California group of employers that provide healthcare coverage for workers) [Abelson 2007].
Part of the problem is the way doctors and hospitals are paid. Dr. Elliott Fisher, a member of the Dartmouth research group, points out: "In a payment system that rewards everybody for staying busy, every bit of capacity you have, whether it's the number of specialists or the number of intensive care beds or the M.R.I. scanner, has to stay fully occupied because they [specialized physicians and hospitals] bought them already and they have to keep paying for them." [Abelson 2007] Dr. Peter Eisenberg, a cancer doctor in Greenbrae, California, and a former director of the American Society of Clinical Oncology, brings it to the point: "The system doesn't value the time we spend with patients. The system values procedures." [Berenson 2007]
Interesting enough, the quality of care seems to be worse in the higher-spending regions. Risks of being hospitalized - like infections and medical errors - can outweigh the benefits. The complexity of the system increases and with an increasing number of involved physicians responsibilities get blurred. But extra care without better outcomes translates into waste in the healthcare system. Some experts say that this waste accounts for as much as 30 percent of the national spending on healthcare [Saul 2007].
There is no easy solution. Reed Abelson asks: "What if medical care came with a 90-day warranty?" A hospital group in central Pennsylvania, Geisinger Health System, is testing exactly that, charging a flat fee that includes 90 days of follow-up treatment. But patients are no consumer goods. This idea might help to foster a better supply chain management in hospitals and a 'Total Quality / Zero defect approach'. But Toyotas Six Sigma model is not something which can be simply adapted to a complex and very specific healthcare system. In hospitals physicians daily face a high risk situation - and they need some backup to take risks in natural situations of uncertainty. Anything else would mean an additional loss of lives.
Some experts are sure that having more primary-care doctors could be a solution. Research indicates that costs go up and quality declines with increased physician specialization. New Jersey, the highest-cost state, has a specialty-oriented approach. Unfortunately it is exactly Internists who get punished through current developments in Medicare where procedures are considered to be a value (which can be billed) - not care.
A significant amount of time primary care physicians spent with their patients is related to prophylaxis. It includes medical advice to live a healthier life which helps to prevent medical complications (and future medical costs). But counseling - as long as not done by a specialist like a psychiatrist - is almost impossible to bill. So when under pressure to reduce costs, primary-care physicians might be forced to cut away talking. And to compensate decreasing incomes some will surely increase the only secure 'cash cow', ordering medical tests.
The trend in medical schools goes clearly away from becoming an internist or family doctor. The average family physician nationwide currently makes $126,000 a year - while the average specialist earns $297,000 [Saul 2007].
Generic Drugs
A generic drug is a drug which is produced and distributed without a brand name. It must contain the same active ingredients as the original medicine. Most nations require manufacturers of generic drugs to prove that their formulation exhibits bioequivalence to the innovator product. By extension, generics are assumed to be identical in dose, strength, route of administration, safety, efficiency and intended use.Usually generic products are not available until the patent protections afforded to the original developer have expired. Drug patents give 20 years of protection - but they are applied for before clinical trials begin. This reduces the effective life of a drug patent to a time period of seven to twelve years. And there is usually no way to renew an expired patent.
The generic drug industry was born in 1984, when Congress passed the Hatch-Waxman Act (formally known as the U.S. Drug Price Competition and Patent Term Restoration Act). The idea was to infuse low-priced generic competition into the high-priced prescription drug business (without cutting away incentives to develop new drugs). Patent-protected drugs that won approval from the Food and Drug Administration still had a monopoly status. But after some time (not necessarily after the patent had expired) generic companies were permitted, indeed encouraged, to file an application with the agency for a generic version while also challenging the drug's underlying patents. If a generic company succeeded in having a patent invalidated, it could then immediately market the drug, with no generic competitors, for 180 days.
But there is one loophole: Generics sold under license from the patent holder are known as authorized generics. There is nothing that prevents a drug maker from licensing an 'authorized generic' of its drug during the 180-day window. With two competitors, the price of the generic drug drops more like 30 percent or 40 percent instead of 20 percent.
In June 2006, Zocor's United States patent protection expired. Zocor is Merck's most successful cholesterol-lowering drug, which generated $4.4 billion for the company in 2005. This made Zocor the largest-selling drug to be opened to generic competition so far. Teva Pharmaceutical Industries, the Israeli generic drug company, had the exclusive 180-day window. But instead of having the period as an exclusive - and thus being able to keep all the profits - it soon was facing another generic competitor. Additionally Merck had decided to sell Zocor itself at a generic-style price, by cutting special deals with certain health care companies, including United Health.
Within one month the price of Zocor copies fell to less than $1 a pill from as much as $4.50 - putting a lot of pressure on Pfizer's rival product Lipitor (the world's best-selling medicine) which cost $3.33 a pill. That seems to be good news for consumers. General Motors for example is more than happy: its cholesterol drug costs can drop to $82 million from $200 million this year, according to Bloomberg News [Nocera 2006].
So where's the problem? The answer is simple - ripping away the exclusive 180 day window is a clever strategy of 'divide and conquer'. Facing
competition means decreasing profit margins for generic companies - and that means less funds for challenging drug patents. In the end it can very
well lead to longer running original brands (at significantly higher costs than generics). This ensures longer high profit margins for the original
patent holder, less generics and finally higher costs for consumers.
The new strategy is obviously attractive: In June 2006, Pfizer's antidepressant, Zoloft, lost its patent protection. The company immediately
rolled out an authorized generic by itself - with no other generic producer at all.
A perfect ROI for Pharmaceuticals
From 1998 till 2005 the pharmaceutical and health products industry spent more than $800 million in federal lobbying and campaign donations at the federal and state levels according to a Center for Public Integrity investigation. No other industry except of insurance has spent more money to influence public policy in that period. The drug industry's huge investments have gained a nice ROI in Washington resulting in a series of favorable laws and tens of billions of dollars in additional profits. They helped to defeat measures aimed at containing prices by allowing importation of medicines from countries which have caps (like Canada). And it led to a more industry-friendly regulatory policy at the Food and Drug Administration, the agency which is responsible to oversees drug makers.Pharmaceutical companies have hired 3,000 lobbyists, a third of them former federal officials, to push their interests in Congress, the FDA, the Department of Health and Human Services and other executive branch offices. The top 20 drug firms and the industry's two trade groups, PhRMA and the Biotechnology Industry Organization representing biomedicine companies, disclosed lobbying on more than 1,600 bills between 1998 and 2004. A third of all lobbyists employed by the industry are former federal government employees, including more than 15 former Senators and more than 60 former members of the U.S. House of Representatives. PhRMA is headed by Billy Tauzin - the former chief of a committee that regulated drug companies.
In 2003 alone, the industry spent nearly $116 million lobbying the government. That was the year that Congress passed, and President George W. Bush signed, the Medicare Modernization Act of 2003. In 2004, drug makers increased their reported expenditures on lobbyists to $123 million, a record amount for the industry, to secure their interest in the development of the new program [Center for Public Integrity 2005]. By adding the Medicare Part D component, the industry found a new very lucrative purchaser for its products. Thanks to a provision in the law for which the industry lobbied, government programs like Medicare are barred from negotiating with companies for lower prices.
Of the 20 largest pharmaceutical corporations, nine are based in the United States - and that's for a good reason. Through tax breaks and subsidies the U.S. contributes more money to the development of new drugs than any other government. Nevertheless drugs are more expensive here than in any other part of the world. Global drug companies make the bulk of their profits in the United States. Pfizer, the world's largest drug company, made a profit of $11.3 billion in 2004, out of sales of $51 billion. So it is not a surprise that this company is number one on the list of pharmaceutical organization contributing to political parties. According to the Center for Responsive Politics - a non-partisan, non-profit research group based in Washington, DC - Pfizer Inc. gave $1,744,339 in 2006. The Republican Party received two third of it (which is very much the same with all other listed organizations).
Total contributions to Federal Candidates and Parties amounted to roughly $20 million in 2006 - while Health Services / HMO contributed $7.6 million (No. 1 is United Health Group) and Nurses $1.7 million (No. 1 is the American Association of Nurse Anesthetists).
The top contributing group in the healthcare business is 'Health Professionals'. Physicians - or more precisely: Medical Specialists - are most generous is supporting their interest through targeted political donations. The leading group is the American Medical Association, which gave $2.2 million in 2006 (out of a total of $54 million) [see Appendix A for details]. While Republicans still get the bulk of money (an almost continuous trend since 1990 when the total amount of contributions was $15 million), the top recipient in 2006 was Hillary Clinton! While 'Health Professionals' rank only number 8 on her private list of political monetary supporters, they are the most important group for 8 out of 20 recipients.
A more detailed analysis of the political positions and plans of Democrats or Republicans related to healthcare has to be done at a later time. While Republicans want to make more private insurance spending tax-deductible, Democrats favor a stronger Government control of drug prices and advocate an increase in efficiency through electronic medical record systems. Both want to expand the State Children's Health Insurance Program (SChip) - and both don't want to establish a Canada-like single payer system.
The Clintons failed in establishing a comprehensive plan to provide universal healthcare for all Americans in 1993 (the plan died in the Democratic controlled Senate in 1994). This defeat is considered to be the number one reason for the 'Republican revolution' in 1994 when Conservatives won the majority in both houses of Congress. The Pharmaceutical Industry, Health Insurance companies and the AMA contributed huge sums to bring 'Hillarycare' to its knees (who can't remember the famous 'Harry and Louise' commercials mocking the Clinton healthcare plan as impenetrably complex).
But time has passed - and old enemies have become new friends. Today Mrs. Clinton is receiving hundreds of thousands of dollars in campaign contributions from doctors (let's be more precise about that: medical specialists [Endnote 5]), hospitals, drug manufacturers and insurers. The senator who was sharply criticized thirteen years ago for a lack of political realism seems to have much more of that today.
Increasing Healthcare Efficiency
Electronic health records:
Electronic medical records can reduce the risk of medical errors and spare hospitals the high costs of missing records and unnecessary treatment. And it is very convenient and helpful - with a few keystrokes doctors can find information about patients, insurers and labs.Usually electronic-records systems don't come cheap. Every cost-saving product or service requires an upfront investment - or as David Cutler, a Harvard health economist, points out: "There is money to be saved, but it's not going to be cheap." [Lohr 2007] The average initial costs are about $33,000 per doctor plus another $1,500 a month for maintenance. But it doesn't have to be expensive. There is very good open source software available like VistA - a public domain version of the program WorldVistA, used by the Veterans Affairs Department. With implementing the software the department was able to improve nearly every benchmark of quality in healthcare. Cost per patient are now 32 percent lower (using inflation-adjusted dollars) than they were a decade ago - while over the same period the medical consumer price index has increased 50 percent for the country as a whole [Goetz 2007].
Today, an estimated one-fourth of primary-care doctors use electronic health records - but only 5 percent of them are in offices with five doctors or
fewer (where about half of all doctors practice). One of the biggest flaws is the unfair distribution of costs and benefits. According to a study by
the Center for Technology Leadership, a medical research group, physicians get only about 11 percent of the savings from electronic health records.
The real benefit goes mainly to private and public insurers which have to pay for fewer unnecessary tests and reap the fruits of automated record-handling.
"Healthcare providers have been dreaming about electronic records for so long that the idea has begun to seem like vaporware, a never-to-be-realized
fantasy similar to flying cars and jetpacks." [Goetz 2007] But this dream now becomes a reality. Unfortunately there is also a special paradox, which
can increase healthcare costs in the end. In the nation's fee-for-service system of medical payments, the more procedures that are done, the more
money a specialist or a hospital receives. Therefore new technology also tends to increase the number of procedures - with increased costs for insurers,
patients and society.
Performing hospital services overseas:
When patients need urgent CT scans, MRIs and ultrasounds late at night at St. Mary's Hospital in Waterbury, Connecticut, emergency room workers send the work to Arjun Kalyanpur - 8,000 miles away in Bangalore. Kalyanpur runs one of an increasing number of 'nighthawk' companies operating in the United States and overseas to take advantage of time-zone differences. Using the latest technology radiologists in India read images from hospitals all over the world. This marks a trend to improve care by guaranteeing that well-trained - and well rested - radiologists are always available, even in the middle of the night, and even for the smallest hospitals in rural areas. The advent of remote radiology services was prompted by a shortage of radiologists and rapid advances in imaging technology - which has caused the sharp increase in the number of tests. Radiologist Dr. Richard Wertz: "Ten years ago, they didn't do all these CT scans at night. Now, everybody gets them." [MSNBC 2004]India is only one place among many to outsource radiology consulting. One of the largest domestic companies offering such services is NightHawk Radiology, based in Coeur d'Alene, Idaho. The company says more than 500 U.S. hospitals now rely on its 35 radiologists - U.S. born and trained - in Australia and Switzerland [MSNBC 2004].
When hospitals were starting to send their radiology work to India "it quickly became a signature example of how globalization was moving up the food chain, threatening not just factory and call center workers but the so-called knowledge workers who were supposed to be immune." [Leonhardt 2006] For Skeptics the practice raises a lot of concerns: Are the radiologists qualified? Can an overseas doctor be held accountable when something goes wrong? Is patient privacy being protected?
Wipro Infotech, a large IT and high-tech outsourcing company in India, began using non-U.S. licensed radiologists to provide 'preliminary' interpretations of images for U.S. hospitals in 2003. After a lot of criticism Wipro halted the service in 2004 [Stein 2005]. Others point to the simple fact that radiology outsourcing is at its very beginning. Frank Levy, an economist at the Massachusetts Institute of Technology teamed up with two other MIT researchers looking for Indian radiologists. Based on what he found "20 is an overestimate" [Leonhardt 2006].
Drug manufacturing and testing in developing countries:
Drug Manufacturing is another area which becomes more and more an outsourced industry. India already has a thriving generic drug manufacturing sector and is moving into biotechnology. Biotechnology Company Biocon - with revenues of more than $100 million last year a leading producer of cholesterol-lowering drugs - went public in India in 2004. Once again it is mainly cost reduction which is driving the process. A chemist in India makes $20,000 to $40,000, in contrast to $80,000 to $100,000 in the United States [Pollack 2005].But it is not the production of drugs itself which is the most significant cost driver - it is the clinical testing of the medicine. Pharmaceutical companies justify their high drug prices with the key argument, that there are huge investments to make in the beginning. The development of a new drug typically takes several years and can cost hundreds of millions of dollars. Clinical tests on patients, to check for efficacy and safety, account for two-thirds of that cost! And drug makers recruit hundreds, and in some cases thousands, of people for the clinical trials. While western patients are often hesitant in participating, the situation in India is quite different. The New York Consulting firm Booz Allen Hamilton: "India's huge patient population also offers vast diversity, making the country an ideal site for clinical trials." [Rai 2005-1]
According to a report published by Cutting Edge Information, a pharmaceutical consulting firm also based in New York, drug companies can cut the cost of clinical testing by more than 60 percent by going to developing countries. Companies like Roche Holding (Switzerland), GlaxoSmithKline (Britain), Sanofi-Aventis (France) or Eli Lilly (United States) have been sending clinical trial work to India already. The total revenue for Indian companies from outsourced clinical tests has grown to an estimated $122 million in 2003 (from $30 million in 2001), according to Bain & Company [Rai 2005-1].
Of course this issue is raising serious ethical questions. In the past, clinical research has fallen short of global standards - and companies conducted nauthorized clinical trials. India with its modern medical facilities, an acceptable infrastructure - and an almost nonexistent malpractice insurance system - can be considered an ideal test bed for drug developers. But the Indian government has become stricter during the last years. Rules were imposed mandating that ethical boards be set up to oversea the trials. Bigger, global clinical trial companies are coming to India, bringing international standards that Indian companies have to adopt in order to compete.
Medical Tourism
'Medical tourism' is a term coined by healthcare outsourcing agencies and describes the increasing trend to visit a different country for either urgent or elective medical procedures. It has become a worldwide, multibillion dollar industry. From a historic point of view 'medical tourism' is by far not a new phenomenon. In ancient Greece, pilgrims and patients came from all over the Mediterranean to the sanctuary of the healing god, Asklepios, at Epidaurus. In the 18th century wealthy Europeans traveled to spas reaching from Germany to Egypt. Today, the ease and affordability of international travel together with improvements in technology and standards of care in several developing countries have led to a booming industry.The reasons patients travel for treatment vary. For many people from the United States cost issues are the most important factor. Patients from Canada are often frustrated by the long waiting times for many procedures (the time spent waiting for a hip replacement as an example might be a year or more). For others, becoming a medical tourist is simply a chance to combine a tropical vacation with elective or plastic surgery.
Jeff Schult, author of the book "Beauty from Afar", a guide to medical tourism, estimates that more than 100,000 Americans a year travel beyond the boarder for cosmetic procedures alone [Repasky 2006]. In 2005, Bumrungrad Hospital in Thailand served more than 50,000 American patients, a 30 percent increase from the previous year [Repasky 2006]. As patients and companies realize they can save up to 80 percent on expensive medical procedures, the medical travel industry is booming.
Several countries are actively promoting medical tourism - including Cuba, Costa Rica, Hungary, Israel, Malaysia and Thailand. Especially Singapore has positioned itself over the last years as a medical hub for healthcare service, biomedical research and pharmaceutical manufacturing. It has gained a lot of attention for complex surgeries in specialties like neurology, oncology and organ transplants procedures. It also has the largest number of U.S. Joint Commission accredited hospitals in the region. Recently Singapore has launched a series of 'medi-spas' which mix medical treatments and services like massage or facials. The city hopes to attract one million medical travelers by 2012 [Kurlantzik 2007].
Over one million people per year travel to Thailand for everything from cosmetic surgery to cutting edge cardiac treatment. In 2005, one Bangkok hospital alone had more than 150,000 treatment seekers from abroad. In 2006, medical tourism was projected to earn the country 36.4 billion bath [Express Hospitality 2006]. The country is well known for its higher, more personalized level of nursing care. English is widely spoken in Thailand - and compared to India Thailand's infrastructure is more modern, with clean, safe streets. The Asian tourist magnet might also have significant income disparities, but they are more hidden. Thailand offers everything from cardiac surgery to organ transplants at a price much lower than the U.S. or Europe - in a safe and clean environment.
Medical tourism for knee/hip replacements has emerged as one of the more widely accepted procedures because of the lower cost and minimal difficulties associated with the traveling to and from the surgery. Colombia provides a knee replacement for about $5,000 USD, including all associated fees such as FDA approved prosthetics and hospital stay over expenses. The country is treating patients from all over the world especially for cosmetic and eye surgery - but has also become a provider for advanced cardiovascular and transplant surgery.
An increasing number of Columbia's surgeons have either trained or practiced in the United States. But salaries for doctors, nurses, and supporting personnel in Colombia are about 20% of U.S. salaries for similar occupations even though they are required to have the same level of education and job skills. Additionally real estate costs related to medical care facilities are a fraction of equivalents in the United States - and that also drives down costs. One significant advantage of Colombia for patients from the U.S. and Canada is ease of travel and close proximity. Colombia offers cheap airfares from all major cities in North America and does not have the visa restrictions of other countries currently in the medical tourism marketplace.
Despite the success of other Asian countries in attracting foreign patients India is still considered to be the leading country in 'medical outsourcing'. India is particular known for heart surgery, hip resurfacing and other areas of advanced medicine. And its main appeal is low-cost treatment. "For many medical tourists, though, the real attraction is price. The cost of surgery in India, Thailand or South Africa can be one-tenth of what it is in the United States or Western Europe, and sometimes even less. A heart-valve replacement that would cost $200,000 or more in the U.S., for example, goes for $10,000 in India - and that includes round-trip airfare and a brief vacation package. Similarly, a metal-free dental bridge worth $5,500 in the U.S. costs $500 in India." [Hutchinson 2005]
The country's National Health Policy declares that treatment of foreign patients is legally an 'export' and deemed eligible for all fiscal incentives extended to export earnings. A joint report by Mc Kinsey and the Confederation of Indian Industry estimates that medical tourism could bring up to $2.3 billion into the country by 2012 [Marcelo 2004, Rai 2005-2, Nazir 2006]. It also states that this industry is now growing by 30 percent a year [CBC 2006].
The largest of the half-dozen medical corporations in India being involved in medical tourism is Apollo Hospital Enterprises. Between 2001 and 2004 they treated an estimated 60,000 foreign patients. In 2004, 7% of its $114.9 million in revenue came from medical services provided to foreigners. Apollo already provides overnight computer services for U.S. insurance companies and hospitals and is also working with big pharmaceutical companies with drug trials.
Its business began to grow in the 1990s with the deregulation of the Indian economy. Drastically reduced bureaucratic barriers made it easier to import the most modern medical equipment. The first patients were Indian expatriates returning home for treatment. After major investments patients from Europe, the Middle East and Canada began to follow. Today Apollo has 37 hospitals with about 7,000 beds. Western patients usually get a package deal including flights, transfers, hotel, treatment and very often a luxurious post-operative vacation. What makes Apollo also special among its competitors is its social engagement. After criticism by Indian politicians it expanded its services to India's millions of poor. It has set aside free beds for those who can't afford care, has set up a trust fund and is pioneering remote, satellite-linked telemedicine across India.
While 'medical tourism' is still in an infant state of its market cycle, it has become an increasingly covered news topic. And obviously every reporter has to tell his or her personal 'early adopter' story. Here are the best ones:
A small number of US entrepreneurs are already involved in Medical tourism. United Group Programs (UGP), located in Boca Raton, Florida sells a
low-premium form of coverage called a 'mini-medical plan'. The plan offers reimbursement for surgery at $3,000 and hospital stays at $1,000 a day.
That would not even cover half a day in the United States - but it is more than sufficient for Thailand's Bumrungrad Hospital.IndUShealth, a medical tourism start-up in Raleigh, N.C., makes arrangements and coordinates care between U.S. and Indian providers. PlanetHospital, medical tourism agency in Malibu, California, is focusing on trips to Mexico, Central America and Singapore. And in South Carolina, BlueCross Blue Shield signed a direct agreement with Bumrungrad in 2006.
All is still a trickle compared with the millions of surgeries performed each year in the $2 trillion U.S. healthcare system. But a serious shift is under way: U.S. corporations - under pressure by rising healthcare costs - are taking a closer look at medical outsourcing. One incentive: patients would get a piece of the firms' substantial savings. Employees who opt for India for example would get a paid air fare for a family member including a recuperative stay at a first class hotel - and some vacation days after the surgery.
But is that good enough to convince people traveling 10,000 miles for medical care? Polls conducted by medical tourism companies show that only a few
customers would opt for this solution if the incentive would be below $1,000. Above $1,000 about 45% of the underinsured or uninsured declare they would
make the trip (and even 19% of those who have insurance would do so). If the carrot grows even bigger to $5,000, the percentage of takers climbs to 61%
and 40%, respectively.
Is the quality of care in foreign hospitals high enough? Many hospitals abroad applying for accreditation (most of them successfully) from the Joint
Commission International - which is the global arm of the institution that accredits most U.S. hospitals. The JCI is together with the ISO 9001:2000
the generic standard for Quality Management Systems in healthcare around the world. So far, two Indian healthcare chains - Apollo and Wockhardt - have
been granted the JCI Accreditation, positioning them in an exclusive league of 71 international hospitals such as Harvard Medical, Massachusetts General
or Johns Hopkins. This certification doesn't come cheap. As Bomi Bhote, CEO of Indian Pune's Ruby Hospital, points out: "Typically, a certification
like JCI requires a spending of roughly $100,000 as it requires a comprehensive rewriting of protocol and innumerous consultancy work. And this is over
and above any infrastructure upgradation work that may be needed." [Nazir 2006]
Is it safe? There are many factors causing people to question whether the savings are worth it: the lack of a uniform regulatory body, inconclusive and varying malpractice laws and the idea of undergoing invasive medical procedures in a developing part of the world. Especially in the United States medical tourism is still widely viewed as risky. Ray Marcelo in The Financial Times: "Cost savings may not be enough to foster a trade in medical tourism. Unfairly or not, most foreigners would not think of India as a land of good health. The sight of the country's overcrowded public hospitals, open sewers and garbage-littered streets would unsettle most visitors' confidence about public sanitation standards in India." [Marcelo 2003] But private healthcare providers argue that foreigners can be sheltered from such nastiness - and that the quality of India's corporate hospitals is world-class.
Obviously again the issue is more complex than what can be covered in this paper. Here we focused on the American side of the topic. There is a lot going on in India right now which can influence the future development in medical tourism. Economists see the Indian economy on the verge of overheating (real estate prices are souring, not a good sign if one remembers the Asian Financial crisis of the late 1990s). Other observers point to the fact that Indian universities "produce" several thousand specialists every month - but they are needed everywhere in the country. Indian social activists are not really convinced that 'medical tourism' is some good form of FDI which helps to improve India's medical infrastructure (except of small islands for the domestic and foreign elite). Legal specialists are troubled about the whole Indian legal system (where it can take years to have a law suite even started) and not only a potential malpractice debacle. Others are concerned about ongoing security breaches - and don't even want to think about medical standards like HIPPA in the United States. But whatever critiques throw into the discussion. There are more and more people willing to take these risks - to get cured for a fraction of the costs they have to bear in America, where the only alternative is to have no cure at all.
Healthcare = Job Engine
Whenever the discussion comes to the outsourcing part, almost instantly fears of the demise of American labor floats like a dark ghost around the room. Is the American healthcare industry in danger - do physicians, nurses and medical technicians need to fear for their jobs?According to a new study by the Hackett Group - a consulting firm helping big business to improve back-office operations - Fortune 500 companies could save $58 billion annually by moving more activities offshore. This sounds like a huge number - but it has to be put in relation: In 2005, the Fortune 500 had revenues of $9.1 trillion! Moving back-office operations overseas would cut costs by way less than 1 percent of sales.
In December 2005, the McKinsey Global Institute predicted that 1.4 million jobs would be outsourced overseas from 2004 to 2008 - or about 280,000 a year. But with 135.35 million payroll jobs in July 2006, that's a drop in the bucket. Even more important - the threat of outsourcing varies widely by industry. Lots of jobs (especially in the dominant service sector) require face-to-face interaction. This is particularly true for the biggest sectors, retail and healthcare. According to the Mc Kinsey study, only 3 percent of retail jobs and 8 percent of healthcare jobs can possibly be outsourced.
In the combined service sector (85% of the United States work force) the potential maximal outsourcing capacity is less than 11% [Gross 2006]. In another study from 2006 McKinsey estimates that less than 0.07 percent of healthcare jobs in 2008 would be outsourced to low-wage countries [Porter 2006].
It is obvious that outsourcing is not a threat for people being employed in healthcare. And with all the demographic development (aging society) and expected rising expenditures the outlook for the industry is anything else than bad. That has significant implications for the nation's job market. Each quarter destroys nearly 7% of existing jobs - but usually creates an even higher percentage of new ones. According to a Labor Department report from 2006, this summed up to an estimated 5.8 million jobs in just five years. In October 2006 alone, 437,000 new jobs were created; unemployment that month fell to 4.4%, a 5 ½-year low [Akst 2006]. But what this number hides is the source of new jobs. During the last years basically two industries contributed to the positive development almost exclusively. The housing boom was a big part of it. But this boom is over now - the market was cooling down significantly during the last months.
Without healthcare the nation's labor market "would be in a deep coma" [Mandel/Weber 2006]. Since 2001, 1.7 million new jobs have been added in
the healthcare sector, including related industries such as pharmaceuticals and health insurance. Meanwhile, the number of private-sector jobs outside
of healthcare is no higher than it was five years ago (housing added more than 900,000 jobs since 2001 - but there is a significant downsizing in the
rest of the labor market). Currently, the U.S. unemployment rate is 4.7% (compared with 8.2% and 8.9% in Germany and France). Without healthcare hiring,
the U.S. unemployment rate would be 1 to 2 percentage points higher. And if the housing market continues to go down healthcare could provide enough
new jobs to prevent a wider recession.
"With more than $2 trillion in spending - half public, half private - healthcare is propping up local job markets in the Northeast, Midwest, and South,
the regions hit hardest by globalization and the collapse of manufacturing." [Mandel/Weber 2006] That is especially true for the so-called 'Health Belt'
that stretches from New England down through New York and Pennsylvania, across the Midwest and down through most of the south. This is the area where
healthcare has been the major source of job growth over the past five years.
If the current trends continue, 30% to 40% of all new jobs created over the next 25 years will be in healthcare. This is not necessarily a good development. The biggest worry is that demand for healthcare will absorb too much of the workforce and squeeze out other types of jobs. If medical spending rises to 25% of gross domestic product by 2030, as many economists expect, health care's share of jobs could grow to 15% or 16% of the labor market from today's 12%. "That is not a blueprint for a well-functioning economy" says Harvard University economist Dale Jorgenson [Mandel/Weber 2006].
On a macroeconomic level, positive gains of a stabilized job market can be more than compensated through outrageous cost increases fostering a deficit spending going out of control. One negative outcome can be a continuous decline of the dollar value and rising interest rates. But the more significant effect is the withdraw of companies from their longstanding role as providers of medical insurance. Many firms, troubled by soaring healthcare costs, may not only cut benefits (or deny them at all) but be forced to lay off people in order to survive.
Is a Single Payer System an alternative?
The US Healthcare system is unique among advanced nations in denying necessary care to people who lack insurance and can't pay cash. But wouldn't a single-payer system lead to higher per-capita health costs? Most likely the opposite is true. The cost advantage compared to private health insurance arises from two sources: lower administrative costs and the ability to bargain with suppliers - especially drug companies - for lower prices. Private Insurances spent huge sums for their medical screening procedures (to fight adverse selection). In 2003 Medicare spent less than 2% on administration while private insurance companies had a 13% rate. And while residents in the United States pay much higher prices for prescription drugs than those in other advanced countries (first of all the neighbor Canada), both Medicaid and - at a much higher rate - the Veteran's Administration, get discounts similar to or greater than those received by the Canadian system.The Government supported Veteran's Administration runs its own hospitals and clinics and provides some of the best-quality healthcare in America at a far lower cost compared to the private sector. They lead in the implementation of electronic medical records and also invest systematically in reventive care to keep its clients out of the hospital.
When following a 'good versus evil' discussion about the adoption of a Single Player System in America, one simple fact is usually overseen. The United States are already halfway toward a system in which the government fully funds healthcare. Out of a total population of about 300 million, 35.6 million elderly Americans were on Medicare in 2005. Of the working-age population, which reached 257.8 million in 2005, some 45.5 million were covered by Medicare, Medicaid or military health programs. An additional 18.2 million workers had health insurance through jobs in the public sector, which includes state, federal and local governments, public schools and state universities, according to Paul Fronstin, director of the Employee Benefits Research Institute. Millions of those workers' dependents are covered as well. Even if those dependents are not included in the listing, taxpayers paid the bill for almost two-fifths of all Americans with insurance in 2005 [Gross 2006].
Employer-provided health insurance premiums are a form of compensation, yet are not subject to federal payroll or income taxes and are exempt from many state and local taxes. Economists consider these exemptions a form of subsidy. Thomas M. Selden, economist at the federal Agency for Healthcare Research and Quality, estimates that the tax subsidy for employment-related coverage at $208.6 billion in 2006, or 35.4 percent of the amount spent on premiums. "The tax subsidy is one of the largest public expenditures on health care" Mr. Selden said [Gross 2006].
The government spends money as if there were a national health insurance program. In 2004, government spending on health care equaled 9.6 percent of the GDP, compared with 6.9 percent in Canada. "We're paying for national health insurance, but we're not getting it" says David Himmelstein, associate professor of medicine at Harvard Medical School.
In an October 2003 Washington Post / ABC poll, by almost a two-to-one margin (63% versus 33%), Americans said that they preferred a universal system that would provide coverage to everyone under a government program as opposed to the current employer-based system. In a Kaiser Family Foundation poll from 2003, more than seven in ten adults agreed that the government should guarantee health insurance for all citizens - even if it means repealing most of the tax cuts passed under President George W. Bush. The Pew research institute found in a study conducted during the same time that Americans favored by 67% a U.S. government guaranteeing "health insurance for all citizens", even if that meant repealing most of "recent tax cuts". Two other studies in 2004 showed even a higher percentage of support [The Century Foundation 2005]. But most of these studies showed also that willingness to pay more in taxes for universal coverage is only 'a soft commitment' - and support dropped significantly if the new system would limit choice of doctors and would mean longer waits for nonemergency treatment.
Should we go for a single-payer system? This simply can't and shouldn't be answered here. Up to now only some elements of a much more complex discussion were covered. The quality of the Canadian, British or French system needs to be analyzed first. There are very good arguments (especially raised by authors from the Gato Institute and the Heritage Foundation) against a one-to-one adaption. And it is not only about long waiting times for specific medical procedures.
It is obvious that a half-hearted reform wouldn't help at all. The problem of how to ration care is a central issue in current healthcare policy - and a universal system might be able to do that in a way private insurance can't. But efficiency must not be allowed to kill choice and personal freedom. There needs to be found a better compromise. We - as a society - clearly must get rising healthcare costs under control. And we have to build on American values including both solidarity and personal choice or freedom. 47 million uninsured citizens are unacceptable! Prizes for medical procedures 10 times higher as somewhere else with a same level of quality are unacceptable too. And the demise of employer-based insurance can't be just tolerated also- and neither can the increasing budget deficit with healthcare as one of the major cost drivers.
Today there can't be a real conclusion. Do we need more primary-care physicians and fewer specialists? Do we have to stop the paradise for malpractice lawyers? Should doctors rethink the need for additional tests after the additional test - just to be sure that malpractice won't become an issue, because patients (or worse: family members)demand it, or to justify the multi-million dollar equipment they just bought. Do we have to encourage drug manufacturers to share a little more of solidarity beyond free samples and special programs for some people in need. Sure! But changes here can only be first steps.
There are many more questions to ask before we might find a sustaining solution to the healthcare crisis.
Endnotes
(1) It clearly leads among the larger nations. There are some others like Tuvalu, Marshal Islands and Niue which have a similar percentage - but the closest more influential countries are Germany with 10.6% or France with 10.5%.[back]
(2) On rank 2 to 5 are Luxembourg ($5,158), Monaco ($4,744), Norway ($4,080) and Switzerland ($4,011).
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(3) Get the PDF document of this report at: http://www.cdc.gov/nchs/data/nhis/earlyrelease/insur200706.pdf
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(4) Get more info at the groups website: http://www.dartmouthatlas.org
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(5) It is interesting to check the Center for Public Integrity data about contributions of different medical associations. As shown the AMA leads the list of 'Health Professionals'. The American Medical Association represents exactly these medical specialists making $300,000 or more a year. They are followed by the American Dental Association and the American Society of Anesthesiologists. Physical Therapy, Orthopedic Surgeons and Radiologists are ranked 4, 5 and 6. Primary Care doctors are represented by the American College of Physicians. This association is not even among the first 20 listed by the Center of Public Integrity. Is that a sign for a higher ethical standards, avarice or stupidity among Internists?
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