Asymmetrical Information

The Nursing shortage thing frustrates me. My wife is a nurse, but she gets treated like garbage. I would think that just being civil to your employees would make a huge difference.

It's interesting that health care is the only sector of the economy where, if people spend more money on it, it's considered a cause for concern. People think its good when more money is spent on technology or movies. Why is a social preference for health care, reflected in greater expenditures, considered a bad thing?

Regards,

Mark Wilson

IMHO, some of the blame ought to be tied to policies of the private insurance companies themselves, or, quite possibly, you could tie it back to the same thing that has been driving up insurance in many other industries - fraud.

I have heard from more than one medical professional (if someone could point me to some facts on this, that would be great) that insurance companies have policies that prevent them from charging different rates to patients paying cash for their care than to patients with insurance. If this is true, it would make the cost of care for cash paying patients artificially high, because you can easily argue that there is a higher cost to processing insurance claims than cash. In most cases, the entire burden of claim processing is put on the medical professionals themselves who have to hire people who have the sole responsibility of dealing with insurance companies. Just as some retailers still charge more to customers paying with credit cards than to customers paying cash because of the extra costs involved, health care professionals should be able to pass this cost on to those paying with insurance without burdening those paying cash-money.

In the retail industry the cost of processing credit cards has largely been absorbed in to the price of products in general, effecting both cash and credit customers. However, in the medical industry the costs of processing insurance are significantly higher. Think - when was the last time you noticed that your favorite shopping outlet had hired someone to run their credit card machines for their cashiers? Or hire a General Manager of Credit Processing?

So how could all this affect the cost of care? Well, imagine next time you are considering your insurance options you note that if you opt to invest your insurance premium in to a medical savings account you will actually pay X% less (I'll leave it to the bean counters to speculate this number) for said services and as a direct result of the lower cost, in an average year, be able to keep X% in the account and roll it over for future medical emergencies or retirement. You might just choose cash over insurance. If insurance companies were allowed to lose customers in this way, they just may be tempted to reform, resulting in two good choices for consumers when the insurance companies get their act together - just as cash or charge are two great choices for retail consumers, each with their own set of pros and cons.

"Why is a social preference for health care, reflected in greater expenditures, considered a bad thing?"

This is classic "broken windows" economics. We see the money spent for glass, framing, putty etc but not the foregone purchases of a suit or some fancy wine or some flowers for the missus ... all the things we would have spent money on if we hadn't had some little S.O.B. heave a brick thru the front window.

So, we see the expense of medical care and ignore the foregone expenses in er, uhm, funerals, I guess ...

I wonder exactly how much the wage increases have contributed to cost inflation? Nurses are starting at $40-50k even in the Western healthcare markets, which (to hazard a guess) is about $5-10k above what similar education levels are drawing as starting salaries in other fields, in the same regions.

I always thought the reason health care costs were so high is because: (i) thanks to medical insurance, the people making the purchasing decisions aren't doing so with their own money; (ii) the people making the purchasing decisions rely on the expertise of the people providing health care services to determine which services they need; and (iii) the supply of providers is limited by licensing requirements.

Jason,

An unofficial source (my dad, a retired doctor) estimated that having to bill the insurance companies and Medicaid from within the office added 14% to his overhead costs--he had to hire an extra assistant whose sole job was to do this.

I actually heard one doctor say to another that he couldn't believe that any patients would choose a doctor based on whether that doctor submitted the bills to the insurance company! Having had to pay up front and then hassle with the insurance companies myself after the fact, I thought that that doctor just didn't have a clue.

Here's a fun fact: 40 percent of Americans take at least one prescription drug a day, and 1 in 6 takes at least three different drugs per day. That's a lot of drugs!

But, come to think of it, there are lots of drugs to be taken. Anti-depressants, birth control pills, cholesterol reducers, blood pressure medicine. And that's not even the good stuff.

Joe..I think the class distinction which the medical world has erected between *doctors* and *nurses* is probably a significant contributor to excess medical costs. I can't think right off of another industry that has such a wide gulf between two major categories of staff, with little or nothing in-between.

Generic drugs aren't coming onto the market faster because the drug companies finally got benevolent. Generic drugs are coming onto the market because the patents held by large drug companies are expiring. Not that this stops the drug companies, by the way. They regularly file frivolous patents to try and extend their monopoly rents beyond the allotted period.

Every time a generic producer wants to produce drugs that are still under a patent, it has to file an application. The holder of the patent then gets 30 months until it loses its patent. It's the 30 month extension that's being abused.

For instance, let's say I spend $100m to develop Drug X, which fights depression. My patent is good for a number of years, which I knew when I developed the drug. My patent means no other drug companies can market generics. So, the deadline is coming up and I don't want to lose my patent. No problem! I'll file a new patent based on packaging. If a generic producer wants to produce the drug, they have to wait another 30 months. So, after 30 more months, I still don't want to give up my patent. Again, no problem. This time I'll file a new patent based on changing the color of the drug. Generic producer has to file another application, I get another 30 months. I'm not making this up.

I belive that drug companies should be given the breathing room they need to innovate, take risks and turn a profit at the same time. However, there's a line. Drug companies are one of, if not the, most profitable industries in the world and get a healthy dose of government subsidies. If taxpayers are footing the bill for the R & D, seems that they should at least be getting a fair shake at the checkout line.

branden: If you're not making it up, why are there any generics coming out? Why wouldn't all the drug companies do this with every drug, such that we never see any generics? We do see generics, so obviously, er, there must be some other mechanisms in play, right?

Certainly Derek Lowe would tend to disagree that his R+D is particularly "subsidized", or that they're actually the most profitable industry in the world. (It might be that the company doing best this week is the most profitable one in the world, maybe. But the industry as a whole? I find that very unlikely, indeed. Are we talking profit as percentage of income? Or total dollars over the entire market?)

"not from greedy drug companies gouging patients, but from greedy drug companies providing more drugs"

Jane, I'm with you except for your selective use of the word "greedy". Just eliminate the word, and I think we agree.

Then the discussion might turn to discovering why people might think it is a rational economic strategy to increase production of, say, shoes - - but deny that it is a rational economic strategy to increase the production of e.g., novastatin.

Back to "greedy" - if you insist on leaving that word in, I have some quibbles. Am I "greedy" to demand health care be delivered to me at the price I wish to pay? I cannot prescribe a drug for myself. My doctor does that. Does that make her "greedy" too? Direct-to-consumer advertising helps drive the demand for drugs, and that implicates consumers. That is, we consumers press our doctors for very specific prescriptions. So aren't consumers "greedy" too? Maybe we're all "greedy". Now, what was the point again?

IMO the use of the word "greedy" is way out of control, wielded like "fascist" in an attempt to impugn the motives of others with whom we disagree and thereby avoid having to engage on the substance of the disagreement. Could it be that the pejorative use of "greed" is actually an expression of disdain for a normal human trait? Or perhaps greed is neither good nor evil, but just a fact of human existence.

mm?

Sivigald:

1. Patent abuse: The generic companies eventually have to take the patent holders to court. When a judge orders them to release the patent, they generally do. This leads to a longer time under which the patent holders can extract monopoly rents than what the law provides. In other words, its an anti-competitive distortion of the market that doesn't just keep options out of consumers hands, but ultimately keeps affordable health out of their hands.

2. Drug company profitability: R & D research is subsidized through tax exemptions built into the tax code. And drug companies have consistently been the most profitable industry since around 1990 (about the time Congress eased the restrictions on drug company advertising). Take a look at http://www.healthlaw.org/pubs/200008Auctioning.html (I don't know how to do the nifty link-in-a-word-thing.) Additionally, many drug companies now spend more money on their PR budgets than R & D.

Again, I'm not trying to demonize pharma here. I'm just saying that they should take a long look in the mirror before they start blaming others for the state of health care in this country.

Everyone talks about all the spending on advertising or PR as if it's a horrible thing and a pure dead-weight cost. But what's the point of developing a drug if no one knows about it? Yes, in an ideal world with no information costs, all doctors everywhere would keep themselves fully informed of any and all advances. But in the real world all of us, particularly doctors, are busy and can't keep up with everything. Advertising ultimately is trying to inform doctors of the merits of new drugs.

I'm not saying that they don't get carried away! I've heard of the conferences at a ski resort where the agenda is 1-1/2 hours discussing the benefits of the new drug followed by 5 hours on the slopes. But that apparently is what it takes to get the attention of those doctors for that amount of time. Everyone seems to be assuming that the optimal amount spent on advertising is nothing, or close to it, which doesn't make sense. Even spending more on advertising than on R&D may not be surprising, since they only have to discover the drug once, but they have to inform huge numbers of doctors.

I haven't figured out the implicit assumptions behind claims that advertising of drug companies is excessive. If these are "greedy" companies, surely they wouldn't throw away money on advertising! They must be doing it because they expect the net gains to exceed the net costs. So, we should be looking at why that is. If they're able to buy the consciences of doctors, getting them to prescribe substandard drugs out of gratitude for all the goodies, then there's a problem that we need to address. If the company is simply buying the time and attention of doctors, to induce them to become informed, then we shouldn't get rid of that system unless we're replacing it with a better one.

Ann -

I wouldn't harp on it if it were only being spent on marketing to doctors. But it's not. It's being used to market directly to consumers. The old model consisted of drug reps telling doctors what the drugs could do, and then doctors would prescribe the appropriate drug to patients based on their symptoms. Now, drug companies advertise on television, generating demand among consumers so that patients go into their doctor's office demanding a certain brand of drug which may be inappropriate to their condition. Remember, the drug companies' PR budgets only started exceeding their R & D budgets when they were allowed to do direct marketing. Finally, you'll notice that I haven't referred to the drug companies as 'greedy' anywhere in my posts. Not because it's an unnecessarily charged word (although I think it is), but because companies are supposed to be greedy. That's why they exist. If I were a shareholder of a company that didn't take an opportunity to maximize my value, I'd be upset about it. It is government's job to keep the corporation in check, not the corporation itself.

Re: nurse's wages. There are plenty of other roles to fill in a hospital other than nurse or doctor. There are clinical pharmacists, nurse practitioners, physical therapists, social workers, clinical psychologists, nutritionists, physician assistants, and many other allied health care fields who more or less provide care to the patient equally. To believe that nurses, doctors, and other health care professionals are on the same pay-scale continuum is ludicrous. In any case, what nurses earn simply reflects basic economics. If the supply is low and the demand is high, prices go up. If more people wanted to be nurses, this wouldn't be a factor.

the insurance companies have an obvious pernicious effect exactly because of the fact that physicians are not allowed to charge more for their insured patients than their cash patients. it's a lot more than just the overhead of processing claims. physicians are required to sign a contract stating that they must accept payment from the insurance company as payment in full. in other words, if i charge $75 for an office visit, which is what a cash patient would pay, and blue cross decides to pay me $18.50, there is no legal way i can make up the difference. and, yes, the difference between amount billed and amount reimbursed can be as grossly different as that. at least medicare will pay me $45 for a $75 office visit.

"the insurance companies have an obvious pernicious effect exactly because of the fact that physicians are not allowed . . . "

This "obvious pernicious effect" is the effect of interrupting the time-honored prerogative of physicians to determine both supply and demand, and then to charge whatever they wished for their services, no questions asked. Those days are over.

You don't like it?

Don't sign the contract. Or, better yet, advocate a single-payer health system for the US. The government would never ask you to accept a payment that is less than you would like.

Branden Bell -

That's a good point about marketing expenditures going up when they started marketing directly to consumers. I'm not sure how I feel about that, since I don't trust doctors to proactively seek out everything that would help me (although the internet is a better resource than TV commercials in helping me figure out what I'm likely to need).

My comment about "greedy" companies wasn't aimed at you or your comments in particular. I just wanted to make the point that profit-maximizing companies must feel that there's a return, or they wouldn't be doing it (they may be mistaken, but that they would hopefully figure out on their own). So, we need to figure out why they're doing it. If they were monopolists for their line of drugs and could merely set high prices and sit back, then they wouldn't throw money away advertising. I've seen many comments on the PR budgets but little analysis of why it's high and whether that's good or bad. Your point about the costs of marketing directly to consumers helps. Thanks!

Ann,

"we need to figure out why they're doing it"

Why ask why? I mean, what do you have in mind to do, when you know? And do you expect the answer will be very different from the answer to why e.g. P&G spends a lot of money advertising their brands of toothpaste or laundry soap? I'm not comparing medicine and toothpaste here. I'm thinking about the advertising strategies for consumer goods because, IMO, pharmaceuticals are becoming more nearly like consumer goods.

First, we should find out why drug companies spend so much on advertising because the story so many people are telling is incomplete. The story seems to go: "these companies are getting too many profits, and the proof is that their costs are high". If they wanted more profits for their stockholders, then they would pay more in dividends, not pay more in advertising.

As for the complaint that the PR spending is greater than R&D spending, the argument seems to be that "drugs are too profitable, therefore companies aren't even trying to find more of them". If the returns to new drugs are excessive and the companies are 'greedy', the evidence would be that companies are doing too much research, because they want to cash in on more of those huge profits.

So, first I guess I'm looking for a complete, coherent story (which I may be missing - all the more reason for someone to spell it out).

Second, I think we need to know why they're spending so much on marketing because we (hopefully) don't want to stop it if it serves a good purpose. Advertising drugs directly to consumers might be a waste, but how do we know? As I said earlier, I don't trust my doctor to proactively seek out everything that would help me. It seems that our medical system is set up to put huge reliance on the patient, since doctors mainly react to problems and information brought to them by the patient. Suppose people have problems that could be helped, but they don't know about the rememdies available until they see one of those annoying commercials?

I'm nervous at the idea of any reform that stops me from hearing directly from drug companies (or anyone else). Maybe some people won't use that information responsibly, but should people that may want the information be blocked from receiving it because others might not use it well?

Ann-

I'm not sure if I'm qualified to give you the coherent narrative you're seeking, but that's never stopped me from doing anything before. ;) So, here we go:

The drug companies are frustrated that they can't actively market their drugs to consumers, but instead have to depend on doctors to dispense information about their products. They get Congress to overturn the ban.

The problem is, do we trust people to make their own decisions regarding the medicine they should be taking? Don't get me wrong, I'm in the camp that believes that 'People can't be trusted to buy what they want to' is one step away from 'People can't be trusted to vote for who they want to.' However, doctors go to school for a long time to learn what drugs do what for what symptoms, etc. On balance, I think the value of letting people make their own drug decisions outweighs the costs associated with it. But that doesn't mean we have to turn a blind eye to those costs.

No matter how much research you do, you can't make up for the 7+ years a doctor has gone to school. Drug companies know this. So, they use mass media advertising to convince you that their drug is the best at combatting a certain ailment or symptom. Their name becomes branded. You decide you want this product. You go to the doctor. The doctor informs you that there is a better drug, but you insist you want the one you heard about on television. Score one for the drug company. Because the whole point of their consumer-based advertising campaign is to get people to buy a drug their doctor would not otherwise recommend, subverting the choice that reflects the most perfect information.

Think of it as a principal-agent relationship. You hire a plumber to fix your sink. You do this because you have no earthly idea how to fix your sink. You watch a commercial that says Brand X wrench will fix sinks real good. You go to the plumber and ask them if they use Brand X. He replies that Brand X won't work on your sink. You listen to him. Why? Because he knows stuff you don't! To bring this analogy back home, the drug companies' ad slogan is premised on convincing you that you know more about medicine than your doctor.

But it doesn't stop there. Because, really, why would they be spending this money on advertising to you if you were just going to buy the same cost drug anyway? It's designed to make you buy more expensive drugs.

And while all of this is going on, the drug companies are fighting tooth-and-nail to keep their patents on drugs for longer than the law allows by filing frivolous extensions. Which amounts to keeping low-cost drugs out of the hands of people who otherwise cannot afford them.

This is not to demonize drug companies (although, admittedly, it's not hard.) They play an extremely important role in helping people live longer, more fulfilling lives. That being said, they need to be brought down to earth. Everyone else who gets a patent has to relinquish it, why shouldn't they? They also need to recognize that they're encouraging bad behavior in telling consumers to go over their doctor's head and get whatever drugs they want.

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