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Michael D. Williams

Health Care

U.S. Healthcare: An Industry Too Big to Fail

If we continue to treat healthcare as an industry, we should continue to expect surprise bills and expensive drugs

Published: Wednesday, August 7, 2019 - 12:01

As I spoke recently with colleagues at a conference in Florence, Italy, about healthcare innovation, a fundamental truth resurfaced in my mind: the U.S. healthcare industry is just that. An industry, an economic force, Big Business. It is a vehicle for returns on investment first and the success of our society second.

This is critical to consider as presidential candidates unveil their healthcare plans. The candidates and the electorate seem to forget that healthcare in our country is a huge business.

Healthcare accounts for almost 20 percent of GDP and is a, if not the, job engine for the U.S. economy. The sector added 2.8 million jobs between 2006 and 2016, higher than all other sectors, and the Bureau of Labor Statistics projects another 18 percent growth in health sector jobs between now and 2026. Big Business indeed.

This basic truth separates us from every other nation whose life expectancy, maternal and infant mortality, or incidence of diabetes we’d like to replicate or, better still, outperform.

As politicians and the public they serve grapple with issues such as prescription drug prices, “surprise” medical bills, and other health-related issues, I believe it critical that we better understand some of the less visible drivers of these costs so that any proposed solutions have a fighting chance to deflect the health cost curve downward.

As both associate chief medical officer for clinical integration and director of the Center for Health Policy at the University of Virginia, I find that the tension between a profit-driven healthcare system and high costs occupies me every day.

The power of the market

Housing prices are market-driven. Car prices are market-driven. Food prices are market-driven.

And so are healthcare services. That includes physician fees, prescription drug prices, and nonprescription drug prices. So too is the case for hospital administrator salaries and medical devices.

All of these goods or services are profit-seeking, and all are motivated to maximize profits and minimize the cost of doing business. All must adhere to sound business principles, or they will fail. None of them disclose their cost drivers, or those things that increase prices. In other words, there are costs that are hidden to consumers that manifest in the final unit prices.

To my knowledge, no one has suggested that Rolls-Royce Motor Cars should price its cars similarly to Ford Motor Co. The invisible hand of “the market” tells Rolls Royce and Ford what their vehicles are worth.

Prescription drugs pricing has different rules

Ford can (but won’t) tell you precisely how much each vehicle costs to produce, including all the component parts that it acquires from other firms. But this is not true of prescription drugs. How much a novel therapeutic costs to develop and bring to market is a proverbial black box. Companies don’t share those numbers. Researchers at the Tufts Center for the Study of Drug Development have estimated the costs to be as high as $2.87 billion, but that number has been hotly debated.

What we can reliably say is that it’s very expensive, and a drug company must produce new drugs to stay in business. The millions of research and development (R&D) dollars invested by Big Pharma has two aims. The first is to bring the “next big thing” to market. The second is to secure the almighty patent for it.

U.S. drug patents typically last 20 years, but according to the legal services website Upcounsel.com: “Due to the rigorous amount of testing that goes into a drug patent, many larger pharmaceutical companies file several patents on the same drug, aiming to extend the 20-year period and block generic competitors from producing the same drug.” As a result, drug firms have 30, 40-plus years to protect their investment from any competition, and market forces to lower prices are not in play.

Here’s the hidden cost punchline: Concurrently, several other drugs in pharmaceutical companies’ R&D pipelines fail along the way, resulting in significant product-specific losses. How is a poor firm to stay afloat? Simple, really: Build those costs and losses into the price of the successes. Next thing you know, insulin is nearly $1,500 for a 20-milliliter vial, when that same vial 15 years ago was about $157.

It’s actually a bit more complicated, but my point is that business principles drive drug prices because drug companies are businesses. Societal welfare is not the underlying use. This is most true in the United States, where the public doesn’t purchase most of the pharmaceuticals: private individuals do, albeit through a third party, an insurer. The group purchasing power of 300 million Americans becomes the commercial power of markets. Prices go up.

The cost of doing business, er, treating

I hope that most people would agree that physicians provide a societal good. Whether it’s in the setting of a trusted health confidant, or the doctor whose hands are surgically stopping the bleeding from your spleen after that jerk cut you off on the highway, we physicians pride ourselves on being there for our patients, no matter what, insured or not.

Allow me to state two fundamental facts that often seem to elude patient and policymaker alike. They are inextricably linked, foundational to our national dialogue on healthcare costs and often ignored: Physicians are among the highest earners in America, and we make our money from patients. Not from investment portfolios, or patents. Patients.

Like Ford or pharmaceutical giant Eli Lilly, physician practices also need to achieve a profit margin to remain in business. Similarly, there are hidden-to-consumer costs as well; in this case, education and training. Medical school is the most expensive professional degree money can buy in the United States. The American Association of Medical Colleges reports that median indebtedness for U.S. medical schools was $200,000 in 2018, for the 75 percent of us who financed our educations rather than paying cash.

Our “R&D”—that is, four years each of college and medical school, and three to 11 years of post-doctoral training costs—gets incorporated into our fees. They have to. Just like Ford. Business 101: The cost of doing business must be factored into the price of the good or service.

For policymakers to meaningfully affect the rising costs of U.S. healthcare, from drugs to bills to and everything in between, they must decide if this is to remain an industry or truly become a social good. If we continue to treat and regulate healthcare as an industry, we should continue to expect surprise bills and expensive drugs.

It’s not personal, it’s just... business. The question before the United States is: Business as usual, or shall we get busy charting a new way of achieving a healthy society? Personally and professionally, I prefer the latter.The Conversation

This article is republished from The Conversation under a Creative Commons license. Read the original article.


About The Author

Michael D. Williams’s picture

Michael D. Williams

Dr. Michael D. Williams is the director of the University of Virginia’s Center for Health Policy, a joint program of the Batten School, the School of Medicine and the Department of Public Health Sciences. The Center for Health Policy provides comprehensive, apolitical analysis of current and proposed health policy for citizens and policymakers.


U.S. Healthcare Industry is an Oligopoly built on Fraud

Ever wonder why the U.S. Healthcare Industry began to increase faster than the CPI, since 1983. That is the year the Internal Revenue Service made a humongous mistake, and everyone bought into it. The IRS said the contract between the health care providers and the private insurance companies determined the taxable revenue for the providers.

Look at any Explanation of Benefits form (EOB), you see the amount billed to the patient and the amount approved by the insurance company, and no one understood what the differrence was. The providers and insurance company listed it as a contract adjustment, but adjustment to what contract. It can't be an adjustment to the patient's contract or the patient's billed amount. So what is it really? In its simpless form it is a kickback, in the form of a cancellation of debt given by the provider to the insurance company. Why would a provider give a kickback to the insurance company? In order to have access to the insured patients the provider has to be listed as on-network. The providers in order to stay in business must have access to the vast number of insured patients. In order to do this they changed the designation of the kickback to a contract adjustment, did not report any cancellation of debts, and continually increased the medical charges to cover the expense of the kickbacks.

If you know of any other explanation of what is going on in the Healthcare Industry please let me know.

Roy J. Meidinger