the editor's corner: healthcare reform legislation—we can run, but we can't hide

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The Editor’s Corner: Healthcare Reform Legislation-We Can Run, But We Can’t Hide James M. Pachence INTRODUCTION The prospect of healthcare reform legislation evokes in many minds the image of a huge, implacable predator whose sole purpose is to devour entire sectors of the healthcare industry. Fear and anxiety in this regard have been expressed by many in that industry, as well as those in academia who depend on its economic health. The best way to allay this fear and anxiety is to join the fight to tame the beast. Although the Clinton plan has already been formulated, and likely will have been announced by the time this is published, the shape of the final legislation can still be influenced. It is hoped that the following will encourage the Society for Biomaterials and its members to take an active role in shaping this legislation. There are, to be sure, some areas where reform is needed, and others where change is unnecessary, even potentially dangerous. An examination of costs in four general areas-medical products, professional fees, hos- pital and nursing facilities, and administration-can go a long way toward dispelling some of the myths that have been used to support various aspects of reform legislation. MEDICAL PRODUCTS The discussions of medical product costs in general, and pharmaceutical costs in particular, has been highly publicized and politicized since the presidential campaign of 1992. What has been lacking from this discussion is an analysis of medical products costs in the perspective of the overall healthcare bill. Pharmaceuticals make up less than 7% of the total US health bill, medical devices less than 3%. Moreover, even though total healthcare costs in the United States are comparatively high compared to those of other industrialized nations, the cost of pharmaceuticals is not: Germans, for example, pay an average of $257 a year for pharmaceuticals, whereas per capita annual expense in the United States is $210. Another point that has been neglected is that new drugs and devices often lead to decreased overall healthcare costs. For instance, ulcer surgery, the therapy of choice Requests for reprints should be sent to Dr. James M. Pachence, Vice- President for Scientific Affairs, Integra Lifesciences Corporation, 105 Morgan Lane, Plainsboro, NJ 08536 Journal of Applied Biomaterials, Vol. 4, 359-361 (1993) 0 1993 John Wiley & Sons, Inc. CCC 1045-4861/93/O40359 - 03 for this condition less than a decade ago, costs on average over $25,000 (not counting lost workplace productivity). With the advent of drugs such as Tagamet, the total cost for ulcer treatment has decreased by more than a factor of 10. Thus it is possible for the medical products bill to increase as a percentage of per capita medical expenses at the same time that the total of those expenses goes down. For this reason and a number of others, medical product costs should be reimbursed in this country just as they are in other industrialized nations. Much rhetoric has been directed against the excessive profits of the medical products industry. However, many economic experts believe that the high costs and high risks of R&D of the medical products industry clearly translates into the need for higher profit margins. For example, only one out of four drugs that enter human clinical trials receives FDA approval. Of the drugs that do reach the market, only 3 out 10 drugs cover their development costs after taxes; about 55% of the profits come from 10% of the drugs. If the medical products industry is to maintain its economic health, it must have financial incentives to develop new life- and cost-saving therapies. Programs such as R&D tax breaks and tax-sheltered R&D partnerships have proven successful, in terms of both company benefits and contribution to the GNP. As it turns out, the innuendo of profit-gouging by the medical technology industry is not supported by facts, even those accumulated by the government. Data collected by the Congressional Office of Technology Assessment, covering the period 1976- 1987, shows that pharmaceu- tical industry profits were 2 to 3% higher than those in other industries. In view of the high risk and financial investment in R&D, as well as the economic and social benefit that a successful medical product provides, the higher profit margin should not be deemed excessive. Even if these “excess” profits were to be eliminated, the total healthcare bill would decrease by about $2.5 billion, or a little less than 0.3% of the total healthcare costs.’ Moreover, the biotechnology sector (which will account for many of the future innovations) lost $1 billion last year alone, primarily due to R&D investment that will take many years to recover.2 Instead of fueling the concern over increases of costs due to medical technology, greater efforts should be made to establish the costbenefit ratios of existing and new medical technologies. Furthermore, lobby groups such as the AARP should concentrate their efforts on restructuring Medicare reimbursement policies regarding pharmaceuticals and medical devices. Fighting over re- imbursement for items with great potential cost benefits

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The Editor’s Corner: Healthcare Reform Legislation-We Can Run, But We Can’t Hide

James M. Pachence

INTRODUCTION

The prospect of healthcare reform legislation evokes in many minds the image of a huge, implacable predator whose sole purpose is to devour entire sectors of the healthcare industry. Fear and anxiety in this regard have been expressed by many in that industry, as well as those in academia who depend on its economic health.

The best way to allay this fear and anxiety is to join the fight to tame the beast. Although the Clinton plan has already been formulated, and likely will have been announced by the time this is published, the shape of the final legislation can still be influenced. It is hoped that the following will encourage the Society for Biomaterials and its members to take an active role in shaping this legislation.

There are, to be sure, some areas where reform is needed, and others where change is unnecessary, even potentially dangerous. An examination of costs in four general areas-medical products, professional fees, hos- pital and nursing facilities, and administration-can go a long way toward dispelling some of the myths that have been used to support various aspects of reform legislation.

MEDICAL PRODUCTS

The discussions of medical product costs in general, and pharmaceutical costs in particular, has been highly publicized and politicized since the presidential campaign of 1992. What has been lacking from this discussion is an analysis of medical products costs in the perspective of the overall healthcare bill. Pharmaceuticals make up less than 7% of the total US health bill, medical devices less than 3%. Moreover, even though total healthcare costs in the United States are comparatively high compared to those of other industrialized nations, the cost of pharmaceuticals is not: Germans, for example, pay an average of $257 a year for pharmaceuticals, whereas per capita annual expense in the United States is $210.

Another point that has been neglected is that new drugs and devices often lead to decreased overall healthcare costs. For instance, ulcer surgery, the therapy of choice

Requests for reprints should be sent to Dr. James M. Pachence, Vice- President for Scientific Affairs, Integra Lifesciences Corporation, 105 Morgan Lane, Plainsboro, NJ 08536

Journal of Applied Biomaterials, Vol. 4, 359-361 (1993) 0 1993 John Wiley & Sons, Inc. CCC 1045 -4861/93/O40359 - 03

for this condition less than a decade ago, costs on average over $25,000 (not counting lost workplace productivity). With the advent of drugs such as Tagamet, the total cost for ulcer treatment has decreased by more than a factor of 10. Thus it is possible for the medical products bill to increase as a percentage of per capita medical expenses at the same time that the total of those expenses goes down. For this reason and a number of others, medical product costs should be reimbursed in this country just as they are in other industrialized nations.

Much rhetoric has been directed against the excessive profits of the medical products industry. However, many economic experts believe that the high costs and high risks of R&D of the medical products industry clearly translates into the need for higher profit margins. For example, only one out of four drugs that enter human clinical trials receives FDA approval. Of the drugs that do reach the market, only 3 out 10 drugs cover their development costs after taxes; about 55% of the profits come from 10% of the drugs. If the medical products industry is to maintain its economic health, it must have financial incentives to develop new life- and cost-saving therapies. Programs such as R&D tax breaks and tax-sheltered R&D partnerships have proven successful, in terms of both company benefits and contribution to the GNP.

As it turns out, the innuendo of profit-gouging by the medical technology industry is not supported by facts, even those accumulated by the government. Data collected by the Congressional Office of Technology Assessment, covering the period 1976- 1987, shows that pharmaceu- tical industry profits were 2 to 3% higher than those in other industries. In view of the high risk and financial investment in R&D, as well as the economic and social benefit that a successful medical product provides, the higher profit margin should not be deemed excessive. Even if these “excess” profits were to be eliminated, the total healthcare bill would decrease by about $2.5 billion, or a little less than 0.3% of the total healthcare costs.’ Moreover, the biotechnology sector (which will account for many of the future innovations) lost $1 billion last year alone, primarily due to R&D investment that will take many years to recover.2

Instead of fueling the concern over increases of costs due to medical technology, greater efforts should be made to establish the costbenefit ratios of existing and new medical technologies. Furthermore, lobby groups such as the AARP should concentrate their efforts on restructuring Medicare reimbursement policies regarding pharmaceuticals and medical devices. Fighting over re- imbursement for items with great potential cost benefits

360 PACHENCE

such as wound care products has caused needless suffering for patients and increased bureaucratic waste. Medicare currently has no reimbursement policy for drugs that can limit or eliminate hospital stays. People over 65, while they constitute 12% of population, account for 27% of prescription drug costs. By footing the bill, Medicare would actually contribute to decreasing overall pharmaceutical costs, for the purchasing power of the Medicare system can be used to demand the best drug pricing.

By lowering regulatory barriers, government can help decrease pharmaceutical and devices costs. In recent years, regulatory barriers, including requirements for more ex- tensive and expensive clinical testing, have become in- creasingly more burdensome, especially in the area of medical devices, with the time to market increasing at an alarming rate. Substantial savings to the consumer can be made through FDA reform.

HEALTHCARE PROFESSIONALS

Fees for healthcare professionals make up about 25% of the total US . healthcare cost. Several scenarios have been suggested to decrease professional fees, such as the British plan, whereby doctors are paid on a per capita basis. However, one has to question whether a system can be devised which would significantly decrease fees while maintaining quality in this critical area.

Expenses can be dramatically diminished without wholesale government regulation. For example, a signifi- cant portion of the recent increase in health professional fees is the result of legal expenses. These are direct expenses passed on to the consumer, such as insurance and lawyers’ fees. There are also significant hidden expenses, such as time away for productive practice, an increase in judicial burdens, and an increased use of overlapping diagnostic procedures. In short, legal reform is needed as much as healthcare reform. Although this will not sit well with lawmakers-most are lawyers-exposure of legal abuses and demand for legal reform will be accepted by the general population. Legal reform can save the country billions of dollars.

Government control over healthcare professionals’ fees would be unprecedented in the United States, and counter to the free-market approach. (Imagine the outcry if it were ever suggested that accounting fees or lawyers fees be minimized by government dictate.) Such an approach would add new levels of expensive and unproductive gov- ernment bureaucracy, which may have the ultimate effect of driving up costs. Many argue for keeping fees high as incentive for young talent to stay in medical profession. Even so, many highly qualified medical professionals are leaving active practice at a young age, opting for better hours at lower-paying positions. A simple supply- and-demand system for specialized care, coupled with incentives to encourage general practice physicians fo-

cused on health maintenance, would minimize government intervention and would be self-regulating with regard to cost control.

HOSPITALS AND LONG-TERM-CARE FACILITIES

Hospitals and long-term-care facilities represent the largest portion of the healthcare bill and constitute the area most out of control. Part of the problem is that the job of hospital administrations is to fill hospital beds, while the goal of the rest of the healthcare system is to keep people out of hospital beds. Containing hospital costs needs to be addressed-perhaps by providing education programs to keep people healthy.

The needed consolidation of facilities and elimina- tion of hospital beds may occur anyway due to market pressures. Under the current system, decreased hospital stays can in fact result in increased total hospital costs if empty beds are used to justify them, a trend that must be reversed. Second, competition among hospitals has led to an increasing amount of funds used for marketing. Competitive pressures have also led to technological in- flation, with high concentrations of specialized equipment in small locales, many of which are diagnostic (MRIs and ultrasounds). A move toward centers of excellence by region might minimize costly technology escalation, while decreasing the overall number of beds.

Spiraling costs of terminal and catastrophic illnesses, reflecting primarily our aging population and the AIDS epidemic, have been a major contributing factor to in- creased hospitalization costs. The largest health expendi- tures are made in the last year of life (estimated at more than 65%), with the majority of these cost accruing during the last three months. Suggestions have been made to institute a lifetime cap on people’s access to third-party reimbursement dollars as a means to limit the costs of care for the terminally ill. However, such limitations could bring about legislated constraints on who should live, and for how long. Rather than introduction of legislation that would raise deep ethical and moral concerns, programs to encourage at-home care of the chronically ill make more sense, both economically and socially.

One cost-escalating factor that is often overlooked is the use of hospital emergency rooms as a substitute for routine office visits or minor health problems. Inasmuch as the typical emergency room visit is three to four times more expensive than an office visit, disincentives should be built into the system to discourage this practice. Healthcare reform should push people out of the emer- gency room and into the practitioner’s office. An incentive program to promote the development of general practice physicians (suggested in the preceding section) would help alleviate overused emergency rooms. Providing greater access to healthcare professionals whose main objective is health maintenance would significantly contribute to medical cost containment. Financial incentives for health

THE EDITOR’S CORNER 361

maintenance, as well as financial penalties for high-risk activities, would enlist all participants in the healthcare system in the fight to contain medical costs.

GENERAL AND ADMINISTRATIVE COSTS

General and administrative costs are over 25% in the United States, amounting to almost $200 billion. By comparison, Canada spends only 3% of its healthcare bill on G&A. Part of the problem is the cumbersome bureaucracy of the U.S. system, which stands to escalate with further government intervention.

Our healthcare system suffers from slow, cumbersome access to information, which leads to duplication and inefficiencies. Healthcare facilities spend approximately 20% less than other industries on data systems. Fewer than 5% of healthcare facilities have recognized that data systems are an economic necessity.

A recent Arthur D. Little report concluded that im- provement of data systems could save the healthcare system at least $36 billion annually-more than twice the profits of the pharmaceutical industry. Financing and keeping track of the estimated 37 million Americans without health insurance would be much more manageable with data systems in place-this should be obvious to an administration that has placed great confidence in high- tech solutions. Moreover, sophisticated data management systems must be in place and tested before we try to deliver healthcare; otherwise, it would be like giving people phones before the phone lines are laid. What is our industry’s stance, our plan? Who will formu- late our strategy, who will speak for us? We have all heard

the footsteps of change approaching since early 1992. We, the academic and industrial technology experts, have had more than enough time to dispel fear and frustration, collect facts, and set forth a concerted plan. Instead, we have all been left somewhat flatfooted, grumbling at one another, and left to our own resources to run form the footsteps of the political monster instead of fencing it in. An offensive strategy could have been instituted to develop an economically sound healthcare plan if we had had the foresight to organize. As the intellectual leaders in our field, we have an obligation to form a lobbying effort to address healthcare reform as well as any other medical issue affecting our society.

The opportunity for voicing our concerns still exists. I strongly encourage the Society for Biomaterials to seize the

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initiative in this, our mutual concern.

REFERENCES

Beardsley, T. Blood money? Critics question high pharmaceutical profits. Scientific American, August 1993;

Casdin, J. Drug price controls will stunt biotech’s growth. Bio/Technology 11544-545; May 1993

115-117.

Other Selected Sources

Charrow, R. A new script for health-care reform. J. NIH Res. 5:81-83; May 1993.

Anderson, C. Research and health care costs. Science 261: July 23, 1993.

Nelson, G. Health-care reform and the medical device industry. Medical device and diagnostic industry 30-33: August 1993.