Why Medicines Cost Too Much -- Managed Care is the Problem, not the Solution

It's about time I got back to the business of explaining why you feel the need to complain about the cost of your medicines every time you go to the pharmacy instead of my usual unimportant job of keeping my patients alive and healthy. I hinted at this issue in the beginning of my rant about the lawyers draining away the lifeblood of the economy. I believe that managed care (in all of its forms) is not the solution to the problem; rather, it is a big part of the problem itself.

There was a time when I would have considered this the number one force driving up the cost of prescription drugs in this country. However, the behavior of the legal eagles over the past few years has dropped this down to a close second on my list. But it is a close second, and could overtake the lawyers at any moment, especially since the advent of Medicare Part D. (Medicare Part D delenda est!!!)

I can hear the protests from here: "But my insurance coverage saves me money -- all I pay is the copay, when I used to have to pay full price." "But I've always heard that managed care was supposed to save money, not cost more!" What most people don't understand is that managed care is a magician, and a really good one. Through sleight of hand and misdirection, the managed care industry has managed to convince almost everyone that they actually save money and reduce costs. Like most magic, however, this is only an illusion. Managed care may save you money (unless you are paying your own insurance premiums!) and it definitely saves money for the insurance companies themselves, but it doesn't really save money overall. Not really. I see you are confused. Let me explain.

Managed care saves money by reducing costs and by the indirect sleight of hand of cost shifting. This is easiest to see in the purest form of managed care, the HMO, but it exists in all forms of managed care. To see the difference, imagine you have the regular old (now almost non-existent) form of health insurance, usually referred to as indemnity insurance. You pay the insurance company a premium (or rather your employer usually does, which is another major problem, but that's another rant); the insurance company takes that money and uses it to pay for any health care claims they get from doctors and hospitals, etc., that provide care to you. If the claims exceed the premium, they lose money. If not, then they make a variable profit from you. In this model, the insurance company takes on all the risk; they don't know at the beginning whether they will make any profit, and if so, how big or small it might be. But ultimately that wasn't good enough for the insurance companies. They wanted guaranteed profit. They wanted bigger profit. So they created managed care, and especially the HMO.

Yes, I know that unless you work in the insurance or healthcare fields, you have only a rudimentary knowledge of how HMOs work. Put very simply, this is how they work. You/your employer buys an HMO policy from an insurance company. The insurance company then takes that money and takes their profit off the top. They then go to the doctors and hospitals, etc., and say 'We'll give you X dollars to take care of all this person's medical care for the year'. Sounds like a good deal, unless you happen to get really sick. Then the doctors and the hospitals lose money on taking care of you. Why? Because the amount that the insurance company gave us to care for you is less than it was in the old model, because the insurance company took its profit off the top -- and usually a bigger profit than they ever made before! In one fell swoop, the insurance company maximizes its profits and shifts all the financial risks off onto the doctors and the hospitals. And if the cost of care goes up so much that the doctors et al. won't play ball, why, they just raise your co-pay or increase the premiums; their profit is sacrosanct. When they can't maintain their profit margin because of increasing claims, they "negotiate" with the doctors et al. to reduce the amount we get paid, or they increase the premiums even more. This principle holds in PPOs and other managed care plans as well. The only difference is that the amount of guaranteed profit and risk reduction (for the insurance company) is not as great.

If I sound cynical about this, I have good reason. A few years back, the insurance company providing the health insurance for my employees decided that they needed more money to cover the increasing cost of care for their "covered lives". So they sent me a statement with a 74% increase in the premium for the next year. Seventy four percent!!!! At the same time, this same insurance company sent me a managed care contract (the contract under which I agree to see their patients and they tell me what they will pay me) including a 22% reduction in the fees they wanted to pay me for seeing their patients (which included my employees)! It's surprising, but somehow they missed increasing the patient's co-pays. So let's see, they wanted to collect more money and pay out less. Just who was saving any money here? By now this should be obvious -- the insurance company!

Remember this the next time your co-pay or insurance premium goes up. We doctors probably are not going to get one red cent more for taking care of you. We may even be getting paid less.

I hear the question coming -- how does this affect the cost of drugs? Doctors don't give us our pills, they just write prescriptions. But do you think that we doctors are the only ones that the insurance companies "negotiate" with to reduce their costs and maximize their profits? They "negotiate" with the pharmacies also, in a manner similar to how they "negotiate" with doctors. They insist on your using the mail-order pharmacies -- not because they're any cheaper, but because they own the mail-order pharmacies, and they can get your drug co-pays that way. They blackmail pharmaceutical companies to offer up incredibly steep discounts on their drugs so that they can get onto as many formularies (especially of the mail-order pharmacies) as possible. (This is the only way that the drug companies can get enough people on their drugs so that they can say their drug is the No. 1 drug used for treating XYZ, which is incredibly important to the drug companies from a marketing standpoint.) These "negotiated" prices are so low that the local pharmacies and the pharmaceutical companies have to raise the prices they charge to other customers to make up what they are losing to the managed care companies.

And that is the indirect sleight of hand of cost shifting that I feel is the greatest insult of all that managed care heaps upon the rest of us. It affects the cost of medicines and medical care alike, driving up the costs for anyone not covered by one of these managed care plans. The managed care plans then have the audacity to proclaim that their cost of care is lower than the old model, when it is obvious to anyone with eyes and a brain that this is so only because they are not counting the cost of your care (and drugs) that they have shunted off to someone else.

And that someone else is most likely some poor Joe or Jane who has either no insurance or very little, but works for a living and would never think about going onto the government healthcare system (Medicaid) and probably wouldn't qualify (because of their job) if they applied -- the least able in our society to afford this increased cost. This group until recently included about the rough one-half of Medicare recipients who did not have any type of drug coverage. It was the complaints of this group that led to the creation of Medicare Part D, the wrong solution to the wrong problem. The real solution, or at least part of the real solution, would be getting rid of managed care. But the insurance industry has our government and our politicians so hoodwinked that they could not see what the real problem was.

So managed care begat more managed care, and they called it Medicare Part D. And as more and more people get dragged into the belly of this unholy beast, it leaves fewer and fewer people out in the hot sun of ever-increasing drug prices. Eventually they won't be able to shoulder this burden any longer. And it won't be the insurance companies that suffer. It will be the pharmaceutical industry that will pay the price, or rather, not get their prices paid. When the drug companies fail, then we will all suffer, for there will be no more new wonder drugs, and a lot of the old drugs may disappear as well.

So it isn't just Medicare Part D delenda est. Managed care delenda est!!!