Trump is Improving Medicare – Part III


This is Part III in a series of posts concerning improvements in Medicare being made by the Trump administration.

This new Trump policy is based on the idea of promoting choice, competition, and market prices.It seeks to do that in Medicare by:

  • Liberating telemedicine
  • Liberating Accountable Care Organizations (ACOs)
  • Ending payment incentives to hospital-based physicians
  • Promoting hospital price transparency
  • Deregulating paperwork
  • Increasing transparency in the market for prescription drugs

In Part I we discussed Liberating telemedicine. In Part II we discussed Liberating ACOs and Equalizing Physician Fees.

Promoting Hospital Price Transparency

When people pay for goods and services out of their own pocket, price transparency is never a problem. Who would think about buying a car without knowing the price?

Some areas of healthcare have transparency. Cosmetic surgery and Lasik surgery for the eye are good examples. In these specialties, where healthcare insurance doesn’t cover the expense, patients are always aware of the full price – and often shop for the best deal. Medical tourism is another example. If you go to another country for your total hip replacement, they’ll tell you the cost up front – and usually expect pre-payment.

But for the vast majority of healthcare patients, payments are made by a third party – either private or government health insurance. As a result, hospitals don’t compete for patients on price. They don’t even compete on quality, either. They mostly compete on amenities.

John C. Goodman, writing in Forbes, says the Trump administration is trying to change all that. Beginning January 1 of this year, every hospital in the U.S. is required to post its standard price for all procedures it performs. Thus far this effort has not made a difference because most hospitals are posting their charge master prices – which nobody pays. That’s like an auto dealer posting the MSRP on all its cars.

Responding to this situation, President Trump last month signed an executive order directing federal agencies to find ways of requiring hospitals to reveal their “actual charges”, including amounts that patients are expected to pay. Right now, people are paying widely different prices for the same service in the same town.

A study cited by the Council of Economic Advisers in its 2019 Annual Report, found that 73% of the 100 highest-spending hospital procedures were “shoppable” – meaning better prices could be found in the same town. Among outpatient procedures, 90 % of the 300 highest were also “shoppable.”

Drug Price Transparency

President Trump is committed to lowering the price we pay for prescription drugs. The Trump administration has finalized another regulation requiring pharmaceutical companies to make visible their list prices in all direct-to-consumer advertising. You haven’t seen this yet in television advertising because a federal judge has temporarily blocked it – until it is decided by an appeals court.

Ending Rebates and Gag Clauses for Drugs

There are two separate markets for prescription drugs – generic drugsand brand name drugs. About 85% of all prescriptions filled in the U.S. are for generic drugs and Americans pay some of the lowest prices in the world for most of these; lower even than Europe or Canada.

Brand name drugs is a different story. For these, the American consumer pays the highest prices in the world. They often don’t benefit from PBM discounts and often they pay more than they should.

Here’s an interesting fact – according to a University of Southern California study, almost one-fourth of these transactions result in patients paying more in health insurance co-pays than the cash price of the drug!In other words, if the pharmacist told them the truth, they would save money by paying for the drug without using their insurance.

What keeps them from revealing the truth? Gag clauses. These clauses prohibit pharmacists from telling patients about more affordable options. Under PBM contracts for these drugs, most of the discounts go to the PBM itself in the form of a rebate. In return, the PBM is induced to place an expensive drug on its formulary so that patients are induced to choose it over a less expensive drug.

In other words, the system is full of perverse incentives that raise the price and the profit for the benefit of the pharmaceutical companies and their middlemen in the market. The Medicare Part D legislation passed in 2003 gave a safe harbor from federal anti-kickback laws that would otherwise prohibit such arrangements.

President Trump is fighting back with two pieces of legislation to ban pharmacy gag clauses and classify PBM rebates as illegal kickbacks unless the benefits are passed on to the consumer. One study says this could reduce federal spending on government programs by $78 – 98 Billion over the next ten years. Costs to seniors in Part D could go down by 18 per cent.

(More on this subject in Part IV.)