Stakeholder in the U.S. health care system constantly play the Blame Game. When policymakers want to reform the health care system stakeholders always seem to blame each other for what is wrong. Take drugmakers for example. Over the past dozen years Big Pharma has run a public relations campaign blaming Pharmacy Benefit Managers (PBMs) for high drug prices. There is something to this claim, but it’s not that straight forward. It is the job of PBMs to negotiate large drug purchases at steep discounts and pass on the savings to their clients, minus a management fee. PBM clients are typically employee health plans and health insurers. The management fee can be a cut of the discount or a negotiated fee. In recent years drugmakers have complained that rather than negotiating discounted prices, PBMs are demanding hefty rebates. Thus, if drug companies believe a pill is worth $4 apiece, they must charge $6 to give PBMs (the middlemen of the drug world) a $2 rebate. PBMs have consolidated in recent years to the point that the three biggest PBMs now control 80% of the drug market.
Drugmakers are not blameless. Nearly nine-in-ten drugs dispensed are generic drugs, but those only account for about 18% of drug expenditures. The other 10% are name brand drugs and represents about 82% of drug spending. A small segment of name brand drugs – between 1% and 2% of drugs prescribed account for more than half of all drug expenditures. Some drugs cost $1 million a year, others $1 million or more for a one-time dose. Name brand drugs are overpriced compared to what other countries pay. All told, drugs only account for about 11% of health expenditures but some of those drugs cost a fortune. For example, the new pancreatic cancer drug that everyone is raving about because it doubled survival, from six months to one year… at a cost of $480,000 a year.
Patients and policymakers tend to treat doctors sympathetically. Yet they too engage in the Blame Game. Nowadays, doctors increasingly work for hospitals and thus cannot always be counted on to be patient advocates against hospitals that want to maximize revenue. Doctors, for their part, blame stingy health plans and stingy health insurers for driving them into the arms of hospital employers. While doctors’ employers (mostly hospitals) are responsible for unreasonable prices, a doctor must order all medical services. That is why hospitals, private equity and insurers have snapped up physician practices. Physician care is about 20% of health expenditure.
Hospitals are also guilty of blaming other stakeholders for the unaffordable prices they charge. About one-third of health care spending takes place in hospitals. Hospitals are allowed to charge more for the same procedure than what is paid outside hospitals. Hospitals have been buying physician practice lately to capture referrals and control how doctors practice medicine in ways that benefit hospitals at the expense of patients. There have been numerous anecdotes of patients seeing the same doctor for years, in the same office. One day the price suddenly skyrockets after the patient discovers they owe a facilities fee because the physician’s office is now considered a hospital setting. Hospitals deny they are the cause of high medical spending. Rather, they argue it due to health insurers’ bureaucratic requirements causing administrative overhead. Hospitals also blame government underpayments, uncompensated care, and regulatory compliance for unaffordable prices. The theory goes that hospitals must charge more to cover those who do not pay and those whose government insurer pays too little. This is mostly wrong. Economic theory suggests if hospitals could charge more for any reason they would, not just because they’re being underpaid for a few patients. In other words, raising Medicare payments would not bring prices down.
Insurers are also accused of charging premiums that are too high, withholding care and not aggressively negotiating provider prices low enough. Economists point out that the higher the medical spending, the higher the premiums and the higher the management fees for managing corporate health plans. Yet, insurers blame hospitals, doctors, and patients for costly medical care.
Finally, patients tend to blame every other stakeholder, but we are also guilty of not comparing prices and demanding price transparency. In summary, we are all to blame. All the stakeholders are guilty of driving higher prices because incentives are perverse in health care. Government is also to blame for creating problems rather than demanding incentives that boost competition.