Mandating Inefficiency in the Health Care Industry – Pacific Research Institute

Mandating Inefficiency in the Health Care Industry

Despite 50 years of failure, faith that the federal government can cure what ails the health care industry endures. That enduring faith drives a seemingly never-ending call for plans, both grandiose and modest, that attempt to address the failings of this sector.

Grand redesigns of the health care system began when President Johnson signed Medicare and Medicaid into law in 1965, almost half a century ago. The purpose of these programs was to provide health insurance coverage for low-income people and the elderly who could not afford to purchase their own health insurance. Trillions of dollars later, scores of other government health programs and mandates have also been enacted – the Affordable Care Act (a.k.a. Obamacare) being the latest and largest example. Like its predecessors, the Affordable Care Act is supposed to provide insurance to 30 million of the 48 million Americans who still lack health insurance. Of these 30 million, 12 million will be added to the Medicaid rolls.

It is noteworthy that government now accounts for fully 50 percent of health care spending. Yet none of these government plans have ever fulfilled expectations, because they have never addressed the root causes of the problems plaguing the health care market. This failure is evidenced by the fact that, despite the government’s increasing involvement in the health care sector, the percentage of the population that lacks health insurance has not declined over the past 50 years.

The enduring belief that government programs can solve the problems of our health care system, despite the evidence to the contrary, is the impetus behind many narrower government interventions as well. These targeted programs are aimed at curing specific ailments such as lack of access and the high costs of health care. Like their more grandiose counterparts of Medicare, Medicaid, and now Obamacare, the targeted programs simply redistribute the economic harm created by our dysfunctional health care system, but never cure the underlying condition.

The contentious inter-industry feud over an obscure federally-mandated drug discount program (the 340B program) is an excellent illustration of this misplaced faith. The 340B program mandates that pharmaceutical companies sell their medicines to covered hospitals and other facilities that that serve populations deemed to be vulnerable at below market prices. The discounts are quite significant and can be a 50 percent-off sale for the hospitals that qualify for the discount.

However, the 340B program is an ill-conceived attempt by the government to lower the cost of drugs for vulnerable populations.

First, the program is trying to solve the wrong problem. The problem of excessive health care inflation is systemic and must be addressed systemically. Controlling health care inflation in a piecemeal fashion is akin to squeezing one end of a balloon – the overall health care costs are simply shifted to another part of the system.

Further, the program’s rules and qualifications all but guarantee inefficiency. For instance, participation in the 340B program was initially conceived to include 90 hospitals; participation is now 1,700 hospitals – around one-third of all US hospitals – according to a 2011 Government Accountability Office study. The explosive growth in the program is due to loosening qualification criteria that are disconnected from the program’s purported mission. For instance, the 340B program is designed to address the drug costs of uninsured out-patients (those patients not spending the night in the hospital). The qualification criteria for 340B status, however, are based on the number of Medicaid and Medicare patients spending the night in the hospital (in-patients). This separation between program goals and qualifications all but guarantee waste, fraud, and abuse.

Perhaps the largest failure of the 340B program is its design, which brings to mind a Rube Goldberg construction. The program’s goal is to help the poor and uninsured afford necessary medicines. The most effective means to achieve this goal is to deal directly with those people the program is intended to help. Instead, 340B represents a circuitous approach that attempts to help the uninsured indirectly by helping third parties.

And the program is undoubtedly effective at helping these third parties. Qualifying hospitals can purchase drugs at a significant discount. However, they are reimbursed based on the rates they negotiated with the insurance providers. For example, a qualifying hospital can purchase a drug whose market value is $100 for $50, but then still be reimbursed based on the $100 market value. The difference becomes revenue for the hospital. This arbitrage opportunity is valuable to hospitals that are already drowning under government created costs and mandates. But it is problematic for the pharmaceutical companies who are forced to cover these costs.

The unintended costs and profit opportunities created by the 340B program exemplify a broader problem with the current government approach to health care. The core problem with the U.S. health care system is the adverse incentive structure both patients and medical providers face. Effective health care reforms, such as the Pacific Research Institute’s comprehensive health care reforms (the Pipes Plan), realign the incentives for patients and medical providers to increase health care quality and decrease health care costs. Then, within this properly incented market, subsidies to help the truly indigent and the elderly can be established.

Short of a different regulatory approach to the health care industry, the consequences from expanding the current system will be more of the same: a health care system plagued with declining quality, skyrocketing health care costs, and piecemeal programs such as the 340B drug discount program, which pits one part of the health care industry against another while failing to achieve its primary objective.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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