Will the US Healthcare System Implode?

If you work in healthcare leadership, you live the mantra of “The Boomers are Coming, the Boomers are Coming.” Technically, the boomers will start hitting the age of 65 in 2010, less than two years from now. In reality, a small percentage of boomers are already starting to retire. Current retirees number around 47 million, but that number is expected to grow to over 80 million by the year 2030. You can see why former Ambassador Pete Peterson of the Concorde Coalition has described this as akin to a goat passing through a boa constrictor. Perhaps more alarming is the recognition that between 70% and 80% of health-care costs are incurred in the last five years of life, and, with the average life expectancy currently at just under 80 years for both men and women, those health-care costs and the last five years of life occur well beyond the age of 65.

There is some concern that, with Medicare slated to go bankrupt in the year 2020, we will witness generational warfare over available finances. This is unfortunate, and it was never expected to be this way. This, in fact, was why the Medicare trust fund was created – largely financed by boomer generation taxpayers, who paid double fare to cover the health care expenses of then-current retirees as well is stockpiling a savings account sufficient to largely cover their retirement health care needs, as well. The Medicare trust fund, however, is empty, having been spent over the years by Congress and presidents of both parties on “needs” both significant and insignificant – defeating the Soviet Union during the Cold War and financing the Lawrence Welk Museum, to provide examples of both.

Today, health care costs are rising at an alarming rate, and there is no one single cause for it. Certainly, the rising cost of patent-protected pharmaceuticals represents one of the most significant contributors to health care inflation on a percentage basis, as do similar advances in the area of novel therapeutics by the medical device manufacturing industry. Another source is wage inflation within healthcare, due to current and anticipated shortages of nurses, certain allied health professionals, and family practice physicians. The anticipated portion of this shortage follows from the recognition that many of those in these positions are, themselves, baby boomers, who are anticipating their senior years in retirement – presumably, tooling around America in Winnebagos, if only gas prices will decline … and stay there.

There are a number of possible solutions to this resource constraints issue. Recently, we’ve seen the arrival of off-shoring, with patients heading down to Brazil (the land of the body beautiful) for the entire assortment of plastic surgeries – anatomically adding and deleting, in an effort to prevent Florida’s beaches from becoming a cellulose eyesore. In the area of non-discretionary procedures, some patients are heading off to India and Malaysia for low-cost necessities, such as coronary artery bypass grafts, where they can recover in Club Med surroundings at half the price charged in the United States. News reports indicate that some insurance companies are even splitting the savings with those willing to travel halfway around the world for life-saving and life-extending procedures – almost rewarding the poor lifestyle choices that made the procedures necessary.

Previously, medical off-shoring was limited to those areas of health care that could be digitized — such as radiology and medical transcription. Today, nearly every aspect of US healthcare seems ripe for such treatment, and it is fair to say that, if we ever invent the Star Trek transporter, the US healthcare system would disappear overnight.

Before tariff reform and the advent of modern international trade, domestic economic shortages were resolved the old fashion way – growing demand increased profits, and profits seduced those eager to fill the lucrative void. Such is the seductive power of the under-tapped market. Healthcare, however, is evidently made of different stuff – an amalgam of free-market competition, government-financed public health, and socialized medicine. To the extent any of these deviate from the competitive market, they serve to bastardize the effects and benefits of the free market, which include lower costs and higher quality.

This includes the cost for pharmaceuticals and medical devices – which the Congressional Budget Office now indicates serve as the principal cause of health care inflation. As outlined in a previous posting, “Is Marketing the Silver Bullet of Health Care,” the pharmaceutical and medical device industries exist in the free-market portion of health care. Their motivations, which are consistent with all free-market firms, is to maximize shareholder value. This means growth of the company or stock value to expand the wealth of company owners. They are not, therefore, nonprofit organizations, nor are they philanthropic. This is neither sin nor estimable. It simply is.

In the case of the pharmaceutical industry, just one in 5000 chemical compounds becomes a product on the market. Moreover, just one in 500 undergoing laboratory research makes it through human trials and survives the FDA approval process. On average, the industry estimates that over $800 million is spent to bring each new product to market. This is estimable (worthy of esteem) because, through this process, life expectancy has nearly doubled since 1900, and it is estimated that life expectancy could extend to 120 years, if medical science continues to realize the promise of genomics, nano-technology, and other discoveries not yet imagined.

It appears, however, that we cannot afford it. Healthcare costs have risen at more than twice the rate of wage inflation since 1980. It is not the elderly, the obese, the diabetic, or tobacco that is driving this unsustainable rate of growth, but, rather, it is the growing cost of medical technology, according to the Congressional Budget Office. Ray Kurtzweil, who created voice recognition, attributes our impressive pace of discovery on an explosion of information, of which the world wide web is a core piece, and he argues that, eventually, new discoveries will arrive almost instantaneously. Personally, I doubt it, but I am not nearly so brilliant as Mr. Kurtzweil.

What I do know is that our inability to afford new discoveries is largely a consequence of a shortening period of patent exclusivity. The patent laws provide 17 years of exclusivity, but the inventor is compelled to patent the expected discovery as soon as the idea arrives. Otherwise, no researcher would feel secure investing the 12+ years normally devoted to research and FDA approval that is the average today. This leaves just four years of exclusivity for new products entering the market. When I graduated business school in 1996, the period of exclusivity was eight years. This means firms have half as much time to cover their research and development investment and secure a suitable return for their investors. And, this shorter period of exclusivity means they must churn new products into the market at twice the pace to sustain the same level of profitability. Add competition to the equation, where a competitor can make a patent-protected offering obsolete by introducing a new and improved alternative, and that window of opportunity declines further.

These are the physics behind the cost of medical technology, and the inflation it promotes is not only unsustainable, it strikes hardest at government, because government covers the cost of healthcare for the four most expensive demographic segments – children, the poor, the elderly, and the psychologically disabled. Unfortunately, it is government, seeking to lower the cost of healthcare, which has caused this unsustainable rate of inflation.

By expanding government payments for an increasing portion of healthcare, it introduced new sources of cash flows into a system that is designed to quickly fill the void between current capacity and available capital. This was the result of Medicare and Medicaid when they arrived in 1965. As Medicaid expanded to cover those at 180 percent of the poverty level, the void was soon filled. When the SCHIPS system arrived, the same result followed. And the arrival of Medicare Part D is having the same effect as when pharmaceutical coverage of medications for psychological diagnoses arrived. Government payment for healthcare has no limit under a hybrid public / private system of funding, because government places no constraint on the pace of technological invention and it has the capacity to print money or increase taxation to cover the growing costs.

Confronting horror stories of defective products achieving FDA approval, government oversight and the approval process became more stringent and time consuming. This had the intended consequence, but it also cut into the period of patent exclusivity, in addition to increasing development costs. This was the unintended consequence, just as increasing government coverage was never expected to serve as the catalyst of healthcare inflation. Indeed, it was expected that increasing FDA oversight would intimidate industry into keeping costs low.

During the first term of the current President Bush, the administration instituted new regulations curtailing industry’s ability to secure patent extensions. Previously, extensions were granted when a patent-protected medication was found beneficial at a different dose, via a new delivery mechanism, or useful in the treatment of a different disease. For years, industry gamed the system to secure extensions, and the administration believed this contributed to healthcare inflation … which it did. The extensions, which averaged 18 months, however, provided industry with more time to achieve the required return on investment. Eliminating the extensions had the unintended consequence of increasing costs, not reducing them.

In the negotiations leading to enactment of Medicare Part D, government opted against negotiating volume discounts on patent-protected medications. Industry maintained that volume discounts would undermine profits and put it in the awkward position of deciding between several unsavory options. Presumably, this would include refusing to negotiate and provide these medications to government-supported patients, reduce research and development investment, cut provision of low-cost medications to third world countries, and other, unspecified, consequences. To avoid this, government agreed to the demands but did not cap expenditures to prior levels, and costs have increased. Again, we are left with the unintended consequence of government intervention that was designed to reduce costs.

To reduce healthcare expenses, government has increased the percent of Americans covered by federal-government healthcare programs under Medicaid. As cost have risen, the federal government has cut funding – leaving the states to shoulder an increasing portion of the burden. Many states have followed Tennessee’s lead and reduced, both, the number of citizens qualifying for coverage and the services provided to those who remain covered. These cuts have reduced delivery of preventative care and prompted an increasing number to ignore symptoms until their disease has progressed to a point where treatment is more costly than if addressed at an earlier stage. Again, the unintended consequence increases costs when the intent was to reduce them.

When other first world countries were converting to socialized medicine, the US elected to retain the free market approach, in order to realize the lower cost and higher quality benefits that accompany market competition. The socialized medicine countries sought to negotiate volume discounts. Industry realized that, if the US consumer paid for the fixed cost of production, selling discounted products outside the US would remain lucrative if just the variable costs were covered by non-US consumers. Having adopting a hybrid-socialized-medicine / free-market system in the US, the US consumer now pays double that charged outside of the US, as we have yet to benefit from illusory free market competition. In fact, the US consumer is now covering the fixed costs that would ordinarily be charged to international consumers — effectively subsidizing socialized medicine in Germany, France, England, Italy, Spain, Canada, etc. Again, government sought to keep costs low but, by adopting a hybrid system, the unintended consequence has been higher costs.

So, what is the solution? Personally, I doubt that a solution exists. It appears US healthcare has been so ineptly managed that insufficient time remains before the system implodes. Even if a narrow window of opportunity remains, I doubt government has the ability to achieve such a dramatic change of character as to move from incompetence to excellence with sufficient speed to achieve the necessary reforms in the time remaining. There are some things that government could do that might just work, and none of them requires adoption of a socialized medicine system.

First, start the patent-exclusivity timeclock when FDA approval is granted. Opponents of this proposal will claim that 17 years of full-blown patent exclusivity is excessive and likely to increase health care costs. Instead, I believe that it would extend the time available to secure a return on investment, reduced churning of new medications into the marketplace, and significantly lower medication costs. Moreover, competition between pharmaceutical firms would ensure that, for the most lucrative patent-protected medications, the next advance would arrive long before the end of the 17 years.

Second, government should negotiate volume pricing discounts. This would return a missing element of the competitive free-market to the system and force the pharmaceutical industry to make a decision between exiting the US market or, alternatively, increase pricing to other countries. Given this choice, I doubt that the industry will depart the largest and most lucrative market on the planet.

Third, in exchange for the patent extension, government should institute anti-gouging laws that limit medical technology firms to 20% profit margins. This should be sufficient to promote continued research and development, compensate for the risks associated with recurrently generating scientific advances, and compensate for the presence of a hybrid system. Would this prevent industry from moving offshore in order to avoid this new law? It would if the savings were reinvested in the US education system, with a required emphasis on math and science. Industry will go where the best and brightest minds are located.

Fourth, open the US boarders and open them wide in an immigration regime that is blatantly liberal and conservatively managed. It should limit acceptance of under-educated applicants to that proportion currently present in comparison to well-educated applicants. With the boomers leaving the workforce, tax-paying replacements are needed and it is too late to procreate our way to solvency. We will need replacement housekeepers, cooks, gas station attendants, and day laborers but not in disproportion to scientists, doctors, engineers, MBAs, lawyers, and teachers.

Fifth, government needs to mandate creation of evidence-based clinical pathways for diagnoses for which we know what optimal care entails. Practitioners treating patients in accordance with those pathways should confront a more forgiving standard of gross negligence in tort liability cases. Moreover, they should receive compensation in treating a patient off-pathway only if based on a medical-note-justification indicating strong patient preference or confounding comorbid condition. This would significantly reduce the variation in treatment practice costs and have the effect of lowering tort liability costs, frivolous lawsuits costs, continuing medical education costs, the costs associated with preventable medical error, supply costs for providers, and healthcare operating expenses due to the inefficiency of treatment variation. In cases were we are uncertain about which treatment approach delivers the best outcome, the pathway should reflect the cheapest among the best available options. The pathways should be created by the physician professors at the leading academic medical centers — giving the pathways credibility within the profession and preventing the insurance industry from confronting the ethical dilemma of conflict of interest. After all, the insurance industry argued in the Grenwald case that its fiduciary obligation was to stockholders, not patients … and the Supreme Court agreed.

Ultimately, we are in this predicament because of stupidity by well-meaning people. We may just have a fighting chance if able to retain the well-meaning people while putting an end to the stupidity. Otherwise, we should simply stop flailing about, suffering unnecessary agony with each new government budget cycle, and just adopt socialized medicine. Whether by choice or compulsion that is where we are headed if not discovering competence in this the 11^th hour.

It would, of course, help if our self-regulating industry enjoyed the leadership provided by an identifable self-regulator, but none of the prime candidates (AMA, AHA, Joint Commission, AAMC, etc.) are leading. Instead, most are following the disparate, atonal, and uncoordinated voices of their membership.

And that is why, I believe our system will fail.

And, oh, by the way, “The Boomers are Coming … The Boomers are Coming.”