Monday, May 31, 2010

Health Tank Part II: Medicare & Medicaid Reform

A compilation of the most promising healthcare policy ideas.

The latest addition to Health Tank is a discussion of Medicare and Medicaid reform.

What can be said about Medicare that hasn’t already been said a thousand times? More than you might think, because the problem is actually far worse than people realize. It’s not just that Medicare threatens to swallow up the Treasury. It’s that Medicare is responsible for at least half of the real increase in the cost of health insurance between 1950 and 1990. Medicare incentivizes the elderly to consume health care without any regard to its expense, and underpays hospitals and doctors for the privilege, leading providers to overcharge those with private insurance in compensation.

It is no exaggeration to say that successful reform of Medicare, Medicaid, and Social Security must be our nation’s highest domestic priority.

Some of the ideas I discuss in Health Tank include: means-testing Medicare benefits; raising the age of Medicare eligibility; moving to a consumer-driven system; reforming Medicare cost-sharing; death panels; fixing the underpayment and cost-shifting problems; and block grants to states for Medicaid. On the Medicaid side, one of the biggest problems is how Obamacare drastically expands the program in a way that reduces flexibility for the states.

Thursday, May 27, 2010

Health Wonk Review Review: Why Insurers Aren't Utilities

Cross-posted from The Agenda on National Review Online.

Health Wonk Review is a traveling, biweekly compilation of interesting posts from the health care policy blogosphere. The latest edition, hosted by David Williams of Health Business Blog, highlights articles from 23 blogs on the left, right, and center. Much of the focus this time around is on the provision in the Patient Protection and Affordable Care Act that requires insurers to spend 80-85% of their premium revenues on patient medical expenses (the “medical loss ratio” in industry parlance).

Austin Frakt of the Incidental Economist argues that increasing competition among insurers, by allowing people to buy insurance across state lines, for example, can lead to increased costs, because health care providers (hospitals, doctors, etc.) also play a role in determining the price of healthcare. While I partially agree with him on that front, his favored solution—converting insurers into utilities via medical loss ratio mandates—will make the problem worse, not better. As David Williams observes, “it is foolish to look at medical costs as good and administrative costs as bad,” because MLR mandates incentivize insurers to “drive premiums up over the long term so that relatively fixed administrative costs (like executive salaries) decline as a percentage of premiums.”

Jaan Sidorov of the Disease Management Care Blog summarizes the MLR debate as one between “constructionists,” who understand that insurance is strictly about pooling risk, and “activists,” who seek to so “enable the betterment of needed health care services” via insurance regulation. (I would quibble with the term “betterment.”) Sidorov notes that “the activist view of Medicare may underlie the nomination of [Donald] Berwick to lead the [Centers for Medicare and Medicaid Services].”

Louise Norris of the Colorado Health Insurance Insider analyzes a new report from the National Center for Health Statistics, which points out that most of the people who visit emergency rooms already have health insurance, debunking the myth that individual mandates are necessary to fix this problem.

John Goodman wrote an outstanding piece on his outstanding blog about why the problem of rescissions—when an insurer cancels someone’s policy because he had misrepresented his preexisting conditions—is overrated. (In sum, rescissions are very rare, and abuse of the procedure is already illegal.)

Bob Vineyard of InsureBlog notes that the latest episode of the Massachusetts health care soap opera involves the state legislature forcing wealthy hospitals to make a “one-time $100 million contribution”—a sentence in which possibly every word is factually inaccurate—to keep the Bay State’s health care system from falling apart. “Some politicians just don’t learn,” he writes.

Roy Poses at Health Care Renewal notes a Pittsburgh Tribune-Review article that shows that the University of Pittsburgh Medical Center paid $5.16 million to CEO Jeffrey Romoff in 2009, and millions to other top executives, puncturing the illusion that it’s only at for-profit entities that senior management is well-paid.

Brad Flansbaum at the Hospitalist Leader is pessimistic about the fiscally sane options for dealing with the “doc fix.” As he concludes: “‘Physicians, you will be making less money, the good time days of the last forty years are coming to a close.’ What is waste, what we can afford, who will take the hit…they are all up for debate, and it is going to get ugly.” Indeed.

Wednesday, May 26, 2010

Christmas Comes Early! 88% Of Employers Will Pass Obamacare Costs Onto Employees

Cross-posted from Critical Condition on National Review Online.

Towers Watson, a leading human resources consulting firm, has conducted a survey of 661 human resource and benefit specialists across America. While benefit professionals are still digesting the new law, the survey shows that they are even more skeptical of Obamacare than the public is.

These benefit specialists represent a broad range of industries, and are responsible for choosing health insurance plans for almost 4 million Americans. If their fears come true, the future of American health care is bleak. Among the survey’s highlights:
  • 90% believe that Obamacare “will increase their organization’s health care benefit costs”;
  • 88% intend to pass the increases onto employees by increasing employee premium contributions or other cost-sharing measures;
  • 74% intend to “reduce health benefits and programs” by using stingier health plans, restricting eligibility for health coverage, and using spousal waivers or surcharges.
By a wide margin, employers’ three top priorities for health care policy are containing health care costs (96% saying it is a high priority); encouraging healthier lifestyles (88%); and improving the quality of care (75%). Only 25% of those surveyed believe that the law will actually encourage healthier lifestyles, and only 20% believe it will improve the quality of care.

Another group that will be affected by Obamacare, according to the survey, are retirees, especially early retirees (i.e., those under the age of 65). 77% of employers believe that large companies will reduce or eliminate their retiree health benefits, now that the law prevents insurers from shunning those with pre-existing conditions. “Just as many baby boomers are deciding whether to delay retirement, employers will be determining if it makes financial sense for them to remain in the retiree medical business,” said Dave Osterndorf, a senior consulting actuary at Towers Watson. The pre-existing condition mandate “will likely accelerate employers exiting sponsorship of retiree health programs.“ Naturally, the more that employers opt out of sponsoring their retirees’ health benefits, the more that the government will end up picking up the tab.

On the bright side, 58% of employers said that the rising cost of health insurance would lead them to replace their existing health benefits with consumer-driven health plans (assuming that Obamacare doesn’t outlaw them). 74% said that they do not plan to discontinue health coverage for their active employees, though “it’s something you want to monitor over time,” said Mark Maselli, head of the Towers Watson group that conducted the study.

Tuesday, May 25, 2010

Tick-Tock: Obamacare's Tax Timeline

For those who have better things to do than read 2,500-word blog posts.

The Heritage Foundation has put together a video that neatly sums up the chronology of Obamacare's implementation (slinky techno music included):

Monday, May 24, 2010

A Non-Cranky Defense Of The Gold Standard

Cross-posted from The Agenda on National Review Online.

In today’s New York Times, Ross Douthat takes on Rand Paul and paleoconservatism on the Civil Rights Act and other issues. “Like many groups that find themselves in intellectually uncharted territory,” writes Douthat, “they have trouble distinguishing between ideas that deserve a wider hearing and ideas that are crankish or worse. (Hence Ron Paul’s obsession with the gold standard and his son’s weakness for conspiracy theories.)”

Douthat is being a bit unfair here. Paleoconservatism isn’t intellectually uncharted territory; whatever its faults or merits, its acolytes built the philosophical foundations of Cold War conservatism. But I don’t want to digress into a pedantic discussion of the intellectual foundations of paleoconservatism. Rather, I want to take on the idea that advocacy of the gold standard is a crankish obsession, one that is intellectually (and perhaps morally) on par with opposing the Civil Rights Act.

If the gold standard is merely a crankish obsession, then the ranks of obsessive cranks include not only Ron Paul but also Friedrich Hayek, Robert Mundell, Jude Wanniski, Robert Bartley, Jack Kemp, and Steve Forbes. That is to say, most of the leading exponents of supply-side economics. (Note that this roll call includes two Nobel laureates.) Indeed, sound-money policies have been at the core of conservative monetary policy from the beginning. It wasn’t too long ago that opponents of the gold standard, like William Jennings Bryan, were thought of as the cranky ones.

It is true that the gold standard is an unfashionable idea in Washington, but it is a mainstream one within the financial community. This is unsurprising on both fronts. The financial community is the consumer of government debt, and is therefore intensely attuned to the relationship of monetary policy to the value (i.e., default risk) of that debt. Investors see over and over again the pattern by which governments depart from hard-money policies (such as the gold standard) in order to engage in deficit spending, and then devalue their currencies in order to reduce the value of the debts they then incur. It is a story that all too frequently ends in credit default and economic collapse. The financial community sees no reason why the United States should be immune from the laws of economics.

On the other hand, the political class is attuned to the value of increasing government debt; that is, of building and rewarding political constituencies with high state spending and low taxation. So it is natural that a return to the gold standard is considered eccentric in Washington.

This is not to say that there aren’t thoughtful, disinterested critiques of the gold standard; there are (Milton Friedman comes to mind). But if we continue on our present fiscal course, it is only a matter of time before the bond vigilantes now ravaging Greece make their way across the Atlantic. When that happens (if not before), countries like China and Russia will take concrete steps to dissociate themselves from the U.S. dollar. Given that few other currencies are ready to take the dollar’s place, don’t be surprised if their next move is a transition back to a metals-based monetary system.

Saturday, May 22, 2010

The Conservative Healthcare Conundrum

Cross-posted from The Agenda on National Review Online.

While I am an admirer of Massachusetts psychiatrist Alexander Vuckovic for his role in electing Scott Brown, his most recent missive to The Weekly Standard contains a contradiction that dogs many Obamacare critics: if we are opposed to Sarah Palin’s death panels, are we simultaneously for unlimited government health spending?

Many more Republicans have criticized the former than have proposed solutions to the latter. And unsurprisingly so, since none of the solutions to runaway spending are politically riskless.

Case in point: On May 7, Mark Thornton, a veteran of both the FDA and the biotechnology industry, wrote an op-ed for the Wall Street Journal. In it, he blasted the FDA for delaying for three years the approval of Provenge, an innovative new treatment for prostate cancer. “In the three years that it took to duplicate what was already known,” wrote Thornton, “upwards of 80,000 men lost their lives to prostate cancer. This is equal to the number of men killed in combat in the Korean, Vietnam and Iraq wars combined. Those FDA staffers who had a role in preventing the approval of Provenge in 2007 will have to live with this sin of omission.”

In response, a physician named James Smith, of Macon, Ga., wrote a letter to the Journal, pointing out that Provenge is not cheap:
Provenge will cost about $90,000 to $100,000 per treatment and will add about four months of life, on the average, to the population of patients who receive it. It is considered a palliative medicine, not a cure.

Therefore, in that three-year period Dr. Thornton cites, the 80,000 patients would still have died, only four months later at a cost to society of $8 billion.

I do not know if Dr. Thornton will lose much sleep over this issue, though he should if he is concerned about how the money could have been better spent...Progress in our war on cancer comes in small, incremental steps. Small advances at tremendous cost, claimed as major victories, may exhaust the warriors before true victory can be achieved.
Which brings us back to Dr. Vuckovic, who was outraged by Smith’s skepticism:

[Smith] notes—triumphantly!—that the drug sells for $90,000 to $100,000 per patient and will only extend life an average of four months at a “cost to society” of $8 billion for the theoretical (not actual—they’re dead, you see) treatment of 80,000 patients who died during the extended drug approval period. To put it in perspective, that’s 26,000 patient years of life which would have been apportioned to men who would have had a chance to see sons graduating, daughters married, grandchildren born, perhaps wonder one last time at the pyramids of Egypt or the Grand Canyon. And remember—an average of four months translates to anywhere from zero to a year or more of life in that population, as well as including a few actual cures. To Dr. Smith, however, those cancer patients had a duty to die sooner so as to relieve us of the burden of the cost of their care. That a physician can make such an argument and at the same time act morally superior to the rest of us is an indelible bloody stain on my profession. President Obama’s most recent health-czar designate is an unabashed admirer of the British National Health Service, where the Dr. Smiths of the world make the life-and-death decisions. This is the future of American medicine unless we rise up and repeal the Obamacare monstrosity which will soon be gently reminding us all of the duty to die cheaply.
While I am no fan of the FDA’s bureaucratic tendencies, nor of Britain's NHS, Smith’s concerns are actually quite reasonable. Indeed, it is Vuckovic who overstates his case. After all, as Smith notes, Provenge is not a cure for prostate cancer—but merely a treatment that will extend life by an average of four months. (Vuckovic gets his facts wrong here: Provenge does not result in any actual cures of hormone-refractory prostate cancer; HRPC remains an incurable disease.)

Clearly, in a perfect world, it would be better if we could give Provenge to everyone, just as it would be better if we could give free health care to everyone. Vuckovic, by asserting that no one should be denied Provenge, is unwittingly making the argument for the very kind of socialized medicine he thinks he despises. Given that 65% of prostate cancers are diagnosed in men over 65—i.e., men on Medicare—this is not a theoretical question.

Here is the basic problem. If the state pays for our health care, then the state has a responsibility to ensure that it is paying for cost-effective treatments; otherwise taxpayer dollars are wasted. It is precisely because politicians are afraid to say no to seniors that companies can overcharge Medicare. Spiraling health-care inflation, in turn, leads the government to strike back with unelected bureaucrats who can relieve politicians of that responsibility.

In other words, death panels are the necessary corollary of government-funded health care: once government is paying for health care, government must decide how much it is willing to pay to keep someone alive. The British, unlike many of Obamacare’s advocates, are intellectually honest enough to admit this, and explicitly put a price on the value of a year of a Briton’s life.

On the other hand, the logic of opposing death panels leads necessarily to restructuring the government’s role in funding health care. Precious few Republicans—Paul Ryan excepted—have proposed a way to do this.

The more that individuals are responsible for their own health spending, the more freedom they will gain to seek expensive or inexpensive treatments, based on their own priorities and needs. If Americans want others to pay for their care, they will need to accept that others will decide how they will be treated. I hope we choose the former route.

Thursday, May 20, 2010

Shining Sunlight Into The FDA's Black Box

Cross-posted from The Science Business on

Investors and companies frequently refer to the FDA’s review process as a “black box.” But some of that may be changing. Yesterday, as part of the President’s Open Government Initiative, the U.S. Food and Drug Administration unveiled 21 draft proposals designed to improve the agency’s disclosure policies. Many details still need to be fleshed out, but overall, the effort could be a substantial step forward in improving the openness of the FDA review process.

The FDA’s current approach is to disclose almost nothing about its interactions with pharmaceutical and drug companies. This stems from the honorable intention of not wanting to disclose companies’ proprietary trade secrets. But the FDA has gone too far in the other direction, harming the public, investors, and the companies themselves.

The new proposals would change all that. If enacted, they would require the agency to disclose, among other things: the “identified safety concern” associated with a rejected new drug or device application; “the reasons for issuing” a refuse-to-file or complete response letter rejecting an application; “relevant summary safety and effectiveness information from…an application” at times “when FDA believes it is necessary to correct misleading information” about the drug or device application. Put simply, the FDA would not only disclose that they had rejected an application, but why.

The why really matters, because it is the only way for investors, and for other companies, to understand the rationale for the FDA’s often puzzling decisions. Describing why the FDA decided to reject what seemed to be a qualified application will help everyone. It will help other companies avoid the applicants’ missteps, limiting unnecessary failures; it will reduce the likeliness of arbitrary decisions by the FDA; and it will eliminate the temptation for some companies to misrepresent their standing with the agency.

That last bit is important. Today, when things go wrong for a company at the FDA, the public is reliant on the company to explain why things went wrong. Most companies are honest (if vague) in describing their interactions with the FDA, because they know that misrepresenting them would incur the agency’s wrath. But there are exceptions, especially when companies are desperate to prop up their shares (and raise money from investors at the inflated price).

Take a small biotech company—let’s call it Forbigene—that has just received a “refusal-to-file” letter from the FDA. Unbenkownst to investors, the letter reminds the company that the agency has been telling them all along that there are serious problems with its phase III clinical trials, and that the company has to start new ones from scratch. Forbigene’s stock goes down 30%. Instead of coming clean, the CEO tells investors that it simply needs to clean up a few details from its existing trials in order to keep everything moving along. Some investors buy Forbigene shares, thinking the market has overreacted to the bad news. Eventually, the real problems are leaked to an industry newsletter, the shares take another 80% tumble, and the company eventually goes broke.

When these things happen, bad CEOs aren’t the only ones hurt. Honest companies also suffer from this lack of transparency, as investors have no way to independently verify their claims that their relationship with the agency is on solid ground. Investors always try to avoid risk, but they especially try to avoid risks that they can’t independently assess. And when investors can’t assess that risk—such as with Genzyme’s manufacturing problems—everyone suffers.

More disclosure of the FDA’s decision-making process would also help the public (and companies) gain insight into controversial decisions, like the agency’s recent rejection of Intermune’s Esbriet. While the FDA does frequently give guidance as to what it seeks from clinical trial packages, this guidance can be further fleshed out by learning of its rationale for approving or rejecting certain drugs. Companies and investors can direct their resources into programs that fit with the FDA’s approach. Patient advocates can challenge that approach when they find it overly restrictive.

Transparency is not a panacea. But the FDA’s lack of it has long been a source of frustration for patients, companies, and investors. Progress may be close at hand.

Tuesday, May 18, 2010

Surprise! Mass. Insurers Hemorrhaging Cash

Cross-posted from Critical Condition on National Review Online.

The Boston Globe is reporting that the four largest health insurers in Massachusetts—Blue Cross Blue Shield, Harvard Pilgrim Health Care, Tufts Health Plan, and Fallon Community Health Plan—lost a combined $152 million in the first quarter of 2010. The companies stated that $116 million of those losses were directly caused by the April 1 institution of price controls by the state’s insurance commissioner. This is exactly what insurers predicted would happen when they filed a lawsuit in Boston last month.
“The health plans are not collecting enough premiums to cover their costs,” said Lora Pellegrini, president and chief executive of the Massachusetts Association of Health Plans. “These results support what we’ve said: that the plans would lose millions of dollars from this scheme and it would do nothing to control underlying health care costs.”
This news will cheer members of three overlapping groups: those who believe that profit is an offensive idea in the realm of health care; those who believe that corporate malfeasance is responsible for most social ills; and those who want the private insurance market to collapse, so that it can be replaced by a socialized model.

But for those who are unfortunate enough to have health insurance in Massachusetts, it is an alarming development. It is also one with national ramifications, as Obamacare rolls the Massachusetts model out across the country.

Massachusetts’ problems are not hard to figure out. Between its forest of insurance mandates and its hospital oligopolies, the cost of health care in the Commonwealth is soaring. Insurance premiums are the symptom, and not the cause, of this problem. But local politicians have been taking their cues from the White House, which has decided that demonizing insurers is easier than actually improving the health care system:
That effort got a fresh boost yesterday from another state report that disclosed that many of the state’s biggest health providers are sitting on large reserve funds, some in excess of $1 billion. At the same time, the state Senate is preparing to vote on a proposal that would require many hospitals to make one-time contributions totaling $100 million to help small businesses pay for health insurance.
Politicians’ claims that insurers were gouging consumers with reckless rate hikes have been exposed as untruthful. So now, the pols are trying a new line on for size: that insurers are greedily hoarding secret piles of excess cash. But insurers are required by law to hold assets in reserve, so that they can meet their future claims obligations without risking insolvency. The politicians are trying to let themselves off the hook, by demanding that insurers eat their near-term losses and deplete their long-term reserves.

The four insurers listed above—non-profits all—probably have enough in reserve to get through a few years of price controls. But after that, they will have to raise rates dramatically, in order to catch up with several years of health care inflation. If they can’t, they will go broke, and the Left will blame “market forces.” Don’t let them.

Pfizer's Intriguing Research Deal

Cross-posted from The Science Business on

In a little-noticed deal yesterday, Pfizer announced a $22.5 million agreement with the Washington University School of Medicine in St. Louis. The company will give the school “unprecedented access to information regarding more than 500 pharmaceuticals and pharmaceutical candidates” in an effort to find new uses for existing drugs, and also to find new uses for failed drugs that are collecting dust on Pfizer’s shelves.

It’s an intriguing idea. One of the great frustrations of the drug industry is that, for all the billions of dollars that it spends on R&D, very few drugs successfully get through the development process. A big part of that problem is structural: big organizations, whether private or public, are like slowly-turning battleships. Universities have a pretty shoddy history with drug development. While academic labs are the font of many biological discoveries, universities tend to run their own clinical trials quite casually. A recent Institute of Medicine report found that 40 percent of all advanced trials sponsored by the National Cancer Institute are never completed.

So the Pfizer deal could be a sign of things to come. It helps the company gain an outside perspective on its proprietary programs, without compromising its financial investments in these molecules. University researchers gain access to a wealth of heretofore non-public scientific data, along a nice chunk of change. Here’s hoping that Wash. U. scientists give Pfizer a reason to replicate the model elsewhere.

Monday, May 17, 2010

Introducing New Blog Feature: Health Tank

A compilation of the most promising healthcare policy ideas.

Health Tank, a new feature at The Apothecary, strives to be a comprehensive repository of the best ideas in health-care reform. It starts from the premise that the Hippocratic ideal of medicine—caring for the sick without regard to self-interest—requires us, paradoxically, to understand how self-interest dominates our health care system.

Patients seek the best care they can get their insurers to pay for, regardless of how much it may cost the overall system. Doctors seek the best care for their patients, so long as they can get reimbursed and not sued. Hospitals seek to treat the critically ill, but make more money when their beds are full of sick people. Insurers, by contrast, seek to keep everyone healthy, because they then receive more in premiums than they pay in medical expenses. Governments seek to spend the wealth of future generations, who don’t vote, upon the present generations, who do.

Self-interest cannot be outlawed; it is a ubiquitous fact of life. But history shows us that the self-love inherent in free markets can be harnessed for the public good. Applying that wisdom, Health Tank seeks to improve the quality and affordability of medical care by aligning the incentives of patients, doctors, hospitals, insurers, manufacturers, and the government.

No small task, I know. But we have to start somewhere.

There are four major problems with our health care system: (1) that the cost of health care is increasingly unaffordable for families and businesses; (2) that our nation cannot pay for all of the promises we have made to provide for the health care of the elderly (Medicare) and the poor (Medicaid and S-CHIP); (3) that structural inefficiencies hamper health care innovation and lead to unnecessary medical errors; (4) that we lack the facilities and the medical professionals to care for every American in need.

The problem of the uninsured, a major focus of the progressive political agenda, is actually a derivative of these four core issues; the reason why some needy families lack health insurance is because it is too expensive, and because other elements of the system conspire to prevent them from being able to access health care at times when they need it.

To access Health Tank, follow this link or the one on the top of the left column of this page. There, you will encounter some of the most interesting approaches to these problems, culled from public policy institutes, industry analysts, academics, politicians, and even a stray blogger or two. I hope to continuously improve the depth and quality of this compilation, so check back in from time to time.

Saturday, May 15, 2010

Mixed Feelings For Bob Bennett

Cross-posted from The Agenda on National Review Online.

On the occasion of the defeat of senator Bob Bennett in the Utah Republican primary, Ramesh Ponnuru and Ross Douthat have engaged in a debate about the merits of his proposed alternative to Obamacare, the Wyden-Bennett Healthy Americans Act. The funny thing is, they’re both right.

On the eve of the Utah primary, Ponnuru and his editorial colleagues at National Review attacked Wyden-Bennett as “worse than [Obamacare] in some respects, but in the crucial respects it was simply identical.” And they have a point: Wyden-Bennett contains many of the key features of Obamacare, such as requiring insurers to cover people who are already sick (guaranteed issue), outlawing the practice of charging cheaper rates to the young (community rating), and forcing everyone to buy insurance (individual mandate). As has been shown in the states that have enacted guaranteed issue and community rating, health costs have exploded. Massachusetts has shown us that the individual mandate is of little use in addressing this problem, while coming at a severe cost to individual liberty.

There are, however, some good things about Wyden-Bennett: it would reduce health spending ($1.4 trillion over ten years, according to the Lewin Group); it would wholly replace the two state health programs for the poor (Medicaid and the State Children’s Health Insurance Program); and would transition us out of the massively inefficient, employer-sponsored health insurance system.

So it’s fair for Douthat to ask: “Wyden-Bennett was not my preferred health care reform either, but was it really no better than Obamacare from a conservative perspective?” Indeed, it probably was better than Obamacare. But it’s far from clear that Wyden-Bennett would have been better than doing nothing: over time, its faults (federalizing the insurance system, exploding health-care costs) would likely have overwhelmed its qualities.

Douthat is right to cite NR’s 2008 endorsement of Mitt Romney as an example of GOP intellectual latitudinarianism:
A successful political party can live without lawmakers who are obsessed with compromise for compromise’s sake, trimmers who constantly shift leftward and rightward depending on the political winds, and politicians who by rights belong in the opposition party. (Hence my lack of sympathy for Charlie Crist, Arlen Specter, and Dede Scozzafava.) But it needs to accommodate intelligent deviations and disagreements, and well-intentioned efforts at bipartisanship from politicians who line up with their party 80 or 90 percent of the time.
Sen. Bennett’s bill, misguided as it was, can certainly be characterized as a genuine effort at bipartisan problem-solving, and for that he should be thanked. But, as Mitt Romney is finding out, the policy content of Wyden-Bennett would have compromised Bennett’s ability to speak out in 2010 and 2012 against Obamacare’s biggest flaws.

Given the critical importance of repealing the new law, that moral authority is paramount. And given the need for genuine reform, we can only hope that Bennett’s successor applies himself as robustly to the serious failings of our health-care system.

Friday, May 14, 2010

Medicare And Medicaid's Hidden Costs

Cross-posted from The Agenda on National Review Online.

Maggie Mahar of the Century Foundation is one of my favorite liberal health care writers. While free-market types would disagree with her admiration for the welfare state, she stands out among her peer group as someone who understands how health insurance works. (In this way, she compares favorably to the President, who believes that “overhead...gets eaten up at private companies by profits,” instead of the other way around.) She is therefore clear-eyed in assessing the practical implications and limitations of Obamacare.

Another one of her qualities is that she takes the time to empirically engage criticisms of the new law. One such criticism is that the law will drive health-care inflation because it massively expands the role of Medicaid. In brief, because Medicaid pays hospitals and doctors an average of 72% of what Medicare pays (and Medicare itself pays much less than what private insurers pay), hospitals and doctors overcharge people with private insurance to make up the difference. This is called “cost-shifting.”

In a December 2008 report, Milliman, an actuarial and consulting firm, estimated that those with private insurance shoulder $90 billion per year of the real cost of Medicare and Medicaid, due to these hidden underpayments. Many Democrats attempted to dismiss the report because it was funded by America's Health Insurance Plans, the insurer trade group. But Milliman’s analysis deserves to be addressed on its merits. Maggie Mahar did so by citing a report from the Medicare Payment Advisory Commission:

This is a canard that insurance lobbyists like to perpetuate because it helps justify climbing premiums. The non-partisan Medicare Payment Advisory Commission (MedPAC) has taken on exaggerated accounts of “cost-shifting” by showing that a hospital’s relative market strength determines what a hospital is paid by private payers.

MedPac points out that from 1994 through 2000, during the heyday of “managed care,” insurers had more power than hospitals in most markets: “managed care restrained private-payer payment rates.” But “by 2000, hospitals had regained the upper hand in price negotiations due to hospital consolidations and consumer backlash against managed care.”

Private insurers no longer tried to “manage care.” Huge hospitals had the clout to perform as many tests and treatments as they wished, without having to prove that the patient needed the procedure, and newly-consolidated hospitals could charge insurers as much as they pleased. They knew that the insurers’ customers wanted those large medical centers in their networks. Insurers “in turn passed along these costs through higher premiums to enrollees and employers,” MedPAC reports. “While insurers appear to be unable or unwilling to ‘push back’ and restrain payments to providers, they have been able to pass costs on to the purchasers of insurance and maintain their profit margins.”
There is no doubt that hospital monopolies are a big driver of health-care inflation; indeed, I and others have written extensively about this problem. But Mahar's argument falls flat, insofar as one cause of health-care inflation doesn’t exclude the other. That is to say, just because hospital monopolies drive up the cost of health care doesn’t mean that government underpayments don’t also do so.

Mahar's contention does lead us to one reason why single-payer systems are less expensive than ours: in a single-payer system, the government has monopsony power to tell the hospitals to go take a hike if they try to charge more than the government is prepared to pay. The problem with single-payer, however, is that hospitals have no incentive to improve their quality: they are paid the same regardless of whether or not they invest in better care for their patients.

Indeed, in important ways, hospitals benefit from poorer quality and a sicker populace: if patients are readmitted to the hospital because they weren't optimally treated the first time around, the hospital gets paid twice. Insurers have the opposite incentive: they benefit economically when their beneficiaries are as healthy as possible.

That’s why the ideal system is free and open competition on both the payor and provider sides of the health care ledger: transitioning from the employer-sponsored system to a national individual health insurance market; and encouraging the proliferation of physician-owned specialty hospitals that can compete with the incumbent monopolies. In this way, insurers can acquire the scale that would allow them to gain the upper hand against hospitals and thereby hold down costs. At the same time, such a system creates the economic incentives for insurers to provide products that people want to buy, and for hospitals to treat patients as well as they possibly can.

Obamacare, unfortunately, moves us in exactly the opposite direction.

Wednesday, May 12, 2010

Why Malcolm Gladwell Is Wrong About Drug Development

Cross-posted from The Science Business on

UPDATE: Gladwell’s response to my article can be found here.

Ever since Watson and Crick first elucidated the structure of DNA in 1953, medical science has made enormous strides in understanding the basic biological mechanisms of disease. This has allowed scientists all over the world to develop innovative and effective approaches to previously incurable conditions.

Malcolm Gladwell isn't buying it. In the May 17 issue of The New Yorker (subscription required), he implies that we should go back to the old way of doing things: of throwing mud on a wall and seeing what sticks. But his case study for that approach, Synta Pharmaceuticals' elesclomol, is in fact an object lesson in its deficiencies.

Gladwell has become a household name by, as the New York Times put it, seeking to "undermine the ideals of talent, intelligence and analytical prowess in favor of luck, opportunity, experience, and intuition." There is no doubt that luck plays a big role in successful drug development. After all, very few compounds get out of the lab and into human clinical trials. And a drug that manages to makes it into human trials has a mere 8% chance of being approved by the FDA. Contra Gladwell, however, recent history shows that talent, intelligence, and analytical prowess are just as important, if not more so, in the development of successful new medicines.

Synta is commonly described as a biotechnology company because it's a small company focused on the traditional biotech domains of cancer and immunology. But Synta's approach to drug development is as old-school pharma as the 21st century gets.

Most biotech companies try to identify the genes and enzymes that cause a disease, and "rationally" design chemicals or antibodies that specifically target those causes. Synta, on the other hand, uses the same basic approach that drug companies have used for centuries: taking a library of thousands of chemical compounds, and testing those compounds one by one in the lab until something seems to work.

Gladwell is a lucid writer, and he elegantly details Synta's thus-far futile quest to turn its chemical library into everyday medicine for patients. He describes the moment in 2006 when, just as Synta is about to enact a round of layoffs, a company scientist tells CEO Safi Bahcall and colleagues that elesclomol has shown promise in a mid-stage melanoma trial:

"So the lights go down," Bahcall continued. "Clinical guys, when they present data, tend to do it in a very bottoms up way: this is the disease population, this is the treatment, and this is the drug, and this is what was randomized... They go on and on and on, and all anyone wants is, Show us the [bleeping] Kaplan-Meier! Finally [Chief Medical Officer Eric Jacobson] said, 'All right, now we can get to the efficacy.' It gets really silent in the room. He clicks the slide. The two lines separate out beautifully--and a gasp goes out, across a hundred and thirty people. Eric starts to continue, and one person goes like this"—Bahcall started clapping slowly—"and then a couple of people joined in, and then soon the whole room is just going like this—clap, clap, clap. There were tears. We all realized that our lives had changed, the lives of patients had changed, the way of treating the disease had changed. In that moment, everyone realized that this little company of a hundred and thirty people had a chance to win. We had a drug that worked, in a disease where nothing worked. That was the single most moving five minutes of all my years at Synta."

The following Feburary, Synta sucessfully launched an IPO, opening its first day of trading at $10 per share. But a number of hedge funds were skeptical, and began shorting Synta's stock. Their criticism was that, upon further analysis, elesclomol's performance in melanoma was not as strong as it seemed. For one thing, the patients in the placebo arm of the study appeared to be sicker, older, and more refractory to prior chemotherapy than those in the elesclomol arm. Therefore, the skeptics reasoned, the elesclomol-treated patients were destined to look like they were faring better, even if the drug itself was doing nothing.

For the next two years, Wall Street continued to energetically debate the merits of elesclomol in melanoma. Synta's share price gyrated accordingly.

On February 26, 2009, the company made a surprising announcement: that they were halting the phase III trial of elesclomol in melanoma, because a board of independent reviewers found that more people were dying on elesclomol than in the control arm. Synta shares plunged 79%, from $6.39 to $1.36. The shorts had won. Melanoma patients and Synta investors had lost.

Though Synta continues to work on elesclomol, and is encouraged by the activity of a new drug called STA-9090, thus far, the company's old-school pharma approach has yet to prove itself. Despite the best efforts of the able and idealistic team at Synta, its chemical library, thrown on the wall, hasn't stuck.

One gets the impression that Gladwell followed elesclomol over the years in the hopes of using its story for one of his books: the story of how luck and intuition can lead to pharmaceutical success. But the opposite happened, and the account ended up in The New Yorker instead. In Gladwell's final assessment, the story remained one about luck: but about bad luck instead of good.

One can't fault Synta nor its partner, GlaxoSmithKline, for investing in elesclomol's phase III melanoma trial. After all, the phase II data seemed compelling. But the companies were not merely unlucky. Their optimism stemmed from trial results that were less conclusive than enthusiasts believed, with a drug that bore no definitive biological relationship to the disease of melanoma. A better-designed phase II study may have identified these problems earlier, and saved both companies tens of millions of dollars.

Rational drug design, the hallmark of new-school biotech, is no panacea, as Gladwell rightly points out. It took decades for Judah Folkman's insight into how tumors gain a blood supply, called angiogenesis, to turn into an FDA-approved therapy. And it's worth noting that, in melanoma, the new-school method hasn't done any better than Synta's. But most of the new drugs that have successfully beaten back cancer—drugs like Genentech's Avastin and Herceptin, and Novartis' Gleevec—have used this analytical, scientific, rational approach.

As the FDA has gotten more stringent about approving new drugs, the cost of developing new medicines has exploded. And while it remains better to be lucky than good, every investor in biotech research must ask the question: if you are going to bet hundreds of millions of dollars on developing a new drug, why wouldn't you try to optimize your chances by attacking a reasonably well-validated biological target? You may still fail—but you will have given yourself the best opportunity to succeed. And that is why the old-school, Gladwell approach is on the ropes.

Tuesday, May 11, 2010

Will Any Of Us Be Able To Keep Our Health Plans?

Cross-posted from Critical Condition on National Review Online.

The blogosphere is no stranger to debunkings of the President’s promise that “if you like your health-care plan, you will be able to keep your health-care plan. Period. No one will take it away, no matter what.” (If you really need proof, check out Deroy Murdock, Jim Geraghty, Stephen Spruiell, and Yuval Levin on the subject.) But, believe it or not, the truth may be even worse. Depending, once again, upon the regulatory divinations of HHS bureaucrats, it may turn out that no one with private insurance can keep his or her preexisting plan.

Here’s how it works: Obamacare, in theory, exempts “grandfathered” insurance policies from some, but not all, of the various regulatory mandates contained within its 2,300 pages. But, obviously, the law massively changes the interactions between government, insurers, hospitals and doctors, and patients. Insurers will need to adjust their policies to take into account changes in both the regulatory and the business environment.

So, if an insurer tweaks its policies in 2011 to conform to these changes, will the government define the new policy as an old one that has been tweaked, or a brand new one that can’t be grandfathered? In other words, what is the degree to which a “grandfathered” policy can change before it is redefined as a new policy and thereby subjected to an additional blizzard of new mandates? As Kaiser Health News describes it:

Many employer organizations, including the U.S. Chamber of Commerce and the National Federation of Independent Business, are pushing for a loose interpretation of “grandfathering” that allows employers to maintain flexibility in designing coverage. They want employers to be able to make changes in their health plans while retaining their grandfathered status. They fear that many of the law’s requirements will increase costs and premiums...

But consumer groups and organizations such as the American Cancer Society Cancer Action Network worry the “grandfathering” clauses will be a huge loophole that allows employers and insurers to avoid complying with the law’s increased consumer protections and benefits. “This is one of the most critical issues going forward in the regulation writing,” said Erin Reidy, senior policy analyst at the cancer group. “We are very concerned.”

Reidy said that grandfathered plans could go on into perpetuity because the law does not give a date when that status expires. She said the group is recommending that the administration “adopt a real narrow definition of grandfathering and any change to coverage should constitute a loss of grandfathering status.”

Unfortunately, at the moment, there isn’t a business in the country that has any idea what is going to happen. “The law is mostly vague on exactly what constitutes a grandfather plan,” notes the Kaiser report. “The administration, which is writing the regulations that implement the new law, is expected to issue its guidance soon on how it interprets the grandfathering clause.” Pray that there are no typos.

Monday, May 10, 2010

What Progressives Know For Sure About Health Care

Cross-posted from The Agenda on National Review Online.

Mark Twain may or may not have once said, "It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so."

In an unintentionally ironic blog entry for The Economist, Matt Steinglass cites this aphorism as an explanation for conservative ignorance about Obamacare. In Steinglass' telling, conservatives hold "factually incorrect ideological beliefs" about the Patient Protection and Affordable Care Act, and engage in "mis- or disinformation" about the law.  ("Factually incorrect ideological beliefs" is a bit of a mouthful; perhaps we could call them FIIBs for short?)

He contends that there were two especially egregious examples of conservative disinformation in the healthcare debate: (1) that Obamacare was a "government takeover" of the healthcare system, when in fact it is "an entirely private-insurer, free-market-based reform"; (2) that Obamacare "involved government 'death panels' that could decide to withhold care from elderly patients on a cost-benefit basis." Even worse, "the better-informed [conservatives] thought they were, the more likely they were to be wrong" (i.e., to believe the two great FIIBs).

For a guy inveighing against the "epistemic closure" of the Right, Steinglass makes no effort to defend the proposition that these two contentions are, in fact, FIIBs. Rather, he accepts as fact, and/or believes it obvious, that Obamacare is free-market-based, and that newly-established government panels would not attempt to withhold care from the elderly.

However, very few observers on either the Right or the Left would agree with Steinglass' outlandish assertion that Obamacare "is an entirely private-insurer, free-market-based reform." Ezra Klein and other liberals describe the law as a "huge progressive victory" precisely because it moves us further away from a free market for health care (not that we had much of one to begin with). The law contains sheaves of intrusive regulations that redefine how insurers must operate, what their policies must contain, and what their profit margins must be. It adds 20 million people to the rolls of Medicaid, a government-run health insurance program, and federally subsidizes the care of millions more. Finally, it, for the first time in American history, it requires that all Americans, simply by virtue of residing in the United States, purchase a product (i.e., health insurance). These are all, dare I say, obvious points; but in the interests of epistemic aperture, I raise them.

Perhaps what Steinglass means to say is that, because Obamacare does not create a government-run single-payer system, it is "entirely private-insurer" and "free-market-based." But this would be a misunderstanding of the terms "entirely" and "free-market." The government does not have to completely take something over in order to effectively take it over. If you have the right to free speech, but a new law says you can only express yourself freely in certain designated areas from 9 a.m. to 7 p.m., and that criticism of any institution except the government is allowed, do you live in a "free-speech-based" system?

And then to "death panels." This has indeed been a sore spot on the Left. I can understand why; most liberals sincerely believe that their policies will make the world a better place (and that their opponents seek the opposite). Hence, to them, it is preposterous that they are trying to kill Granny by instituting an Independent Payment Advisory Board and/or end-of-life counseling.

On this question, the controversy is not about facts, but about predictions. Progressives believe that because their policies are intended to result in quality health care for all, they will. Conservatives believe that there are unintended consequences to major policy changes, that things don't always turn out the way they are intended. (The most cynical conservatives suspect that Obamacare had nothing to do with health care, and is instead a big Trojan horse for income redistribution.)

For FIIB number two, conservatives have more evidence than do progressives to support their predictions. Jim Towey's harrowing accounts of developments at the Department of Veterans Affairs demonstrate what can happen when advocates of physician-assisted suicide infiltrate the end-of-life counseling process. And the new Medicare Independent Payment Advisory Board (IPAB) is explicitly charged with capping Medicare spending, by denying reimbursement to doctors and hospitals for tests and therapies it deems less cost-effective. To argue otherwise is simply not honest. Conservatives see no reason why the IPAB would not ultimately evolve into a facsimile of Britain's National Institute for Health and Clinical Excellence (NICE), which now assigns a monetary value—£20,000-30,000 per "quality-adjusted life-year"—above which NICE denies treatment.

Steinglass may not have a lot of expertise on health care issues; it may be that his rather basic errors are the result of trusting the assertions of other progressives who have made similar arguments. But isn't that the epitome of "epistemic closure"?

Saturday, May 8, 2010

Weekend Links: Risk Pool Problems, How Obamacare Increases Costs

Must-read articles from the past week.

John Goodman had a strong week over at his National Center for Policy Analysis blog. On May 3, in a piece entitled "Why are Health Care Costs So Hard to Control?", he blows apart some of the myths around the Obamacare approach to regulating medicine, such as "more widespread insurance equals lower costs":

All insurance involves a pooling of risk. Since people are naturally risk averse, this pooling is potentially valuable. Once resources are pooled, however, people have incentives to change their behavior and do things they would not otherwise have done. People with life insurance may kill themselves, or allow themselves to be killed, in order to leave a substantial sum to a surviving wife or children. (Fans of “Damages” will know what I mean.) People with fire insurance may be less careful about avoiding fires — particularly if they would like to redo their home anyway.

In health care, people with insurance obtain tests and procedures and even undergo hospital surgeries they would not have opted for had they been spending their own money. Economists call this type of behavior “moral hazard,” although there should be some sort of penalty imposed on the person who came up with that term.

Read the whole thing.

On May 5, Goodman came out with another piece entitled "Rational Risk Pools". In it, he persuasively argues that it is not possible for politicians to run risk pools efficiently:

Here’s something you can take to the bank. Politicians are incapable of setting the right price for anything — whether it’s the price of wheat or corn or any other good or service. As Phil Porter and I have shown, there is no known political process (not democratic voting or any other mechanism) that even in theory can produce the right result.

Here’s something else you can take to the bank. Price setting errors that government makes in the market for risk will invariably be worse than in just about any other market.

Another article worth reading in full. If Goodman is right, he has shot down Republicans' most promising idea for addressing those with serious pre-existing conditions. Are risk pools worth pursuing, despite their imperfections, or should free-market advocates try to come up with another approach?

Finally, on May 4, Robert Bluey of the Washington Examiner published an outstanding report detailing how Obamacare's prohibition of physician-owned hospitals is consolidating the power of incumbent hospital monopolies, and how these hospital monopolies are the principal driver of health inflation:

Physicians at McBride Orthopedic Hospital had ambitious plans for their Oklahoma City hospital before Obamacare. Two new operating rooms and a four-bed intensive-care unit were part of a multimillion-dollar expansion project that promised to bring competition and more health care choices to the community.

But once President Obama's signature was dry on the 2,409-page Patient Protection and Affordable Care Act, so, too, was the McBride project. The recently enacted law imposed a series of new federal regulations on physician-owned hospitals, including an immediate ban on expansion...

Imagine if the government owned General Motors and the Congress passed a bill that barred Ford from producing "any new cars and couldn't expand on its existing cars," Galliart said. "What other industry would put up with this? If we were spending money recklessly and harming people, that's one thing. But physician-owned hospitals are doing it better and more efficiently."

Remember those words the next time you hear the White House try to blame insurance companies for higher premiums.

Friday, May 7, 2010

Obamacare's January Insurance Time Bomb

Cross-posted from

One of the quirks of ObamaCare is that most of its key provisions don't go into effect until 2014. But in any 2,300-page law, there are bound to be provisions that have immediate and unintended consequences. One such provision is Section 2718, entitled "Bringing Down The Cost Of Health Care Coverage."

If only. Section 2718, at a mere 802 words, goes into effect first thing next year and will have a huge impact on the private insurance market. It is the section that converts private insurers into regulated utilities by effectively placing a ceiling on their already-low profit margins. Depending on how the law is implemented by Kathleen Sebelius, the Health and Human Services secretary, it could end up driving many insurers out of business.

It all hinges on a regulatory technicality: In the context of insurance, how do you define "profit"?

One of the key metrics for comparing the financial performance of different insurance plans is what is called the "medical loss ratio," or MLR. The MLR is the percentage of an insurer's premium revenues that are spent on actual medical care. The largest insurers typically have MLRs in the low 80s: In 2008 Aetna's MLR was 81.3%; Humana's was 79.3%; UnitedHealth's was 81.5%; and WellPoint's was 83.6%. After insurers spend on beneficiaries' health care, whatever money remains is used to pay for labor, expenses and taxes and, if anything is left over, to generate a small profit.

There are three large markets for health insurance sold in the United States: large group plans for companies with 50 or more employees (ObamaCare increases this to 100), small business plans and individual plans. Due to economies of scale, large-group plans cost less to administer than small-group plans, which in turn cost less than individual plans. In addition, large employers have more negotiating power with the insurance companies than small groups or individuals, and thus can bargain for lower premiums.

All this means that in the large-group market, insurers can spend relatively more on health-care expenses. For example, UnitedHealth's 2008 loss ratio was 81.5% overall and 82.7% for large groups. But for individuals, it was 67.8%.

Now enter the world of ObamaCare.

Section 2718 requires that from Jan. 1, 2011, onward, MLRs in the small-group and individual markets must be above 80%, and above 85% in the large-group market. Many companies will need to lay off employees or use other cost-cutting measures in order to meet these congressional targets. Some important services offered by insurance companies, such as 24-hour nurse hotlines and disease management programs for preventive care, are classified as administrative costs, and not medical expenses, solely because of the technicality that they are not payments to a third party. These programs, if they cannot be reclassified to count as part of the MLR, will get shut down--to no one's benefit.

Given that the typical profit margin for a health insurance plan is under 5%, there isn't much fat on the bone. It may well be impossible for United to move its individual-market MLR from 67.8% to 80%; instead, the company may decide to exit the business altogether.

The worst-case scenario--the one with dire consequences for the insurance market--revolves around how exactly Secretary Sebelius decides to calculate these medical loss ratios. Since health insurers are already regulated at the state level, national insurers like WellPoint have discrete plans in each of the states in which they operate. The loss ratios of these plans can range from 30% to 170%, depending on how well or poorly each plan is established in its respective state. Averaging together these disparate performers allows the insurer to keep its ill-performing plans in operation.

Will Sebelius allow insurers to meet ObamaCare's MLR mandates on a national basis, or will she require that each discrete, state-based entity to jump through the hoop?

If she decides the former, private insurance market can survive by raising premiums. If she decides to calculate loss ratios on a state-by-state basis, it will cause massive dislocation. Insurers will exit the states in which they have high fixed administrative costs (due, say, to low market share), in order to keep their units in other states in business. In essence, it will reward well-established incumbents in each state and reduce competition. The likely outcome: more insurance monopolies at the state level, which will doubtless be decried by the very people who caused them.

Over the next few months, Secretary Sebelius and her staff will work around the clock to plug the various regulatory holes in the Affordable Care Act. It is a massive undertaking. Sebelius and her White House compatriots seem to enjoy demonizing insurers. Will they spend enough time on a few sentences in Section 2718 to avoid blowing up the private insurance market? Would that even bother them? We will find out soon enough.

Thursday, May 6, 2010

How The FDA's Conflict-Of-Interest Rules Hurt Patients

Cross-posted from Critical Condition on National Review Online.

The New York Times has an editorial out endorsing the U.S. Food and Drug Administration’s stepped-up efforts to root out conflicts of interest within its advisory committees of outside experts. If you’ve ever wondered why FDA decisions have gotten increasingly erratic over time, you can thank those who agree with the Times:
For many years now, critics have complained that the votes of some committee members could be swayed by financial conflicts — such as owning stock in or consulting for a company whose product is under consideration, or for one of its competitors. Although laws and regulations are supposed to screen out scientists with financial conflicts, the F.D.A. routinely granted waivers to allow participation by specialists whose hard-to-find expertise was deemed essential.

Prodded by a 2007 law, the F.D.A. has greatly reduced the number of waivers and gone even further than the law requires. It had been granting waivers to more than 15 percent of the members participating in meetings but is currently granting waivers to less than 5 percent. That is a major accomplishment toward cleaner decision-making.
This sounds nice. Cleaner decision making. Who should want people with conflicts of interest to advise the FDA? Actually, patients should — because the physicians who have the most knowledge about a given disease are almost always those with the most conflicts.

There are two kinds of physicians: the vast majority, who do their job based on adherence to consensus-based standards of care; and the small minority, who investigate the basic biological causes of disease and conduct clinical trials based on the latest science to see if we can come up with new ways to better treat patients. They are the ones who try to change the consensus, for the better.

But those clinical trials of experimental new drugs cost money. A 1,000-patient trial, for example, might cost $100 million to run. Who has the money to pay for such a trial? The developers of the experimental therapy — that is to say, a drug company. Hence, doctors who participate in clinical trials are partially “funded” by drug companies. In the Left’s simplistic worldview, anything with the taint of industry is fundamentally corrupt. Hence, these doctors, simply because their trials are funded by industry, are corrupt by association.

In the old days, the FDA populated its expert panels with thought leaders in every major field of disease. But now, due to these draconian conflict-of-interest rules, most true medical experts are disqualified from participating. So the FDA fills its panels with non-specialists, or other doctors who are less familiar with the latest developments in a particular area of medicine. As a result, the FDA’s panels have become unpredictable, and have much less bearing on the actual clinical-trial data for a particular drug. The FDA, fully aware that its outside panels are less useful, now routinely disregards their advice and does whatever its internal reviewers want to.

A much simpler approach would be to completely eliminate these conflict rules and simply require panelists to disclose their funding sources. This way, the FDA can take potential biases into account when listening to their advice. But to cut off that advice in toto is irresponsible. It has made the FDA more insular and less able to solicit the advice of leading doctors in every field of medicine. This harms the agency’s ability to bring new, life-saving drugs to the market.

While the Times has its fun alleging that these doctors and companies are corrupt, the only interests that have been compromised are those of the actual patients who suffer from the diseases those innovators are trying to treat. Bravo.

Wednesday, May 5, 2010

What Intermune's Smackdown Tells Us About The FDA

Cross-posted from The Science Business on

In March, Intermune's shares rocketed from the low teens to the high 40s, because an outside panel of experts convened by the FDA recommended approval of Esbriet, the company's drug for idiopathic pulmonary fibrosis. But, yesterday, the FDA told Intermune that it would need to conduct a third phase III trial in order to confirm that the drug actually works. The stock went back to $10 after hours, taking down many of the most sophisticated biotech investors on Wall Street.

What does it tell us about the FDA's overall attitude toward new drug applications? Less than you think.

In the past, an endorsement by the FDA's panel of outside experts was 90% likely to result in final FDA approval for a given drug. In more recent years, the FDA has more regularly gone against the recommendations of its panels (see Dendreon circa 2007). But Esbriet was no ordinary case.

First, why the panel recommended approval: Esbriet (or pirfenidone) is clearly doing something for patients with idiopathic pulmonary fibrosis. IPF is a disease involving progressive scarring of the lung tissue. Over time, the lungs lose their ability to expand and contract due to their loss of elasticity, and patients' ability to breathe gradually declines. The average patient diagnosed with IPF survives for 3 to 4 years.

If you sum up all of Esbriet's clinical data, the drug appears to incrementally improve the ability of these patients to breathe, without causing serious toxicity. Hence, any pulmonologist treating IPF patients would want to have access to this drug: it's better than sitting around, waiting for them to die.

But there was one key problem: in the two large phase III trials that Intermune conducted, the drug showed a clear benefit vs. placebo in only one of them. Federal law requires "adequate and well-controlled studies"—emphasis on the plural—and almost never lets drugs through with just one.

Hence, the FDA was caught between two important priorities: getting a useful drug in the hands of doctors, and making sure that the pharmaceutical industry knows that two well-controlled trials are still necessary for approval. Investors bet on the former, because the FDA's comments at the March 9 panel meeting were surprisingly benign. But it's always risky betting against the bureaucratic tendencies of the FDA.

Shionogi, the Japanese drug company that owns rights to Esbriet in Japan, had conducted their own successful studies with the drug. But Intermune didn't have access to the patient-by-patient records from that trial, and those trials therefore couldn't be audited by the FDA and incorporated into their evaluation.

In retrospect, Intermune made a huge mistake by not beginning a third phase III trial right after they learned that their second trial failed. They probably worried that by starting that third trial, they would give the FDA an excuse to wait for its results. But now, the company is at least three more years from getting Esbriet in the hands of doctors and patients—not a good outcome for anyone.

Tuesday, May 4, 2010

David Brooks On The Limits Of Policy

Cross-posted from The Agenda on National Review Online.

David Brooks has an unusually interesting column in the New York Times today entitled "The Limits of Policy." In it, he makes the case that "bad policy can decimate the social fabric, but good policy can only modestly improve it":
In 1950, Swedes lived an average of 2.6 years longer than Americans. Over the next half-century, Sweden and the U.S. diverged politically. Sweden built a large welfare state with a national health service, while the U.S. did not. The result? There was basically no change in the life expectancy gap. Swedes now live 2.7 years longer.

Again, huge policy differences. Not huge outcome differences.
He cites a study from the Social Science Research Council which shows wide disparities between the achievement levels and life expectancies of various American ethnic groups, and cites another that contends that doubling the income of the poorest Americans would have minimal social impact. His upshot is drawn from Edmund Burke:
Therefore, the first rule of policy-making should be, don’t promulgate a policy that will destroy social bonds. If you take tribes of people, exile them from their homelands and ship them to strange, arid lands, you’re going to produce bad outcomes for generations. Second, try to establish basic security. If the government can establish a basic level of economic and physical security, people may create a culture of achievement — if you’re lucky. Third, try to use policy to strengthen relationships. The best policies, like good preschool and military service, fortify emotional bonds.

Finally, we should all probably calm down about politics. Most of the proposals we argue about so ferociously will have only marginal effects on how we live, especially compared with the ethnic, regional and social differences that we so studiously ignore.
Is this actually true? Both liberals and conservatives might have some objections. Liberals’ favorite example of successful social policy is the 1964 Civil Rights Act. While opponents’ core argument against the Act was grounded in the Tenth Amendment, the degree to which it transformed social bonds in America was both its great strength and also what many of its opponents most strongly opposed.

Conservatives, especially free-market-oriented ones, point to how reducing the burdens of the state, such as with the Economic Recovery Tax Act of 1981, can unleash tremendous economic activity. One can even argue that these Reagan tax cuts helped win the Cold War. Just as with the Civil Rights Act, today the ERTA is not especially controversial. But while opponents of tax cuts usually couch their criticisms in fiscal terms, the degree to which tax cuts undermine the welfare state—and, thereby, in the minds of liberals, the economic security of lower-income Americans—is what truly makes them controversial. (Jim Manzi discusses this problem in depth here.)

But there is an implicit argument in Brooks’ column that again harkens back to Burke: that change is usually bad for social and economic security, regardless of the merits of the new policy. People get accustomed to the way they live their lives, and to their relationship to the government. Dramatically changing these relationships always leads to a period of insecurity and adjustment. A Burkean might contend that, while such change may be required from time to time (such as in 1964 and 1981), most times it’s not. This is one of the reasons why the Texas state legislature only meets in odd-numbered years.

So, while Brooks is basically right, terms like “social bonds” and “economic security” mean different things to different people—which brings us right back to a debate about policy. That is to say, what policies undermine, and what policies promulgate, social bonds and economic security? We are a long way from reaching a consensus on this question.

Monday, May 3, 2010

Why the FDA Isn't A Model for Financial Reform

Cross-posted from The Agenda on National Review Online.

In Washington, the debate about financial reform has taken on a more bipartisan bent than did the battle over Obamacare. Most people think of health-care reform as an ideological debate about the nature of entitlements and the scope of the welfare state, whereas many of us see financial reform as a technocratic issue, in which both sides are working to achieve the best policy outcome.

But there are striking similarities between Obamacare and financial reform: both involve large swaths of the economy (U.S. health care spending is about 16% of GDP; the financial services industry is about 20%), and both have been dramatically affected, for better or worse, by policy decisions in Washington.

In this context, it is interesting to observe the debate around one element of the Democratic financial reform package: the creation of a new government institution, the Consumer Financial Protection Agency (CFPA), whose mandate would be to ensure that consumers aren't duped by predatory lenders. The plan's many critics, such as those at the Wall Street Journal, argue that the CFPA would (1) be redundant with existing government regulations and agencies; (2) place small community banks at a competitive disadvantage to the big "bulge-bracket" firms; (3) further tighten the supply of credit; (4) compromise important aspects of consumer privacy; (5) do nothing to address the actual causes of the 2008 crash.

Liberals, however, remain optimistic that a new CFPA could succeed at protecting consumers in ways that they believe that other government agencies have failed. Some, like Johns Hopkins political scientist Steven Teles, see the U.S. Food and Drug Administration as a model for how a successful CFPA could function.

Teles makes his case in the most recent issue of The Washington Monthly, in which he reviews a new book by Harvard political scientist Daniel Carpenter, entitled Reputation and Power: Organizational Image and Pharmaceutical Regulation at the FDA. Specifically, Teles argues that a key to the success of the CFPA will be where it is located on the big Federal org chart:

The story of the FDA as presented by Carpenter holds important lessons for liberals. First and foremost, while Americans' skepticism of government is strong, it is not insurmountable. Many Americans think of "bureaucrats" as either ineffectual or self-interested power grabbers, but few feel that way about employees of the FBI, the military, the Social Security Administration, or the National Institutes of Health. And because Americans view these agencies in a positive light, they and their representatives in Congress have been willing to grant them broad power and authority, and in some cases to allow them to exercise power that they have not been explicitly granted—proof that Americans do not oppose handing power to government when they believe it is in trustworthy hands. Just as important, as a result of their reputation these agencies have been able to attract talent that other agencies cannot.

Carpenter's argument has some important, if highly speculative, implications for our current debate on financial regulation. As many liberals have rightly noted, and indeed Carpenter himself argued in a recent op-ed in the New York Times, it may be dangerous to put a consumer financial regulator in a larger—and perhaps more finance-friendly—organization like the Federal Reserve. Yet there are lessons from Carpenter's own book that suggest there may be real advantages as well. The Fed is taken seriously by the financial industry itself, and because of its reputation and more attractive salary schedule it is substantially more able to attract talent than other federal regulatory agencies. If placed inside the Fed, the CFPA would be able to build a strong, clear organizational image (especially if it were given the insulation from the rest of the Fed that Senator Dodd's bill would provide, including near-complete control over its own budget). This would help foster the political will to grant the agency the autonomy it needs to effectively regulate the financial industry.

There are, however, two problems with this argument: first, the FDA is far from perfect; second, the successful aspects of the FDA have nothing to do with its bureaucratic location, and instead are due to factors that a CFPA wouldn't be able to replicate.

Let's start with the second argument first. Teles is right to point out that, when compared to other federal regulatory authorities, the FDA does its basic job reasonably well. It has, over time, evolved into a sophisticated regulator of the pharmaceutical industry, and does a good job of auditing clinical trial data at a level of rigor far exceeding that of the academic community. But these qualities are not a result of the FDA's bureaucratic location or its fiscal independence. They are due to the fact that medical science, by its very nature, is highly empirical.

If a new medical therapy, in well-controlled trials, clearly demonstrates that it outperforms the prior standard of care, the FDA will approve the treatment. To do otherwise would make little sense. Similarly, if a drug performs worse than placebo, say by causing significant liver toxicity, the FDA will quite sensibly reject it. The FDA's main regulatory role is to make objective assessments of factual clinical data. The same can't be said of the proposed CFPA. Is there anything objective about the definition of "predatory lending," especially in the current political climate?

Teles is also wrong to suggest that the FDA is a citadel of apolitical technocracy: any veteran of the FDA will tell you that FDA reviewers live in fear of being dragged into Congressional hearings. Their basic goal in life is to do their jobs, keep their heads down, and hope that nobody on Capitol Hill forces them to spend hundreds of thousands of dollars on lawyers.

When does the FDA arouse Congress' ire? Whenever it makes a decision that can be second-guessed in hindsight. And the only decisions that can be second-guessed in practice are positive ones. That is to say, Chuck Grassley doesn't come after you if you don't approve a drug that never makes it to market. Patient advocates might complain, but they won't sue you. On the other hand, if you approve Vioxx, and it later turns out that 0.3% more patients get heart attacks on Vioxx than on naproxen, U.S. senators start pounding tables and demanding answers.

Hence, in a classic manifestation of the precautionary principle, reviewers at the FDA are temperamentally biased against approving new drugs. When the precautionary principle is excessively applied, it causes far more harm than good: instead of protecting consumer safety, it delays or prevents life-saving drugs from reaching the market. In addition, due to increased demands from the FDA for larger, costlier studies, the cost of developing new drugs has skyrocketed. In 2001, according to the Tufts Center for the Study of Drug Development, pharmaceutical companies spent $802 million in R&D for every drug approved by the FDA. Today that number is estimated to be $1.3 to $1.7 billion.

Companies must recoup these costs in the form of higher drug prices, which in turn drive up the cost of health care. Similarly, we must worry that a poorly-structured CFPA will drive up the cost of borrowing, which will in turn cause a significant contraction in the economy, as individuals and small business find it harder to finance mortgages and purchase equipment.

Financial regulation is a highly technical subject, and it is understandable that many eyes in Congress glaze over when the subject is brought up. But the world paid a significant price for the way Congress elevated the ideology of home ownership above responsible lending practices. At this point, we cannot be assured that the current version of financial reform won't result in similar problems.