Profits and Health Care

 “It is a socialist idea that making profits is a vice;
       I consider the real vice is making losses.”

-Winston Churchill

 “To make a profit out of the need of another
    Is condemned by all laws, human or divine.”

-Pope Leo XIII


Today’s newspaper carries a story about health care profits.  CMS, the government arm that runs Medicare, has proposed to lower the amount of money it will reimburse doctors for administering medicine in their offices.  The rule is likely aimed at cancer specialists who use intravenous medicine to treat many kinds of tumors, but it will also have a significant impact on other specialties such as rheumatology.  I will deviate from the usual inspirational nature of this blog to explain a complicated situation.

Many cancers and rheumatic illnesses are responsive to intravenous medicine.  These drugs are usually proteins that would not be effective if swallowed.  There are also many forms of chemotherapy that work best and have less side effects when given intravenously.

Forty years ago most patients went in the hospital to receive their chemo.  For two reasons: there were a ton of side effects which required close supervision, and most insurance plans would only pay when the patient was hospitalized.  In the early 1980’s we got a lot better at managing side effects, and insurance companies realized that they could save money if they allowed cancer specialists to give the medicine in their offices.  Medicare went along with this trend.

Doctors who gave outpatient infusions had a problem.  These medicines were expensive.  The nurses who started the IV’s and followed the patients during infusions had to be paid.  The drugs had to be stored; many of them had to be kept at a certain temperature.  The only way that they could afford to perform these procedures was if the insurance companies (and Medicare) allowed them to charge a premium for the medicine.  In other words, with every infusion of chemo the doctor was allowed to bill for and collect the cost of the medicine plus a profit.  Insurance companies went along with this, because hospitals were already making a profit on chemo; a much higher percentage than doctors were allowed to make.

The doctors profited handsomely from this arrangement.  Oncologists became one of the highest paid medical specialists.  Every time that a cancer patient had an infusion the doctor charged for the nurses’ time plus a premium based on a percentage of the drug’s cost.  To use a very oversimplified example, if the drug cost $1,000 per dose the doctor pocketed $1,100 if the profit was 10%.  Many times the percentage was higher.  A doctor who treated fifty cancers a month did very well.

There were ethical quandaries.  If a patient was supposed to survive for 3 months after the cancer diagnosis, and a cancer medicine allowed the patient to live an extra three months, you could say that the medicine doubled survival time.  Without lying.  There were quite a few patients who were given chemotherapy when there was very little chance that they would have meaningful benefit from the drugs they received.

This gets to be a thorny issue.  Patients want to live.  Many of them; in addition many of their families, want “everything” to be done.  An oncologist who counseled a patient against further treatment would probably see that patient go down the street to another doctor who offered more treatment, even if it was highly unlikely that the treatment would help.  It is much easier to go ahead and give the medicine than to be abandoned by a patient and his/her family.  To say nothing of the bad mouthing that the honest doctor would have to endure.

“Dr. A gave up on mom, but sweet kind Dr. ___ said that she could have more chemo.  She died, but at least the doctor tried.  I wouldn’t send my dog to Dr. A.”

Give the drug and make the money.

Over time things changed.  We got really good at developing chemo drugs that were not terribly toxic.  This expanded the pool of people who could have treatment.  Other medical specialties, such as rheumatology and ophthalmology, developed effective treatments for diseases that were not fatal or curable.  This greatly expanded the number of patients on injectable therapy, because patients did not die or get cured.  They just had to come back every month or two for treatments.  The pharmaceutical firms smelled a dollar ten miles away: the number of diseases that could be handled with success and minimal side effects boomed.

Demand went out of control.  As any amateur financier knows, limitless demand will raise the price of an item.  Drug companies raised the cost of their products.  Even on medicines that were “mature” and had been around for a while, that had no development and minimal marketing cost associated with them.

Doctors (specialists) were thrilled.  A 10% profit on a $1,000 drug comes to $100.  What if the drug costs $5,000?  Now the profit is $500.  For no extra work or time.  Bring them on!

Things went out of control.  There are now medicines that cost in the tens of thousands.  Medicare had a conniption.  They reacted by limiting the profit that a doctor could make to 6%.  When the budget sequestration went into effect the percentage went down even more.  Most doctors who treated Medicare patients with infusions could not make a profit on these margins unless their offices were a model of efficiency and high volumes.  Patients were told to go back to the hospitals to get infused.

In another front, hospitals were busy trying to once again become infusion centers.  But hospital costs are outlandish.  They pay nurses better than doctors in private practice.  They also give them better benefits.  Go to any hospital in St. Louis; you’ll see beautiful gardens, gorgeous cafeterias, and immaculate hallways.  All of these things cost money.

A 10% margin will not cover this.  So hospitals hired lobbyists to go to Washington to convince Congress that their profit should be higher.  The result was the 340B law.  Drug companies were forced to sell all of their injectables to hospitals, and only to hospitals, at a 30% discount.  The hospitals were allowed to bill Medicare and all commercial companies at full price.

The law meant well.  It was supposed to provide cheaper medicine to hospitals so that they could treat indigent patients who had little or no insurance.  But the law allowed hospitals to buy ALL of their injectables at this deep discount; even when patients with excellent insurance were being treated.  Think about this.  A $10,000 infusion realized a $3,000 profit.  For one treatment that lasted an hour.  Multiply this by 600 infusions a month that most busy hospitals have no trouble reaching, and often far exceed.

There were restrictions.  Hospitals had to prove that they treated a higher than average percentage of indigent or low income patients.  Soon hospital lawyers figured out how to get around this issue.  They merged into large health systems.  They were sure to partner with at least one hospital that treated low income patients.  Once the 340B status was achieved ALL hospitals within the system got the deep discount.  All the health care system had to do was put up a sign at hospital A’s infusion room that said that this particular room was part of hospital B.  Yes; they also had to comply with dozens of pages of regulations.

Profits rocketed into the billions of dollars.  The government didn’t care, because it was no sweat off their back: it was the pharmaceutical firms that had to give the discount.  Pharma firms were livid, but they did find a way to raise the cost of the medicines they made.  In this manner a 30% “bite” did not hurt as much.

Hospitals swallowed numerous oncology and rheumatology practices (disclosure: mine was one of them).  They offered these doctors very nice salaries in exchange for doctors sending all of their infusions to the hospital.  It became very difficult for a doctor not to be affiliated with a hospital, because hospitals urged their primary care doctors to never refer a patient who needed a specialist outside the hospital’s web of influence.  Specialty practices need a constant stream of referrals.  These are being dried out for the independent docs.

Insurance companies and Medicare are feeling the pinch of the markedly increased utilization of injectables.  Hence the new rules.  The payors feel that if the profit is removed from infusions, doctors will have no incentive to order them.  That they will prescribe self-injectables instead; these medicines generate no profit for the doctor.

Wishful thinking.  The 340B program remains, although hundreds of pages of new regulations have been added to the hoops that hospitals need to jump through in order to qualify.  And jump through the hoops they will.  Hard to turn down billions in profits.

Hospitals will continue to acquire practices.  Those few docs left in private practice will finally give up; they will sign up with the large health care systems.  Prescribing practices will not change much.  New rules will of course need to be drafted.

I understand about the profits.  I did very well as a hospital-employed doc.  I’m not clamoring to give any of that money back.  When I get my chest pain or my stroke at 2AM by golly I want that hospital to be fully staffed and ready to treat me.  All of this costs money.

But billions in profits?  Drive through any of the hospitals in town; chances are you’ll see cranes and lots of new programs being developed.  All of these buildings go up only if they’re expected to generate even more profit.

A comprehensive plan to improve the health and well-being of the neighborhoods these hospitals are located in doesn’t exist.  That doesn’t pay; profit is generated only when people get sick.  The new health care law promises to try to fix this.  In its current form it won’t.

Hospitals need the money.  People need their health.  There should be a way that we can get the patient, the doctor, and the hospital to pull in the same direction.

There should be.  There must be.

If only there weren’t all those billions of dollars lying around…

Leave a Reply

This Post Has 10 Comments

  1. lolaroig2013

    Te necesitamos en el Congreso!

  2. Maria Imel

    Thank-you Paco, for your blogs . They are very informative! I enjoy them !

  3. Cordell Webb

    My wife just passed away a little over a month ago from cancer. She had fought it for over 3 years. Chemo, radiation you name it. It did let her live a little longer, but was not a very good quality of life. Our insurance pick up most of the cost, but we had to pay quite a bit out of pocket also. I am not complaining I would have paid anything to keep her here with me. There just has to be a better way. Do G. I had to chuckle a little bit. Drive by St. Joe. West (Lake St. Louis) and see all the construction and cranes out there right now.

    1. rtiepelman

      I’m sorry to hear about your wife. Would it be too strange to ask for her name?

  4. rtiepelman

    At least money is still being sunk into health care, and they do manage to find a few good docs.
    That is until they retire on you….

  5. Lois Allen

    No matter how many regulations, restrictions and laws are compiled to control the spiraling cost of medicine, they cannot outpace the simple fact of human greed. Where some see need, others just see opportunity to feed the greed.
    If only knowledge and education were required to correct the problem, you have written exactly what we need to go about correcting things. Unfortunately, the hearts of men have to be changed and that cannot be legislated.
    Thank you so much for sharing your considerable knowledge with us.

    1. franciscogarrigamd

      There is too much money to be made (and spent). MRI machines are expensive; so are drugs; so are employees. It would make so much more sense to help people to lose weight and stop smoking! But now everyone connected to the health care system expects to make a lot of money. They will not take less without a huge fight.

  6. Don Peterson

    Thank you Paco for such a thoughtful essay. As you point out, when governments try to control market forces such as runaway demand for biologics, they tend to swing the pendulum too far in the opposite direction. This new pricing demonstration project will send more patients into the hospital to receive their infusion, which is likely what the American Hospital Asscoiation wants. But Medicare patients will pay the highest price for this when their physicians either prescribe less costly, less effective treatments or end unprofitable in-office infusions altogether. Medicare recipients will now be met by physicians with the same negative bias previously reserved for only Medicaid patients. And that negative bias is not borne out of greed. For independent practices, it’s about survival.

    1. Betty Townsend

      I think it is all greed. I believe that almost all Doctors are sincere in helping their patients. The drug Co.’s CEO is making way too much money and so are all of the other CEO’s Thanks for your explanation of this problem.