Prescription Drug Managers

A 1/15/10 Wall St. Journal article detailed a Dept of Justice case against Johnson and Johnson (J&J), accusing the company of paying kickbacks to Omnicare, a publicly held company (OCR) and a Medicare and Medicaid Prescription Benefits Manager (PBM). Omnicare is the country’s largest PBM servicing nursing homes. Prosecutors allege that Omnicare’s annual purchases of J&J products almost tripled to more than $280M.

In addition to the kickbacks, J&J paid bonuses to Omnicare for switching patient’s prescriptions from competitor’s drugs to J&J’s medicines.

PBMs typically negotiate prices with drug manufacturers and then add on a markup to their client, whether it be the U.S. government or a large Fortune 500 company. In an earlier blog, I related Caterpillar’s recent negotiations with Wal-Mart and Walgreen’s to lower their drug costs. How much could Medicare/Medicaid save by following a similar path?

Health Care & Medicaid

Dr. Miller, dean and CEO of Johns Hopkins, wrote an op-ed piece in the WSJ 12/4/09 citing a CMS actuary that the House bill will increase Medicaid rolls by 18 million. The Senate version will increase eligibility for Medicaid to 133% of Federal poverty level. Miller cites the Kaiser Family Foundation that an additional 308,000 people will meet that eligibility in Maryland alone so the Senate version appears to have a similar impact as the House bill.

Dr. Miller is concerned about the costs. JH has already struggled handling the Medicaid patients it has and has lost a good deal of money in unreimbursed costs from the state.

From 1990 to 2004, Federal and state Medicaid spending increased yearly by about 10%, more than triple the average 3% CPI rate of inflation. For the three year period 2004-7, annual increases slowed considerably to 3.6%. States are reporting 2009 Medicaid spending increases averaging 7.9% because of the recession.

United States of Insurance

The United States government has become the largest insurance company in the world.
Its citizens are among the most heavily insured people in the world. We are insured for many aspects of our lives, from our life itself to other people’s mistakes.

Some insurance fees we pay directly. These include insurance against getting old, Social Security and Disability Insurance, insurance on our health, home, car and mortgage. Some insurance fees are indirect in that the cost of that insurance is passed on to us in the price of a product we buy or income to us is reduced by these fees.

Examples of the first type of indirect insurance are “mistake” insurance, malpractice and liability. A business pays a fee to protect themselves in case they make a mistake. Those fees are passed on to us in higher prices.

Unemployment and FDIC insurance are examples of the second type of indirect insurance.
Unemployment insurance is a based on a percentage of the wages paid by an employer to an employee. An employer typically reduces the wages that it can pay an employee by that amount. FDIC insurance is a fee charged to banks to protect savings against bank failure. The bank reduces the interest it can pay on a savings account to offset the fee. Like individuals, businesses pay for many types of insurance, passing the cost on to their customers in the form of higher prices.

There is another indirect form of insurance in the form of taxes paid into a general fund.
We are insured against poverty in the form of SSI and food stamp programs, whose payments come out of general Federal and State tax revenues.

How have Federal and State governments become so heavily involved in the insurance business? With the passage of the Social Security Act during the 1930s Depression, the Federal government entered the annuity insurance business – sort of. Annuities are a type of insurance where a person pays premiums over a period of time and, at the end of that period, begins collecting payments from the insurance company. Insurance companies invest the premiums paid in order to make the payments at a later time. The Federal government, on the other hand, spends the premiums received each year, relying on future premiums to make payments. If our Federal government did not spend the premiums each year, Social Security would be more like an annuity program. Since the premiums are spent, it is a Ponzi scheme.

With the introduction of the Medicare and Medicaid programs in the 1960s, the Federal government stepped into the health insurance business. Unlike private health insurers who charge higher premiums for those with higher risks, the government charges higher premiums based on a person’s ability to pay higher premiums. This premium pricing system is most often used by those in the protection racket.

Ponzi schemes and protection rackets eventually collapse. What can we do? Elect representatives who are willing to make a transition to a valid business model. Elect representatives who will support a new law giving them a legal fiduciary duty to the voters and taxpayers. Without that duty, our elected reps have no responsibility to the public or liability for their actions other than the prospect of losing their jobs. They can enact laws and make promises with impunity. We, the voters and taxpayers, pay the price.

Medicare Reimbursement

In anticipation of the annual announcement of reimbursement rates for Medicare patients, pundits have been warning of a tsunami of hospital bankruptcies once the new rules were implemented. Last year marked a transition to a new cost coding system, one that some feared would significantly reduce reimbursements to hospitals.

On May 1st, CMS published the proposed reimbursement rules (NPRM) to take effect Oct. 1st of this year. Analysts at the independent Congressional agency, the Medicare Payment Assessment Commission, or MedPac, dug into the 1228 pages of data and found only minor changes, and a slight reduction in per patient case rates. Colorado hospitals will see a slight increase.

As Edward Berger reports at, MedPac found that Medicare reimburses hospital 6 – 8% less than the cost of care. Higher private insurance reimbursements offset this negative impact. In the ongoing debate about public vs private insurance, this would seem to reinforce the opinions of those who say that a greater presence of public insurance and below cost reimbursement rates will close hospitals, force doctors out of business, and reduce the availability of medical care.

However, Berger writes “MedPAC research shows that the hospitals with the highest private insurance margins have the highest Medicare per-case costs; those that can’t achieve high private-payer margins have lower costs across all classes of payer – with no discernable impact on quality.” If this assessment is true, public insurance is achieving an efficiency normally associated with a competitive marketplace, causing hospitals to examine their operations and find cost efficiencies while maintaining the same level of care.

75% of nursing homes’ revenue comes from Medicare and Medicaid. When Medicare reduced their payments in the late nineties, a number of nursing homes went bankrupt. Due to the weak economy, many nursing homes were worried that there would be no annual reimbursement increase.

On May 12th, CMS published their 110 page set of proposed rules, specifying a 2.1% increase in Medicare reimbursement rates effective October 1st. While not as large as the 3+% increase of last year, it is an increase in an economy with a negative year over year CPI cost index.

Tight state budgets may impact Medicaid reimbursement to nursing homes. A more complete analysis of the Medicaid fiscal environment can be found here from a CPA at

Health of Health Care

In a 4/23/09 WSJ article, Vanessa Fuhrmans reports on the health of the country’s health plans.

Wellpoint, the largest insurer, lost 2% of its subscribers since December. It ascribed the larger than expected 1/2 million subscriber loss both to layoffs and workers who are declining coverage under their employer’s plan. United Health Group, the second largest insurer, reported a subscriber loss of 900,000 in the first 3 months of 2009.

The Kaiser Family Foundation estimates that the U.S. Census Bureau figure of 45.7 million uninsured in 2007 has grown to about 50 million uninsured. In a nation of 300 million, that is a 1 in 6 ratio. Of the estimated 9M people who have lost coverage since December 2007, Kaiser calculates that 3.6M have enrolled in Medicaid and other public health programs.

A Kaiser Family Foundation study of Medicaid fees from 2003 – 2008 shows that Medicaid pays physicians only 72% of what Medicare pays. In 2008, the average Medicaid reimbursement for the most commonly billed procedure, a 15 minute office visit with an existing patient, was $38. If you have a stopped up toilet, it costs $75 – $100 for a plumber to run a snake through the toilet bowl.

As the boomer generation nears retirement, swelling the ranks of both Medicare and Medicaid patients, should we be encouraging young people to become plumbers instead of doctors?
The Association of American Medical Colleges reported that the average educational debt of indebted graduates of the class of 2007 was $139,517. The site link is a student doctor network with a message board that you can read, but not post or comment.

State Taxes

According to a Census Bureau report (follow link to Excel spreadsheet), the states collected $782B in taxes in 2008. That is about 70% of what the federal government collected in federal income taxes. This doesn’t include local taxes.

The Census Bureau breaks them down into major categories: Property, Sales and Gross Receipts, Licenses, Income and Other.

Alaska, Florida, South Dakota, Texas, Washington and Wyoming do not have a personal income tax. Texas, Washington and Wyoming do not have a corporate income tax.

13 states do not charge a property tax. Alaska, Delaware, Montana, New Hampshire, and Oregon do not charge a general sales tax. Alabama, Alaska and Arkansas do not charge an estate and gift tax. 16 states do not charge a severance tax, a tax on extracted resources like coal, oil and gas.

While Texas and Alaska do not charge on income tax, they don’t need to. Texas collects $4B in severance taxes, Alaska $7B. Together the two states collect almost 2/3 of all the severance tax collected by the states.

What did they spend all this money on? In 2008, Medicaid spending was estimated at $164B, a whopping 20% of state revenues. As unemployment continues to rise, Medicaid spending will also rise.

What steps are states taking to control these costs? As this Kaiser Family Foundation table shows, there is a lot of room for improvement.

Almost 2/3 of states have some pharmacy cost controls including approved manufacturers, use of generics where possible – routine controls that patients with health insurance encounter. Only 3 states have co-pays. The Federally mandated maximum copay for a Medicaid patient is $3, less than a Big Mac. As long as Health and Human Services designates such a low copay, most states probably will not bother to try and collect.

Only 8 states have any cost containment programs for long term care, which is 44% of Medicaid spending. As the population ages, this cost will increase dramatically. Only 3 states have any restrictions or reductions on benefits.

All of the states complain about the growing Medicaid expense and its impact on their budget. But what are they doing about it? Maybe we should ask our state representatives.