Harold Hastings’s journal round-up for 16th July 2018

Every Monday our authors provide a round-up of some of the most recently published peer reviewed articles from the field. We don’t cover everything, or even what’s most important – just a few papers that have interested the author. Visit our Resources page for links to more journals or follow the HealthEconBot. If you’d like to write one of our weekly journal round-ups, get in touch.

Legal origins and female HIV. American Economic Review [RePEc] Published 13th June 2018

I made this somewhat unusual choice because the author Siwan Anderson draws an important connection between the economic and legal status of women across sub-Saharan Africa and the incidence of HIV. As summarized in the American Economic Review feature Empowering women, improving health, “Over half of all people living with HIV are women. Of all HIV-positive women, 80 percent live in Sub-Saharan Africa.” Anderson hypothesizes that regional differences in female property rights (lower in common law eastern and southern Africa than in civil law central Africa) may explain significantly higher HIV incidence in eastern and southern African women, especially relative to eastern and southern African men. Health economists have long studied how economic status affects access to health care; Anderson presents an important and interesting complementary argument for how economic (and legal) status affects health. In particular, improved legal status and access to legal aid may be a key step in improving women’s health.

Addressing generic-drug market failures — the case for establishing a nonprofit manufacturer. The New England Journal of Medicine [PubMed] Published 17th May 2018

We have recently seen shortages in many generic drugs, including generic injectables used in emergency, trauma and other hospital medicine. In many cases, there is only a single supplier, who can dramatically increase prices. One might expect others to enter the market in this case. However, frequently significant fixed start-up costs pose a barrier to entry and the single supplier, who has already made and in many cases paid for the start-up investment, can drastically reduce prices to make it difficult for the competition to cover these costs. Thus there is little incentive to enter a potentially low-profit market. The authors propose establishing a nonprofit manufacturer, essentially a pharmaceutical counterpart to a variety of national and nonprofit health systems, as a novel and a potentially successful way to address this issue.

An incomplete prescription: President Trump’s plan to address high drug prices. JAMA [PubMed] Published 19th June 2018

The prices of many drugs are significantly higher in the United States than in much of the rest of the developed world. President Trump proposes some market actions such as granting Medicare negotiating power; but the authors find these insufficient, making two interesting additional proposals. First, since much pharmaceutical development derives from NIH funded research (including chimeric antigen receptor T-cell immunotherapies which may cost $400,000 US per dose), the authors argue that the NIH and academic institutions could require US prices based upon independent valuations or not to exceed those in other industrialized countries. The authors also suggest authorizing imports where there is adequate regulation as a further mechanism for controlling drug prices; in my opinion a natural free-trade position. The pricing of pharmaceuticals remains complex and perhaps new economic models are needed to address the risk and cost of pharmaceutical development. Kenneth Arrow’s critiques of the limitations of economics to address health issues might provide interesting insights.

Cost-related insulin underuse is common and associated with poor glycemic control. Diabetes Published July 2018

I would like to conclude by citing a recent abstract providing a human side to the growing cost of pharmaceuticals. Darby Herkert (a Yale undergraduate) reported that a quarter of almost 200 patient responses to a survey of patients at a New Haven, CT, USA diabetes center reported cost-related insulin underuse. Underuse was prevalent among patients with lower income levels, patients without full-time employment, and patients without employer-provided insurance, Medicare or Medicaid. Patients reporting underuse had three times the incidence of of HbA1c >9%. These results cite the human costs of high insulin prices in the US. A Medscape review cites the high cost of typically prescribed insulin analogs, and quotes the lead author calling these prices irrational and describing patients living near the Mexican border crossing the border to buy their insulin.

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Sharing the burden of healthcare: providing care to our sickest patients

One of the major challenges to affordable, universal health insurance is the high cost of providing care to the sickest patients. According to Roy Vaughn, senior vice president at BlueCross BlueShield of Tennessee, “just 5 percent of the company’s marketplace customers had accounted for nearly 75 percent of its claims costs.” What is the cost of healthcare for the typical person in the United States?Distribution of per capita US health expenditures 2012

Data from 2012, the last year for which a full analysis is available, presents a complex and confusing picture. The graph above shows per capita expenditures by percentile starting with the highest per capita expenditure. 10% face expenditures of at least $10,250. The median per capita expenditure was $854. The mean average per capita expenditure was $4309 – five times the median – and “the top 1 percent ranked by their healthcare expenses accounted for 22.7 percent of total healthcare expenditures with an annual mean expenditure of $97,956″. In brief, there is no typical person: since the bottom 50% accounted for 2.7% of total expenditures, the average per capita expenditure of the top 1% was 420 times that of the bottom 50%. There really is no typical person in terms of healthcare expenditures.

Pareto/ power law distribution of healthcare costs

This extreme distribution of healthcare costs (approximately an “80/20”, Pareto/ power law distribution) poses a major challenge to providing universal healthcare through traditional insurance models based upon risk pooling. Prior to the Affordable Care Act (ACA), the US health insurance industry addressed these challenges with risk selection – adjusting premiums or denying insurance to patients with high predicted risks, such as those with pre-existing conditions, and imposing caps on annual and/or lifetime benefits, much like the way the auto insurance industry sets premiums and limits benefits to address extreme differences in projected driver risks. Come back tomorrow for another blog post with more technical details about the Pareto distribution and healthcare costs.

Risk selection is illegal but prevalent

The ACA makes both caps on benefits and risk selection based upon pre-existing conditions illegal. In particular, US insurance carriers are required to provide coverage to all, at rates independent of pre-existing conditions, a requirement which President-Elect Donald Trump would like to keep.

However, the extreme distribution of healthcare costs means that “Targeting the highest spenders represents the greatest opportunity to have a significant impact on overall spending”; an opportunity for insurance carriers as well as for public policy. Moreover, there are good predictors for high spending: age and end of life, chronic conditions, and high spending in a previous year. For example 44.8% of the top decile in 2008 healthcare expenditures “retained this top decile ranking with respect to their 2009 healthcare expenditures”; a fact cited in an extensive Forbes report. Swiss and Dutch experience found risk selection prevalent and persistent. However, with every adult paying the same premium – within a given fund for the same type of contract – but expected healthcare expenditure (HCE) varying widely, strong incentives for risk selection are created in the absence of an adequate risk adjustment scheme. Although risk selection is illegal, it is prevalent. Swiss conglomerates of insurance carriers have been reported to achieve risk selection by assigning applicants to “specific carriers based on their risk profiles.”

Removing the economic incentives for risk selection

There is one clear way to avoid built-in economic incentives for risk selection (incentives which seem to drive insurance company behavior); that is, a single payer system, universally or as excess coverage for significant, predictable expenses. The United States now has several parallel single payer systems, namely Medicare for the elderly, Medicaid for the very poor and CHIP for children; thus, in effect, a public/private partnership in healthcare. These pre-existing single-payer systems might serve as models for a more inclusive US single payer system. Alternatively, the United States might act as an insurer of last resort, providing umbrella insurance covering individual expenses above some relatively high limit, or for costly but treatable conditions using the End Stage Renal Disease (ESRD) Program, passed in 1972 as a model. This approach would also remove extreme costs from the health insurance risk pool, as both Medicare and the ESRD Program do now, by providing near-universal coverage for our sickest patients outside the private insurance system (elderly US citizens and those with severe chronic kidney disease, respectively).

Tomorrow I will return to the Pareto-like distribution of healthcare expenditures and its consequences for any competitive insurance program. But for now, a few conclusions. Medicare and the ESRD program provide models for a smooth transition from health insurance pre-ACA with its caps and limitations to a more universal system. Medicare can be expanded to a broader public alternative. Universal coverage for additional treatable but high-risk conditions can be modeled on the ESRD program. These steps should provide the basis for further evolution of the present public/private partnership into a more universal, more cost-effective system.

In my opinion, the extreme distribution of healthcare expenditures and the ability to perform risk selection, even though illegal, present a strong, essentially irrefutable argument for a single payer system; either overall, or for chronic conditions and expenditures predictable through risk selection. In the US, Medicare and the ESRD program provide illustrative, successful and useful models.

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