How the U.S. Government Rations Health Care

President Barack Obama deflects criticism that his health-care plan will bring on government rationing of medical care by arguing that insurance companies ration care. Everyone knows private payers limit access to some health care. But government does it in far more byzantine and arbitrary ways.

Consider the $450 billion Medicare program. It provides a model for--indeed its bureaucracy could well end up running--the "public option" health plan that Mr. Obama wants to offer all Americans under the age of 65. In recent years, Medicare's staff has been aggressively restricting coverage for costly treatments. Looking for ways to control spending on medical products--and preserve the illusory "trust fund" that pays Medicare claims--is what shapes the culture of the organization and motivates the agency's staff.

This often means limiting access to the costliest technologies. To do this Medicare relies on its rationing and pricing systems. National coverage decisions (NCDs) are assessments issued by Medicare's medical staff that define who is eligible for new but often expensive treatments. Medicare then assigns medical products and procedures with "codes" that determine which regulated category they fall into. Finally, price "schedules" are developed by Medicare's staff each year to assign each unique code with its own updated payment rate. The process for getting a favorable code on a new product is a source of intense lobbying. It can make or break a technology.

For a remote agency like Medicare, far removed from clinical practice, it's easier to try and manage the use of a high-cost but specialty treatment than a much lower-cost but very widely used product. Yet cheaper, more commonly used products can still be mispriced and account for more total cost to the agency. For example, low-tech orthotic devices and other "durable medical equipment" are a known source of wasteful spending. These medical products often evade Medicare's attention in favor of less used but more expensive items such as a biological cancer drug.

Take the agency's tortured decisions concerning the use of implantable defibrillators that jump-start stopped hearts during cardiac arrest. Medicare sharply restricted their use in the 1990s. Mounting research proved that the $30,000 devices could be saving many more lives. So in 2003 Medicare adopted a novel theory to expand coverage to some, but not everyone, who needed one. The agency said only patients with certain measures on their electrocardiograms (called "wide QRS") seemed to benefit.

It was an easily measurable but ultimately imprecise way to allocate the devices. After another major study firmly refuted the QRS theory, Medicare expanded coverage again in 2005, potentially saving 2,500 additional lives according to a press release issued with that decision.

That experience wasn't unique. From 1999 to 2007, Medicare denied access in a third of the treatments it evaluated through its coverage process, taking an average of eight months to complete its reviews. When coverage was granted, in 85% of cases the treatments were restricted, usually to patients with more advanced illnesses.

Medicare is lately increasing its use of the national coverage process and is becoming more tightfisted. Since 2008, according to my review of Medicare data, it conditioned access in 29% of its reviews and denied new or expanded coverage in fully 53% of cases.

Medicare's methods can also be arbitrary. Take the travails of the pharmaceutical company Sepracor and its drug Xopenex, an innovative respiratory medicine that competes with the chemically distinct and much cheaper generic albuterol. Both are inhaled aerosols used to treat asthma and chronic obstructive pulmonary disease. Xopenex has the same benefits as albuterol, but some believe fewer of its cardiac side effects. Medicare didn't agree.

The agency tried to make a "national coverage decision" on Xopenex but couldn't come up with a clinical justification to limit the drug's usage. So Medicare manipulated its payment process, saying it would pay Xopenex a price equivalent to the "least costly alternative" form of generic albuterol, 10 cents a treatment compared to about $2.50 for Xopenex. Then Medicare was sued by a patient, and a Federal court recently ruled the agency exceeded its authority.

Medicare finally succeeded in reigning in the use of Xopenex with its coding system. By issuing Xopenex the same classification as generic albuterol, it was able to pay both products the same "blended" price--an average of the cost of each individual drug. That lowered the price on Xopenex, but ironically increased what Medicare paid for the generics.

It's not a stretch to say that Medicare spent hundreds of cumulative man-hours focusing on Xopenex while other priorities languished. The question is why? There weren't safety concerns. Xopenex may have been used in lieu of a cheaper alternative, but at peak Medicare sales of about $300 million it represented far less than one one-thousandth of the agency's budget. Simply put, a few staffers inside Medicare were consumed with the drug and its higher price--revealing a process that is capricious and often disconnected from science.

Worse still is how impenetrable these programs have become. Drug and device companies spend millions of dollars trying to influence Medicare decisions. The hundreds of consultants they hire to advise them typically command $20,000-a-month retainers.

Formal patient and provider appeals to Medicare took an average of 21 months, according to a report issued in 2003 by the Government Accountability Office (using 2001 data), with delays in "administrative processing" due to "inefficiencies and incompatibility" of data systems eating up 70% of the time spent processing appeals.

There's nothing inherently wrong with a program like Medicare seeking value for taxpayers. But it shouldn't make up the rules as it goes. When private plans ration care, patients can appeal directly to an insurer's medical staff. Only a small fraction of Medicare's denied claims--about 5%--are ever formally appealed because its process is so impenetrable. People can also switch insurers, and in many cases patients chose a policy because it matched their preferences in the first place. These options don't exist in a government health program.

Scott Gottlieb, M.D., is a resident fellow at AEI.

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  • Scott Gottlieb, M.D., a practicing physician, has served in various capacities at the Food and Drug Administration, including senior adviser for medical technology; director of medical policy development; and, most recently, deputy commissioner for medical and scientific affairs. Dr. Gottlieb has also served as a senior policy adviser at the Centers for Medicare & Medicaid Services. 

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