Fiona Scott Morton: Taming Healthcare Costs

Harlan Krumholz: Welcome to Health & Veritas. I’m Harlan Krumholz.

Howard Forman: And I’m Howie Forman. We are physicians and professors at Yale University. We’re trying to get closer to the truth about health and healthcare.

Harlan Krumholz: Today we’re going to be talking with Fiona Scott Morton, a terrific colleague at the Yale School of Management. Fiona is a health economist, well, actually an overall economist. She covers the entire sphere of, particularly around competition. She’s done a lot in healthcare. And she’s going to discuss her work on drug pricing reform and competition and a whole range of things. We’re really happy to have her here today.

First, though, we usually talk about something in health news that has got people’s attention. So, Howie, what’s on your mind this week?

Howard Forman: So, right after our podcast last week, which with Liza Fisher talking about long COVID, it was obviously on my mind. Literally the next day, a reporter at the Wall Street Journal wrote this article. Her name is Lisa Beilfuss, and she wrote an article talking about maybe the Great Resignation, which is a way of describing why there’s so many people missing from the labor force. Maybe that’s not just due to people making conscious decisions to stop working or not seek work. Maybe some of it’s due to long COVID. In the article, she talks to a lot of experts on this, both in the economic and the health side of things. And she surmises that even with conservative estimates, there may be as many as 2 million people out of the workforce because of long COVID. And while this would not explain the full deficit in the workforce that we might otherwise expect, it would account for nearly half. And so the Great Resignation may be less than we think, and the economic effects of COVID may be much more than we think. What has caught your attention this week, Harlan?

Harlan Krumholz: Well, I’ve been thinking a lot about the way in which we’re learning in healthcare. Last week, for the very first time since the beginning of the pandemic, I was at a conference, in-person conference where I gave a few talks. And I had just such a strange feeling about it. It was something like if you haven’t been riding a bicycle for a long time, and all of a sudden you get back on that bike. Seeing people in person, but it was very stilted. I mean, people were wearing masks, and I don’t know, there was just a sense, Howie, that we’re still in the midst of this and that there’s been a transformation going on. It felt inefficient. Some people flew in, some people were still going by video. And I just have this sense that we’re about to see a sea change in the way that we do things. It’s always nice to get in person and to connect. It was great to see friends, but it was also a sense that maybe we’re about to change the way we’re going to do things. And now, this week, there’ve been a cancellation of a whole bunch of conferences that were scheduled for the winter. And I’m seeing times change. And so while I enjoyed seeing friends and it was great to be in that situation again, I had a sense that maybe we’re not going to go back to exactly what we were doing before and that medical education, medical dissemination of science, we’re going to have to find new ways of doing things. And we’ve already embraced a lot of new ways already.

Howard Forman: So, Harlan, I’m really delighted to introduce our guest right now. Fiona Scott Morton, my colleague, our colleague at the Yale School of Management. She’s also a jointly appointed in the law school, the public health school, the economics department. And although her work has mostly been about competition writ large, in my mind she’s sort of like a closet health economist, because she has had such an enormous impact on the healthcare field. And for many of our viewers who may not know, Uwe Reinhardt, a very famous health economist who just passed away in the last year or so, is famous for having said, “It’s the Prices, Stupid” as a title to an article explaining why is the United States such an outlier in terms of spending on healthcare. And professor Scott Morton’s work really informs that answer. Why are prices so high in healthcare, and what can we do about them? So first of all, I just want to welcome you, Fiona, to the podcast. Thank you for joining us today.

Fiona Scott Morton: It’s a great pleasure. I think it’s terrific that two such eminent and informed people are carrying out this project.

Harlan Krumholz: Okay, I think she wants softball questions after that.

Howard Forman: Yeah. No, no. And look, she can go on for a little bit. My parents listen to this.

Harlan Krumholz: Okay, come on.

Fiona Scott Morton: Yeah, very good, very good.

Howard Forman: All right.

Fiona Scott Morton: Let’s get straight into the prices issue, because I think Uwe was right. The way you want to think about delivering healthcare is that broadly you could do it two different ways. You could do it with private markets and give the normal incentives like we do for automobiles or strawberries, and producers will invest and create products and services to sell into that private market. Or you could think about it, delivering it as a government service, the way we do, for example, public education, where we pay taxes and the whole thing, from the building to the paper to the teachers, is supplied by the government. And you see that most countries around the world choose that second way of doing things. When you choose that second way of doing things, the government is the one bearing all the costs, but there are no prices, that is to say, let’s assume people get the healthcare by being, because they’re a citizen. So you don’t have prices in the same way. And the costs are controlled by the government being able to decide that the hospital will be a little bit out of town and everyone will have to take a bus there rather than it being right downtown, where it’s more expensive.

Now, in the United States, we say private markets are really great because it’s capitalism, and they provide quality and innovation and so on in the way that government services don’t. And we pretend that’s what we’re doing. But because health is such an important area and affects so many people who are not able to pay for it, what we end up doing is regulating. And so we have a really awkward hybrid of lots of government intrusion and lots of government regulation, which is taken advantage of by firms to make sure that they don’t have to compete, which would be the thing that you would normally get in the markets I mentioned before, like strawberries or cars. Honda competes with VW competes with Ford. But in many of our healthcare markets, firms themselves have organized things by either making sure they have intellectual property or making sure there’s some kind of government regulation that limits the extent of competition. And healthcare by its nature helps them because most of us are not remotely qualified, like the two of you, to assess our knee surgeon or primary care physician. Could they be doing a better job? We have no idea. And so we don’t go find a better one the way if we taste the strawberry and it tasted like sawdust, we’d say, “Let’s get a different strawberry.”

Howard Forman: And you have specific experience in this besides just the economic background because you’ve worked within the Department of Justice in the Antitrust Division and have an understanding fundamentally about some of the monopolies, monopsanies that exist within healthcare. Do you want to speak a little about why sometimes hospital prices are just so high?

Fiona Scott Morton: Yeah. Hospitals are a good example to talk about, in the first place, because you need a lot of people to support a hospital. In many rural areas, there’s only one hospital. So that’s already a problem. That’s inherently a monopoly. And there’s nothing to restrain the prices of that hospital at all because there’s no competitors to it. Once you get to cities where there’s more than one, what we’ve seen in the United States is a merger wave that began in the ’90s and continues today. There are enormous numbers of hospital transactions merging and merging and merging. And what economists have shown is that when those hospital mergers occur, it becomes more difficult for an insurer to create a network with hospitals in it, a health insurance network that people want to buy as insurance, that has enough hospitals spread around geographically without being subject to that monopoly power, because there might be, all the hospitals in the state join one big system, and then you’ve got a monopoly selling to the insurance company, or possibly there’s a big system and a small system and that’s it, instead of fragmented hospital markets. And the Department of Justice and the FTC, more particularly, study those situations and enforce against mergers they think are anti-competitive. But there are so many of them, they can’t possibly keep up. And courts don’t recognize, oftentimes, the threat of hospitals merging because they think, “Oh, they’re so many miles away” or “Oh, they’re a nonprofit” or “They promise that they won’t raise prices.” Things that we know actually don’t work as justifications for a merger, but sometimes individual judges fall for that.

Harlan Krumholz: Yeah, I think it’s frustrating in this country to see the amount of money that we spend and the performance that’s produced as a result. If you think about economics as trying to push markets that produce efficiencies, we have an intrinsically inefficient system. We spend so much more, particularly since, what is it, Howie, since the 1970s? I mean in the 1970s, we weren’t that different from a lot of countries. And since then we’ve separated out in a tremendous way. And it’s not just that, asking whether our hybrid system is better. We have a lot of evidence that it’s much worse. Commonwealth Fund just came out recently, this week I think, and was showing how our comparables were versus others. And it’s a real disappointment.

This issue about competition, since really you are one of the nation’s and really the world’s experts in competition. It’s a problem throughout our entire healthcare system. I mean, take physicians, for example. I mean, we control supply. There are many more qualified people who want to go to medical school than we enable to become physicians. And this is rife throughout the entire system. And then we’re upset because we have shortages. I mean, in the pandemic, we’re experiencing great shortages, but yet there are a lot of people who would be interested in entering healthcare but are unable to because of restricted slots. What are your thoughts about that? I mean, to what degree can increased competition throughout the entire healthcare system drive us to better practices? Or are we going to need to just transition to a public system that basically is a top-down control of the way in which healthcare resources are deployed?

Fiona Scott Morton: That’s a deep question, Harlan. I think that we easily could inject competition into lots of parts of the healthcare system, and that would make a huge difference. If we blocked more hospital mergers, broke up some anti-competitive ones, trained more primary care doctors, got rid of licensing restrictions so doctors could practice everywhere, trained more nurses, reformed the way we purchase pharmaceuticals, reformed some of the device and entry, generic entry and device competition rules, we would bring down prices a lot. And that would probably save us…I bet you could get a percent of GDP, easily, maybe even two. But here’s the thing: somebody’s “competition causes cost savings” is somebody else’s income. And so the parties that have gotten us to this place will never let us inject competition. And so I think what is going to happen is your Option B, which is we just transition to a public system because no one can defeat the market forces that are the sellers of all of these goods that won’t change.

Howard Forman: So, along those lines, you’ve done some work and you teach a lot of our students on prescription drug pricing. And obviously pending right now are consideration of prescription drug pricing reforms. What can be done there? And you already said part of it: if the government takes control of it, that’s one solution. But what do you think is reasonable right now?

Fiona Scott Morton: Yeah, there’s a lot of really reasonable things we could be doing right now. We could really change the way we enforce and approve generic drugs. Right now, I think generic drugs are poor quality. They’re made abroad. We don’t inspect. At the same time, we don’t induce entry the way that we could, so that we have insufficient entry in generic drugs and then we take a long time to approve them. We have particular problems with any generic drug that’s a little bit complicated, like think of an EpiPen, where the drug itself is really old, but the device is patented and adds another layer to the approval process. So we just don’t use the FDA to stimulate competition at all. The FDA is just out there in a bubble kind of by itself, not thinking about the competitive impacts of what it’s doing.

But let me give you another example. There’s restricted distribution. A firm can say, “My pharmaceutical product is dangerous and it needs to be put in a specially secure distribution channel so that people can’t get it by accident. And so it needs to stay locked up in the pharmacy” and so on. Well, brands voluntarily put their own drugs into those distribution channels because it makes it harder for generics to enter the market. Because now the physician gets used to the brand’s restricted channel and has a hard time using the generic one, or the generic can’t create one. The brand won’t give them samples. We’ve had a whole way of keeping generics out of the market through brands voluntarily saying, “My product is dangerous,” which makes, otherwise, makes no sense. So there’s that kind of thing.

Another huge area where we need reform and pharmaceuticals is biosimilars. We’ve allowed the brands to define the entry requirements for getting in for biosimilars. We’ve allowed—

Harlan Krumholz: And just for a second, just to define biosimilars for people.

Fiona Scott Morton: Yeah. A biosimilar is like a generic drug, but it’s for a large molecule biologic drug. And the thing about the large molecules is, they’re so big and they fold their proteins that fold on themselves, you essentially can’t draw them. So that when you’re making a generic, when you’re making a copy, your copy is not an exact copy. Think of a small molecule drug as being of size 20. And you can draw it on a piece of paper. These things are of size 5,000, and you can’t exactly copy them, so they’re biosimilars because they’re not identical, but they’re therapeutically equivalent. In order to get onto the market, they do testing in humans to make sure that they cure the same disease in the same way as the originator drug. So they’re like generics in that way. They’re not trying to be novel. They’re trying to copy the thing that’s already shown to work.

And this is extremely important because biologics have patents, of course, and they’re complicated so they have lots of patents. And they’re going to stay on the market, be at a high price for a really long time. And the only way to bring down prices is to have follow-on biologics that are these biosimilars coming in and driving prices down. And we see in Europe, they started doing this in 2006 and their prices have come down by a lot, 50, more than 50% sometimes.

What did we do in the United States? We let the incumbents lobby so that we didn’t get a pathway until 2011 in the Affordable Care Act. Then the standards were very high. We have very, somewhat, I think, poor and abused patent protection, so that it’s hard to get in. And then once you get in, the incumbents write contracts with the hospitals and other buyers so that the hospitals don’t want to buy the biosimilar, because it would be extra expensive to purchase the brand if they buy the biosimilar. And the result of that is that we have no substantial competition in biologics the way the Europeans do. And this is a large and growing share of our pharmaceutical expenditure. And it’s really expensive. It’s really expensive.

Harlan Krumholz: We are going to need, by the time we end, to get something optimistic on a path forward because it is a little depressing to think about the path we’ve been on. Let me ask you this. I’ve been thinking a lot about how technology might be able to help inject a lot of competition into the current system, dis-intermediate a lot of incumbent actors who are basically serving as middle people, adding costs and not adding particular value. With people with their data and the world is flat, people should be able to seek care in a variety of different places, not be limited geographically for a wide variety of services. We’re already seeing this. For many people who are insured, you can call a primary care doc 24/7 and get somebody on the line and that person may be anywhere else in the country. We’re seeing things like PillPack and others come into the pharmaceutical industry, also to dis-intermediate some of the pharmacy benefit managers, these big companies that are standing between the manufacturers and those who are selling the drugs but trying to go direct-to-consumer exerting market might in this.

So on one hand, I want to ask you, do you feel that this is a promising strategy to shake up the industry? And secondly, I want to get to, whether you have concerns about the monopoly power of some of these companies, so that although they are currently disrupting incumbents, we’re going to be left with some of the same problem at the end, because there’ll just be a few companies standing and they will be able to exert enormous influence on what prices they charge and profits they can command. So I’m curious what your thoughts are.

Fiona Scott Morton: I think you hit on it, Harlan. You don’t want to replace one intermediary with another. You don’t change this market power problem, except maybe temporarily while they’re fighting it out. Remember that one of the things that the PBM [pharmacy benefit manager] does that’s helpful is to say, “These four blood pressure medications are essentially the same—which one of you is going to offer the lowest price? I want some price competition here. And then I’m going to steer people to the lowest-cost drug.” That’s what they’re supposed to do. Sometimes the PBM, however, gets corrupted as an agent and instead of steering people to the lowest-price drug, they steer to the drug that gives them the biggest kickback. And then don’t share that kickback with the end consumer. And that’s where the problem arises, when the PBM isn’t a good agent.

So one of the things I think we need to think about is, maybe we all have to have... Oh. So, why do I get great healthcare? It’s partly because I have an HMO, which is the Yale health plan, which is really interested in my health as a long-term Yale employee and not... When they create their own formulary and act as their own PBM, they can’t have the wrong incentives because they’re acting for me, the enrollee. And so they care about quality and they care about price.

So we need to think carefully about who the agents are acting for our end consumers and trying to make sure that they’re very empowered and have the right answer. So an insurer is pretty good, except it’s hard to change insurers. So I think one positive thing to think about is the ACA exchanges, where an insurer’s trying to deliver good quality and low prices. And every year it’s open enrollment, and I can change. And how can we think about making that model really work and maybe extending it to more places?

Howard Forman: I don’t want to miss the opportunity to ask you about surprise billing. Because there’s an example of something that you worked on with our colleague, Zack Cooper at Yale, that got a lot of press. And in just a matter of about five or six years, you moved from identifying something that the vast majority of people did not understand, and I’ll let you explain it, to something that actually is part of a legislation now that is passed into law, and that hopefully will have some impact in improving that. So what are your thoughts on that?

Fiona Scott Morton: The practice is that while your insurer has a network of hospitals and a network of doctors, those two don’t have to line up. And so the emergency room physicians that contract with your insurer might be in the hospital where you go to the emergency department, or they might not. And so you can go to an in-network hospital, go into the emergency department and be treated by a physician who is out of network. And the problem with that is that then you get an out-of-network bill, and your insurance company says, “Well, you went out of network. We’re not going to pay this.” And your response is, “Well, wait. No, I didn’t. I broke my leg, and I went to a hospital that was on the list of in-network hospitals.” And of course, because the in-network hospital doesn’t bear any responsibility for figuring out who’s on what plan and what the doctors are, the patient gets stiffed with this large bill.

And we, Zack Cooper and I, looked at the prevalence of this and found that it was quite high, about 20% of all emergency visits had a out-of-network doctor. But it wasn’t randomly distributed. There were EDs where this was a strategy and EDs where it wasn’t. Most EDs, it’s a handful of people, and which you could easily see would happen just by accident, because these are emergencies. But then there were other hospitals where staffing companies—in particular, we focused on the two biggest, EmCare and Team Health—would come into a hospital, take over the staffing of the emergency department, get the doctors and the contracts with the insurers and have a bunch of doctors who are there for treating everyone in the hospital without any contracts. And they would raise prices after the contracts ended so that they could bill patients these very large amounts.

And this is, of course, it’s not fraud, but it’s one of those things that once it goes on the front page of the New York Times, everybody thinks that’s really bad, and that’s not the patient’s fault, and that’s not how this is supposed to work. And they’re, really, this should not be allowed.

Howard Forman: Yeah. Thanks to you and Zach for doing that good work.

Fiona Scott Morton: Oh, it was fun. It was fun. But anyway, we now have a federal law that is supposed to, it doesn’t, it’s not perfect, but it keeps the patient out of the situation and says to the doctor and the insurance company, “Off you go to arbitration and figure this out.”

Howard Forman: So last question. If you had a magic wand right now and could make one thing change within our healthcare system, other than just bringing in a nationalized single payer system, let’s say, but anything beyond that, within that, what would that be? Where do you think the lowest-hanging fruit is, where we could have the biggest positive impact?

Fiona Scott Morton: Well, I’ll tell you, I’m going to fight back with the premise of your question just for a minute. Zack and I have another project which is called 1% Steps for Health Care Reform. And the reason we started that project is because you go on a panel, you get asked by a reporter, and they say, “What’s the thing we need to do to fix U.S. healthcare reform?” There is no one thing. It’s 20% of GDP. And there’s every kind of patient and every kind of provider and all kinds of things go wrong with our bodies, and there’s thousands of things to fix. So we looked at surprise billing. It’s a big amount of money, but it’s 1% of healthcare, less than 1% of healthcare. So it’s just not... asking someone that question gives the reader, gives the listener, the impression that there really is only one thing to do. Or that one thing to do might actually get half of the dollars. No, the one thing will get 1% of the dollars, if you’re lucky.

Now, since we’re talking about 20% of GDP, that enormous amount of money, but we’ve just got to do thing after thing after thing after thing after thing. So I would say, “Go to that website and you’ll see the 20 things that I already know I want to do right now.” But in particular, that what would really help is to have the people we elect as our representatives have the political will to actually work for the people and not for the industry. And if they were willing to do that, then all of these good ideas could be implemented. I would urge listeners not to believe anyone who says, “Healthcare’s so complicated. We don’t know how to fix it.” That’s not true, we know exactly how to fix it. They’re just not doing it. And the reason they’re not doing it is because the people who get paid are lobbying to make sure that the reforms don’t happen. So that is not true. We can change things if we want to, but so, the magic wand would be, make our senators and representatives care.

Harlan Krumholz: Well, and I think that’s a matter of us raising our voices too. I want to thank you. You want to say what that website is, just so everyone wants to take a look?

Fiona Scott Morton: The website is onepercentsteps.com, O-N-E percent steps. And any healthcare economists listening to this podcast: we are always looking for more ideas. So if you’ve got an idea with some research behind it, get in touch, because the idea is of course to have a hundred of these, and then we’ll solve the healthcare problem.

Harlan Krumholz: So look. This, what a great pleasure to have you on. Thank you so much for joining us. And I love the optimistic end, which is that we can make change. We just need to raise our voice. And there is, there’s not one thing; there’s lots of things. And we all have to have the will to do them together. Thank you.

Fiona Scott Morton: Yep. Well, thanks so much for having me. What fun.

Howard Forman: Harlan, what’s something that inspires you or keeps you up at night right now?

Harlan Krumholz: Well, how can we say anything else but Omicron and what’s going on in the pandemic. And the juxtaposition of the worry about it, but the recognition that most of the harm being done in the U.S. is still being done by Delta. So everybody’s afraid of what’s around the block with the new variant and how it’s going to outcompete the Delta variant, but in our own state, we’re seeing marked increases again, as we enter the winter, in hospitalizations and in harm, in just pure infections, and most of that is still Delta. So we’re starting to see the beginning of Omicron in this state. There’s some people who estimate that by mid-January, early February, it’ll be 50%. Nate Grubaugh has tweeted today that he’s seen growth in the amount of Omicron. But in this country, we’re still being pelted by the Delta variant and mostly still among unvaccinated. When I saw the stats from Yale New Haven Hospital, the number of hospitalizations in the of growth in hospitalizations are almost all among unvaccinated. There still remain breakthroughs, it’s true, but it’s mostly among the unvaccinated.

Next week we’re going to have someone who’s an expert in epidemics. And I look forward to that talk, because I think we’ll have the kind of information we need to know what we should be doing, going into the holidays.

Howard Forman: Yeah, and I’ll just echo what you’re saying there. I work as a radiologist, and as much as a radiologist may be far away from the patient, when it comes to COVID, it’s about as close as you get because we get to see the worst patient outcomes, the people that come in with really bad chest X-rays. And at this point, I’m still seeing almost no cases of severe COVID happening in patients that are fully vaccinated with a booster or even fully vaccinated below the age of 65. I can’t think about a single case like that in the last several months. And a lot of cases among the unvaccinated, or people that are way overdue for a booster. So my advice to our listeners right now is, go out there, if you haven’t been vaccinated, please get vaccinated. Do it for yourself; do it for others. And if you haven’t been boosted and you do, please do get that now.

Harlan Krumholz: And Howie, are you thinking now that you can’t call yourself fully vaccinated if you’re more than six months out of your second dose?

Howard Forman: Yeah, it’s unfortunate that the administration and that the politics of this, that the appearances, that the communications piece about this is so challenging that we’re not willing to admit that right now. But the reality is, fully vaccinated means that you’ve had a booster when it’s due. And if you are overdue for the booster, you’re not fully vaccinated, any more than you were after the first shot.

Harlan Krumholz: Yeah. And a coda on this is two pre-prints that were posted just yesterday that were conveying that being fully vaccinated with the two doses of the mRNA vaccines were very ineffective in protecting against Omicron, but being boosted on top actually looked like it was going to be reasonably protective. And so that for someone who called themselves fully vaccinated more than six months ago, they were in a fairly unprotected stance with regard to neutralizing antibodies, were at risk. But if they had gotten boosted, they were in a much stronger position. It’s sort of tilting me, very strongly, to telling everyone that, look, if it’s been more than six months, get boosted. There seem to be little risk associated with it and growing evidence of upside.

Howard Forman: We are 100% aligned on that.

Harlan Krumholz: You’ve been listening to Health & Veritas with Harlan Krumholz and Howie Forman.

Howard Forman: So how did we do? To give us your feedback or to keep the conversation going, you can find us on Twitter.

Harlan Krumholz: I’m at H-M-K-Y-A-L-E. That’s HMKYale.

Howard Forman: And I’m @TheHowie. That’s at T-H-E-H-O-W-I-E.

Harlan Krumholz: Health & Veritas is produced with the Yale School of Management. Thanks to our researcher, Sherrie Wang, and to our producers, Blake Eskin of Noun & Verb Rodeo, and Miranda Shafer. Talk to you soon, Howie.

Howard Forman: Thanks very much, Harlan. Talk to you soon.