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Healthy Competition newsletter
Issue #7, April 13, 2006

Welcome to Massachusetts: Health Insurance Papers, Please

Massachusetts governor Mitt Romney (R) has signed legislation that will require residents of that commonwealth to purchase health insurance.

Medicare MSAs Were Doomed to Fail

In 1997, Congress created a demonstration program designed to give Medicare beneficiaries the choice of a medical savings account, or MSA. The most recent Cato Journal gives one possible reason why, almost 10 years later, not one Medicare beneficiary has an MSA: mathematically, the program was doomed to fail.

In an article titled, "Contradictory Incentives in the Medicare+Choice Medical Savings Account Program," University of North Texas economics professor Janice Hague argues that "given self-interested seniors and insurers, the MSA program was almost certain to fail, and given the similarity of the new [Medicare Advantage] MSA plan to the [Medicare+Choice] MSA, success under the new program is unlikely."

Hague offers ideas for additional incentives to encourage Medicare Advantage plans to offer MSAs.

Rx Price Controls Are Hazardous to Your Health

Another Cato Journal article argues that government price controls on prescription drugs are leaving Americans less healthy. Professors Rexford E. Santerre, John A. Vernon, and Carmelo Giaccotto of the University of Connecticut show that between 1962 and 2001 price controls in such government programs as Medicaid have led to a loss of one-quarter of a trillion dollars of spending on drug research and development and a loss of nearly 200 million life-years.

The Welfare Effects of DTC Drug Advertising

The upcoming issue of Regulation magazine features an article titled "Evaluating the Welfare Effects of Drug Advertising," which appraises the costs and benefits of direct-to-consumer advertising of COX-2 inhibitors. Authors David Bradford of the Medical University of South Carolina and Andrew N. Kleit of Pennsylvania State University find that the "net effect of advertising is to get patients in front of their physicians," and that "increased advertising is connected with a decrease in the rate of Cox-2 prescriptions for people at risk from the drugs."

FDA: Your Source for Drug Info (Except on Type II Errors)

In the same issue of Regulation, the Hoover Institution's Henry Miller ("Drug Safety: One Step Forward, One Step . . .") praises the federal Food and Drug Administration for launching DailyMed, a website designed to present consumers with useful information on prescription medications. Miller is less enthused about another idea, a site called "Drug Watch" where the FDA will list approved drugs that it is watching for safety concerns. Miller argues that the FDA would do better to offer an electronic catalog of successful off-label uses of approved drugs.

The Perils of "Free" Health Care

A March 3 New York Times article illuminates the differences between providers' and patients' preferences and the dangers that come with offering patients "free" medical care.

In the mid-1990s, the Medicare program became concerned that a popular surgery for emphysema patients, which cost upward of $50,000 a pop, would break the bank. In 1996, lung surgeons billed Medicare for 3,000 of these "lung volume reduction" surgeries, which the surgeons believed helped patients walk and breathe. Skeptical, Medicare required lung surgeons performing the procedure to participate in a clinical trial to test the procedure's effectiveness. The surgeons protested loudly but ultimately relented.

The results of the clinical trial were striking, but the different ways that lung surgeons and emphysema patients reacted to those results was even more striking. The trial found that lung volume reduction surgery helped two out of three patient subgroups. However, the procedure did not extend life overall and even entailed an 8 percent mortality risk. Lung surgeons were heartened by the benefits and expected an increase in demand for the surgery. But when emphysema patients saw the same data—particularly the mortality risk—they took a pass. Even though Medicare still agreed to pay for the surgery, by 2004 the number of surgeries dropped by roughly 90 percent.

The episode highlights a few of the perils of offering patients "free" medical care:

Insured, Uninsured...No Matter: Quality Is Poor All Over

A study by Steven M. Asch and colleagues in the March 16 New England Journal of Medicine reports that patients with health insurance receive roughly the same quality of care as the uninsured. The authors write: "We found that health insurance status was largely unrelated to the quality of care among those with at least minimal access to care." So were other demographic factors:

According to our study, a 50-year-old white female college graduate with private health insurance and a household income above $50,000 would receive 56.7 percent of recommended care. In comparison, a 50-year-old uninsured black man with less than a high-school education and an income under $15,000 would receive 51.4 percent of recommended care (P = 0.02). Although the difference between these two hypothetical persons is significant, the gap between the care each of them receives and the standards of good practice is substantially larger than this difference and is probably much more clinically important. (Emphasis added.)

Those findings suggest that policymakers need to focus on why there is such a large quality gap for all patients and why "covering the uninsured" will not improve the quality of care the uninsured receive.

Who's the Real Constituency for the Medicare Rx Program?

On February 15, the firm Credit Suisse released a report on the retiree health benefit obligations of companies in the S&P 500. The report notes, "Medicare Part D not only provides prescription drug coverage to Medicare eligible retirees starting this year, it also provides companies with a tax-free federal subsidy for providing prescription drug coverage to its Medicare eligible retirees. That subsidy effectively allows companies to pass off a chunk of their retiree healthcare costs to the U.S. government; in other words, to you and me." Firms receiving the largest subsidies are:

On its website, IBM reports that it expects to receive $400 million over six years. In all, Credit Suisse "found 134 companies that expect the subsidy to reduce their [retiree health benefit] obligations by more than 5%."

Rather than take the cash, some firms took the occasion of Medicare Part D to drop their retiree health benefits entirely. The firm Rockwell Collins reported, "As a result of the Medicare [drug program], we amended our retiree medical plans . . . to discontinue post-65 prescription drug coverage effective January 1, 2008."

According to Credit Suisse, when the Medicare drug program was passed, "many companies with large [retiree health benefit] plans breathed a collective sigh of relief."

Upcoming Cato Institute Events

Michael Cannon to address state legislators at the American Legislative Exchange Council's 2006 Spring Task Force Summit at 2 p.m. on Friday, April 21. Location: The Coeur D'Alene Resort, Coeur d'Alene, Idaho. For more information contact ALEC at meetings@alec.org or call 202.466.3800.

Michael Cannon to debate Columbia University professor Sherry Glied on health savings accounts at 6 p.m. on Tuesday, April 25. Location: Columbia Health Sciences Campus, Armand Hammer Building, 701 W. 168th Street, New York City.

Michael Cannon to join panel discussion on Medicare at the World Health Care Congress's 2nd Annual Leadership Summit on Medicare, at 9 a.m. on Monday, May 8. Co-panelists: Tom Saving, public trustee of the Medicare Trust Fund, and Gail Wilensky, senior fellow at Project Hope. Location: Hamilton Crowne Plaza, 14th & K Streets, N.W., Washington, D.C.

Recent Cato Institute Media Appearances

Michael Tanner debated individual health insurance mandates with the Heritage Foundation's Ed Haislmaier on CNBC's Closing Bell (Wednesday, April 5). (Real Media)

"Medicare? But That's for Old People," by Michael F. Cannon, Washington Times, April 1, 2006

"Conquering Cancer with Private Medicine," by Michael D. Tanner, National Post, March 16, 2006

"Is Socialized Medicine the Answer?" by Arnold Kling, TCSDaily.com, March 14, 2006.

"VHA Is Not the Way," by Michael F. Cannon, Nationalreview.com, March 6, 2006

"The Mythology of Health Care Reform," by Michael D. Tanner, Foxnews.com, March 3, 2006

"How to Get What We Want—Better Health Care," by Arnold Kling, San Francisco Chronicle, March 2, 2006.

"Wal-Mart Health Benefit Blues," by Alan Reynolds, Washington Times, February 26, 2006

"Bush's Bad Recipe for Savings," by Steve Slivinski, Star Telegram, February 20, 2006

"With Spending Plan on the Table, the Legerdemain Can Now Begin," by Jagadeesh Gokhale, Investor's Business Daily, February 15, 2006

"Health Savings Accounts Work," by Michael F. Cannon, Philadelphia Inquirer, February 5, 2006.

Healthy Competition is a periodic newsletter produced by the Cato Institute. It features news and commentary on current health policy issues from a free-market perspective. If you wish to subscribe to this free newsletter, update your address, or be removed from our list, please click here and follow the instructions. Send feedback to healthycompetition@cato.org.