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Why Market Competition Will Not Mend Our Health Care System

MANAGED CARE February 2007. © MediMedia USA

Why Market Competition Will Not Mend Our Health Care System

Doctors have a saying: 'Half of what we know is wrong.' In which half is the conventional wisdom that competition is society's best hope for improving quality and controlling costs?
Maggie Mahar
MANAGED CARE February 2007. ©MediMedia USA

Doctors have a saying: 'Half of what we know is wrong.' In which half is the conventional wisdom that competition is society's best hope for improving quality and controlling costs?

Maggie Mahar

Editor's note: With all the talk in the industry about the virtues of the marketplace and so-called consumer-driven or consumer-directed plan designs in bringing health care inflation under control, it's easy to forget that there are other points of view. Maggie Mahar, who has recently written books on Wall Street and on health care, argues here that relying largely on market forces and on educated consumers is a misguided strategy.

In the early days of managed care, those who made policy held out hope that market competition would create a health care system that offered the best possible care at the lowest possible cost. Health care providers would compete on quality, they reasoned; the market would work its magic, and prices would fall while quality rose.

More than 20 years later, even the Jackson Hole Group's Paul M. Ellwood, MD, — best known as "the father of managed care" — is disappointed. "I learned much during 17 years of medical practice and 35 years of health policy work. But I didn't really understand the health care system until I depended on it as a patient," Ellwood wrote last year in an open letter to President Bush published in Stanford Medical Magazine. "I am now a typical Medicare patient with the prerequisite five big-ticket chronic illnesses, plus a broken neck from a reckless ride on a young horse. The system does not work.

"Until recently I was convinced that consumers, given adequate information about their choices, could effectively influence both the cost of health insurance and the quality of health care," Ellwood continued. "I was wrong! . . . Studies show that despite the greater public access to sound health information, market forces . . . do not exert sufficient influence over the quality of health services."

Market forces may work well to do many things, but creating a sustainable, affordable health care system does not appear to be one of them.

In other industries, competition works because comparison shoppers reward quality at a lower price. But health care is not like any other industry. When a "consumer" (a.k.a., a patient) is dying of cancer, he is probably not hunting for a bargain — even if he is paying 20 percent of the cost out of his own pocket. Most cancer patients will pony up their share of the $50,000 for a drug that extends life by only five months, even if it means mortgaging their home.

Front page news

Indeed, it is so unusual for a consumer to balk that 87-year-old Ellis Minrath made the front page of the New York Times when he refused to take a pricey cancer drug that required a $1,000 monthly copayment. "If anybody came out and said, 'By God, this is the stuff. You want to get well, find a way to buy it,' that would be one thing," Minrath declared.

"But that isn't the case," he continued. "The forecast of how much it's going to do is not that wonderful."

More importantly, even if a patient wants to compare cost and quality, how is he going to go about doing it? As anyone who has ever been seriously ill knows, the more you learn about the pros and cons of various bleeding-edge treatments, the less certain you are likely to be as to which might be best for you. Part of the problem is that every human body is unique: What works for one patient may not work for another. And frequently, doctors cannot explain why.

The ambiguity that haunts health care can make it extraordinarily difficult to evaluate health care products and treatments. As MacArthur Award winner Atul Gawande, MD, MPH, who teaches surgery and health policy at Harvard Medical School, puts it in Complications: A Surgeon's Notes On An Imperfect Science: "Medicine is an enterprise of constantly changing knowledge, uncertain information, fallible individuals . . . the core predicament of medicine, its uncertainty, [is] what makes being a patient so wrenching, being a doctor most difficult, and being part of a society that pays the bills so vexing." [Emphasis added.]

The recent controversy over stents illustrates the dilemma that would-be comparison shoppers face. A study published in the New England Journal of Medicine in December 2006 roiled the world of heart specialists by suggesting that while opening a blocked artery with balloons and stents can save lives in the early hours after a heart attack, if the procedure is performed more than 25 hours after the attack, it has no long-term benefit in reducing mortalities. Moreover, like any medical procedure, it carries risks.

Adding to the uncertainty about stents, other new studies show that state-of-the-art stents coated with drugs meant to prevent excessive scarring within the artery are linked to significantly higher rates of fatal blood clots than the older, bare-metal version. "We should not have adopted these [drug-coated] stents the way we did," declares cardiac pathologist Renu Virmani, MD, medical director of the not-for-profit CVPath Institute in Maryland.

Although drug-coated stents cost an average of about $2,200 each, nearly three times the price of bare-metal ones, they took the U.S. market by storm when they were introduced a few years ago. Before long, they were used in 85 percent of all cases. Overseas, where national health insurers have been more reluctant to pay the higher prices, drug-coated stents have caught on more slowly, but here, aggressive marketing persuaded both doctors and patients that the newer product must be better. See the chart below.

As the use of stents has grown, the drug-coated stent has quickly come to dominate the field.

"This is, in fact, the typical pattern of how the health care industry [in the United States] works. It does something new, and employers, taxpayers and, increasingly, consumers pick up the tab in a fairly unquestioning way," Matthew Holt, editor of the widely-read Health Care Blog, observed in an opinion piece on ABC News last October. "Because health care is such an emotionally important part of most people's lives, it's very hard for consumers and their employers to say 'no.'"

But now some researchers charge that overuse of these drug-coated stents may be leading to thousands of heart attacks and deaths each year. In many cases, the critics say, the stents are being used in relatively mild cases where drugs work just as well. In other cases patients would be better off receiving the simpler, cheaper bare-metal version.

Turf war

Meanwhile, some cardiovascular surgeons are inclined to crow "I told you so." As stents became more popular, a turf way broke out between the surgeons who perform open-heart surgery and the specialists who use stents in less invasive procedures. "There used to more than enough work for everyone," one physician told me a few years ago. "Physicians weren't vying for patients," and usually there was agreement among doctors as to what procedure was best for the patient. Recently, however, the surgeons have become more and more critical of the widespread use of stents, arguing that eventually, most patients will need a bypass anyway.

It is no surprise that stent manufacturers are defending their products. In October, Johnson & Johnson told Bloomberg News that its drug-coated Cypher stent is no more dangerous than bare metal ones. Boston Scientific, by contrast, acknowledged that there is a higher risk of blood clots with its Taxus drug-coated stent. But, the company insisted, the death rate for those given the Taxus stent is no higher.

The FDA quickly held a hearing, using a 21-member panel that included six members with financial ties to the heart-device industry. This group split on the question of whether the coated stent is riskier than the bare-metal stent and called for more study.

It will take up to five years of long-term clinical trials to settle the matter. In the meantime, how can a consumer hope to sort out conflicting claims? Yet the whole idea of market competition guiding prices lower and quality higher depends on a savvy consumer making the market work. How can a consumer make an informed choice in the bare stent/coated stent/surgery debate?

Infant science

There are of course, areas of medicine where there is sufficient long-term scientific evidence to assess the effectiveness of competing medical products and procedures, but by and large, "outcomes research" is an infant science. When market advocates such as Michael E. Porter and Elizabeth Olmsted Teisberg, authors of Redefining Health Care: Creating Value-Based Competition on Results, argue that our health care crisis could be solved if providers competed on the quality of care they provide for specific conditions, they underestimate how complicated it is to measure quality.

Outcomes must be adjusted for comorbidities as well as demographics and ticklish subjects like "patient compliance." Trying to collate the data and adjust for all of these factors while working with paper records takes an extraordinary amount of labor and is expensive. Until more patients have electronic medical records, detailed analyses can be done only on a limited scale. Moreover, today, even those hospitals that use EMRs don't have compatible systems, another barrier to evaluating rival treatments.

This is why, as Carolyn M. Clancy, director of the Agency for Healthcare Research and Quality, pointed out on Health Affairs' Web site in November 2006, even in the seemingly simple case of "a 55-year-old woman with a scan showing greatly decreased bone density," it's not clear whether the best course of treatment would be for her to take drugs, increase vitamin D and calcium intake, or focus on weight-bearing exercises. "Drugs are effective, but there is limited information on their long-term effects," she explains, "and some women develop kidney stones after increased calcium."

Exciting opportunities

Clancy envisions a future when more information will be available to comparison shoppers: "Advances in bioscience and health information technology present exciting opportunities for providing timely, relevant information about the comparative effect of health care services." But, she warns, "Successful growth will require transparent, participatory collaboration and new partnerships between the public and private sector to achieve the goal of providing valid evidence." [Emphasis added.]

Today, just one major obstacle stands in the way of "transparent collaboration" — market competition. As Clancy acknowledges, when researchers compare the effectiveness of various treatments, there will be "winners and losers," and news reports may well have "substantial financial impacts" on some companies. Little wonder that those who make drugs and devices resist head-to-head comparison of similar products.

Market rivals are, after all, vying for the same customers. This is why health care businesses rarely collaborate. Instead they compete, and staunchly oppose sharing research with their closest rivals. Often they don't even disclose the results of trials to patients and doctors.

How capitalism works

Especially when outcomes are negative, companies are likely to label the information "proprietary." In the case of the stent controversy, for instance, Virmani, the chief critic of the coated stents, told Bloomberg News that the companies "have kept independent investigators like her from checking their claims" by "maintaining tight control of 'proprietary' scientific data."

When market enthusiasts like Porter and Teisberg say that market competition can mend a broken health care system — if health care businesses would just follow their advice and learn to compete "to improve value for customers" — they seem momentarily to forget just how capitalism works. In the health care industry, as in any other sector, for-profit corporations are required, by law, to put their shareholders' interests first. This means that they cannot do anything that is likely to pare earnings — even if sharing knowledge with a competitor might advance the larger project of improving our health care system. Reforming the system is not their mandate; producing profits is. And it should be said that Wall Street is particularly keen on seeing companies meet short-term earnings targets.

Of course, for-profit corporations are not supposed to lie to their customers, but they are not required to warn them that a product is too expensive to be cost-effective, or that a new device that costs three times as much as the product it replaced is, in fact, no better. It's up to the buyer to figure this out on his or her own: In a free market, "Caveat emptor" is the rule. And in an industry where value is far from transparent, companies have little incentive to compete by "improving value for customers." They know that, in many cases, customers have no way of measuring value.

If Porter and Teisberg overlook how the rivalries that define a free market stand in the way of making information about competing products transparent, Ellwood — one of the earliest champions of the idea that the industry's players should compete on quality — understood early on that sharing data would mean violating the rules of the marketplace: "We are held hostage by our tendency to create information repositories independently of each other," Ellwood acknowledged in 1988. Nevertheless, he argued, "This incompatibility in data systems, rooted in history, pride, function, and money, creates an added urgency to adopt a uniform subset of health outcomes data."

Nearly two decades later, rivals still haven't come around to the idea of freely sharing information. A 2005 survey of hospitals, physician groups, and community health centers published in Health Affairs last year reveals that "respondents widely viewed competition as a barrier to communitywide data sharing. When asked about collaborative efforts, [they] noted that the barriers to developing information systems [that can talk to each other] are not just financial and technological. A communitywide effort requires competing and adversarial parties to collaborate and share their most valued asset: patients and their data.

"The competitive tensions ... involve competition between physicians, between health plans, between hospitals and physicians, and between physicians and health plans," researchers at the Center for Studying Health System Change reported. "Our study findings suggest that market competition may inhibit the development and sustainability of regional health information organizations.

Not interested in pooling data

As the survey shows, in a market-driven system, even hospitals are loath to pool information. In Escape Fire: Designs for the Future of Health Care, Donald Berwick, cofounder of the Institute for Health care Improvement (IHI), recalls phoning a hospital in Houston to learn about its reportedly successful innovations in pneumonia care, and being told that "the gains were enormous but ... the methods could not be reported to the public — excellent pneumonia care offered the hospital local competitive advantage."

In a fiercely competitive market, hospitals and doctors also engage in "medical arms races" — games of duplication and one-upsmanship in which they add technology and services that their competitors already provide. As a result, five hospitals in one town may wind up owning the same diagnostic imaging equipment, providing far more capacity than the population needs.

Hoping to boost their income, a few physicians may have outfitted their offices with similar state-of-the art technology. And the only way to pay for the equipment is to use it. Thus competition leads to overtreatment, undermining the quality of care.

Race for profits

Meanwhile, in a Darwinian market, the race for profits lifts the price of a two-day hospital stay as hospitals invest in the amenities that will attract well-heeled, well-insured customers. Rather than sinking health care dollars into a program (which customers will not see) to reduce hospital infections, many hospitals feel forced to pour money into hotel-like amenities such as marble lobbies, valet parking, whirlpool baths, and indoor waterfalls — flourishes that ultimately will hike everyone's hospital bill.

Such competitive pressures lead drugmakers to duplicate each other's efforts as they focus on developing those products that their marketing departments tell them will be most profitable. Recently, for example, major pharmaceutical companies like Pfizer, GlaxoSmithKline, and Wyeth realized that there is seemingly no limit to what they can charge for cancer drugs. Granted, the market is specialized, and the average patient may not live long enough to take the drug for more than a few months, but the profit margin more than compensates for low volume.

Spotting a lucrative niche, drugmakers rush to market, clog the pipeline with "me-too" products and then lay out billions to promote their versions — investing twice as much in advertising, marketing, and administration as they do in research and development, according to Families USA, a not-for-profit consumer advocacy group. So, drug prices shoot up.

Too many choices?

But doesn't competition lead to more effective products? In theory, when rivals turn out so many competing products, patients stand a better chance of finding one that works for them. But some physicians warn that too many new drugs only contributes to the lack of transparency in a marketplace where free market competition has turned into a free-for-all. A sign of the times: In 2004, one session of the American Society of Clinical Oncology's conference was titled "Therapy for Metastatic Colorectal Cancer: What Do We Do With So Many Options?"

The problem is this: As more companies enter the fray, a competitive market is spawning a dizzying array of half-way cures. Too many cancer drugs shrink tumors — but don't reduce mortalities — and an embarrassment of nostrums leaves frustrated oncologists scrambling to sort out which treatments are most effective, which should be used together, and in what sequence.

Market theory suggests that when the number of rivals offering similar products multiplies, prices will slide. But once again, the health care business is like no other — and unfettered competition fails to live up to its promise. In fact, on Wall Street, professional investors favor medical device companies precisely because they know that this is a sector where competition will not put a lid on prices.

"There are very few markets in which multiple competitors selling similar goods can enjoy high margins and good pricing power while maintaining the ability to introduce slightly improved but relatively untested products at still higher price premiums," Justin Ferayorni, founder and principal of Tamarack Capital Management, observed not long ago on «realmoney.com».

There for the taking

Why do device makers and many of the surgeons and hospitals who use their products charge such exorbitant prices? Because they can. Stung by the backlash against the tightly managed care of the mid-1990s, employers and health insurers are afraid to say "no." Meanwhile, corporate lobbyists have persuaded Medicare that it would be unseemly to haggle for discounts.

Originally "managed competition" had seemed such a clean, clear idea. And on paper, it was. When thinking about the concept, Lawrence Casalino, MD, an assistant professor of health studies at the University of Chicago, cannot help but recall a question that a reporter once asked Mohandas Gandhi:

"What do you think of western civilization?

"I think it would be a very good idea," Gandhi replied.

"The same," Casalino observes, "could be said of managed care."

This, of course, is no reason to give up on the idea of western civilization — or managed competition. But it does suggest that market forces alone cannot create the health care system that most Americans want.

In the end, "managed competition" must be — well, managed. And the experience of the late 1990s demonstrates that insurers lack the standing to do the job alone. When health care plans question the efficacy of a treatment, outraged patients assume that insurers are simply trying to save money.

Ellwood's conversion

What we need, Ellwood concluded in his 2005 open letter to President Bush, is a federal institution "responsible for guiding . . . the health care system" by overseeing "the quality and value of health services."

Ellwood recognizes that this is a radical proposal — especially coming from the father of managed care. "Why," he asks "is such an intrusive, top-down proposal coming from the leader of the Jackson Hole Group, which arguably brought the United States its laissez-faire, market forces-based, HMO/managed-care health policies?"

He answers his own question: "I learned much during [the last] 17 years.... Currently, the medical industrial complex ruthlessly wields tremendous power, using it in ways that can harm the public."

As a check on that power, an independent agency, staffed with physicians and researchers who have no financial interest in any treatment, product, or procedure, is needed to oversee outcomes research. And that agency must be insulated from corporate lobbyists, politicians, and special interest groups.

Otherwise it will suffer the fate of the Agency for Healthcare Policy and Research (now the Agency for Healthcare Research and Quality) when it issued a report on the most effective care for back pain in the early 1990s.

The study was seen as an act of political suicide. It drew "such political fire from a small group of threatened orthopedists and neurosurgeons" that they almost succeeded in closing the agency, Ellwood recalls. Instead Congress slashed AHRQ's budget, rendering it nearly impotent. A new health care agency that oversees quality must not be dependent on Congress for funding, Ellwood warns. He suggests the Federal Reserve Board as a model.

The alternative: ruinous competition. Today, a Hobbesian war of "all against all" pits hospital against hospital, hospital against doctor, insurer against hospital, drugmaker against drugmaker, drugmaker against insurer, and as health care costs spiral, the game is getting rougher, making collaboration less and less likely.

Redundant and confused

Turf wars among specialists, an arms race among hospitals, billions spent on pharmaceutical ads rather than in pharmaceutical labs — these are just a few examples of how too much competition and too little collaboration have created a fractured health care system, riddled with redundancies, weighed down by high administrative costs, and shrouded in confusion.

In the end, it is crucial to remember that "The enemy is disease.... The competition that matters is against disease, not one another," Berwick reminds his audience in Escape Fire. Yet "in the storm of the health care crisis, it is easy to forget why we trouble ourselves in the first place. It is so easy — frighteningly easy — to become trapped in the sterile thesis . . . that our true, deep purpose is to gain and preserve market share in a vacant terrain of others whose purpose is precisely the same."

In other words, it is so very easy to forget the patient.

Before becoming a journalist, Maggie Mahar taught English literature at Yale University, then went on to become senior editor of Barron's. She wrote Bull! A History of the Boom, 1982–1999 — a book recommended by Warren Buffet in Berkshire Hathaway's 2003 annual report — and, most recently, Money-Driven Medicine: The Real Reason Health Care Costs So Much (HarperCollins, 2006). She lives in Manhattan where she is currently working on a new book while continuing to write about health care.