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Medicaid expansion often means a hollow benefit, says Scott Gottlieb, MD, a resident fellow at the American Enterprise Institute and a leading conservative expert on health care policy. And the exchanges are in trouble with little political support. But Gottlieb says there will be some reluctance for sweeping reform because of a “fatigue factor,” so targeting the exchanges may be the best way forward for Republicans.

Scott Gottlieb, MD, is a physician and resident fellow at the conservative American Enterprise Institute. He held senior positions at the FDA and CMS during the George W. Bush administration and helped oversee implementation of the Part D drug benefit. Gottlieb’s articles appear regularly in leading publications, including ForbesWall Street JournalNew York Times, and USA Today, and he is a guest commentator on the financial news channel CNBC and on Fox News. Gottlieb is a clinical assistant professor at the New York University School of Medicine in Manhattan.

Traditionally health care has not been a strong suit for Republicans. Do you see that being different this year?

I am not sure I would say it hasn’t been a strong suit for Republicans. In the past when people have evaluated the competing plans from different candidates, Republicans typically were at a disadvantage, insofar as a lot of the estimates that were made in terms of how many people would be insured by various plans always demonstrated or showed that the plans proposed by Democratic candidates would cover more people — in large measure because they relied on government programs to distribute benefits as opposed to relying on people to opt into receiving benefits. That, from a media standpoint, always disadvantaged Republicans and made it look like their plans were not as expansive.

I think that the reality is that what people now realize is that the plans proposed by Democrats don’t fulfill the expectations that were set out and don’t fulfill the estimates that were made at the outset after the experience with the Affordable Care Act. I think that the reality is going to be much different this year. I think people are going to put much less emphasis on those sort of binary estimates made by third party groups that, frankly, have lost a lot of credibility about how many people are going to be insured and what the savings is going to be and the impact on consumers. I think people are going to be more skeptical of those estimates and they are going to look into the details more carefully.

It is said over and over again by supporters of the ACA that whatever problems the law has, the number of Americans without insurance has gone down. Are you saying that characterization is wrong?

The simple arithmetic is not wrong but the reality is that the only reason that more Americans are insured today versus before the Affordable Care Act is because of the Medicaid expansion. If you look at the number of individuals who actually are purchasing private coverage in the market, only a small fraction — I think about 4 million people — are actually newly insured. The rest of the people who are getting private coverage through the exchanges are people who previously had private coverage and were transitioned into the exchanges, in many cases forcibly, because their plans were canceled.

If you look at the big expansion in coverage, most of it is Medicaid. I don’t really see it as a political victory or a victory on behalf of consumers to obligate a whole other large cohort of Americans to Medicaid, knowing that the Medicaid program is broken and failing a lot of patients. Medicaid, in many states, has become a hollow benefit where, sure, you have this basic promise of coverage and you have an expansive list of services that are purportedly covered, but when you go to actually use your Medicaid card or go to actually access care, you find you cannot find a provider and you cannot get access, especially to outpatient specialty care.

Why do you think the exchanges have failed?

You have a very intrusive, gratuitous law implemented by folks who, I think, wrote regulations that were even more intrusive into the functioning of the markets.

Are you talking here about the essential health benefits?

The Obamacare plans are not providing all the benefits that have been promised, much like Medicaid doesn’t, because the networks have become so narrow.

It is the essential health benefits. It is also the inability to offer plans outside a very narrow rating band. You don’t have any variety in terms of the types of plans that come up to be offered in the market. What happens is managed care companies try to design plans to back them into these narrow rating bands, rather than designing plans from the bottom up based on what they think the best benefit design is going to be for different consumers. If you do not have any competition in the market, you basically have a one-size-fits-all plan.

The other thing that I think was a big mistake was the caps on the medical-loss ratio. A lot of new plans enter the market and, initially, they are going to have higher costs. And so, they are going to need to spend a larger amount of their operating revenue on their overhead costs to enter the market. But if you tell a plan they can only spend 10% or 15% of all their revenue on operations, and they know that they are going to have to spend 20% or 30% for the first five or six years, or however long it takes to get started, that means they are going to have to sustain a loss for multiple years until they can get established in the market.

A lot of plans cannot do that. What you did not get was a lot of new start-up plans. You did not get a lot of investor capital coming in to start new plans. If you look at what happened under Part D or Medicare Advantage when those were first implemented, you literally got — I mean, in the case of Part D — you got thousands of new plans, many of which were started by investors. You also got a lot of investors pooling capital to start Medicare Advantage plans. You did not see that happening here.

Let’s pivot to the election and the Republican proposals. Paul Ryan has proposed a tax credit for individuals and families that would allow them to go into a market and buy health insurance. Do you think that’s a good idea?

Well, we put out a plan at the American Enterprise Institute that I think mirrors a lot about the aspects of what Paul Ryan put out. I think if you look at a lot of the plans being put out by conservatives and Republican legislators, they all contain very similar elements.

The idea of providing some form of tax subsidy directly to consumers to go into the market and purchase a basic level of care is an element of all those plans, and I think that is a good idea. I think giving states the ability to auto-enroll individuals into plans that will only cost the amount of the subsidy is also a good idea. The plan that we talked about at the American Enterprise Institute gives states the discretion to do that if they want to. That is why, if you look at the scoring on our plan that we put out, it actually shows a higher number of people being insured than even under the Affordable Care Act, because it gives states the discretion to auto-enroll people in basic coverage.

Now, the complaint from the left is going to be that well, the level of tax subsidy that you are providing isn’t enough to pay for all of the benefits that are mandated as part of Obamacare — and that’s true. But the reality is that the Obamacare plans are not providing all the benefits that have been promised, much like Medicaid doesn’t, because the networks have become so narrow and the formularies have become so narrow that, yes, people are promised their essential health benefits but they are going to have a hard time accessing all of them.

I read a piece in which you critiqued one thing that Donald Trump has proposed — the importation of drugs as a way to deal with high prices.

The importation of drugs was proposed at a much different time, when senior citizens did not have access to coverage and a lot of seniors were going to Canada, when the exchange rate between Canada and the U.S. was very different so price differences were sharper, and where the drug companies did not control the supply of drugs into Canada. It was easy to pull supply out of Canada into the U.S. All those things don’t exist anymore and so they all will diminish the margin gained, if you will, between the U.S. and the Canadian purchased drugs.

I don’t think any candidate or politician would do this outside of any kind of regulated scheme. The regulation itself would add so much cost to the imported drugs that it would just really extinguish any potential savings. So, I don’t think it’s a real viable way to address the underlying issue that I think could be addressed more directly.

More directly, I think you were talking about some scheme that would base drug prices on value. Correct?

Well, it would allow drug prices to adjust more readily. We are talking essentially about Part D, also Part B, where drugs have one price in the market, regardless of how they are being used, or that drugs are priced based on volume rather than the indication for which they are being prescribed or the outcome they achieve. You cannot adjust a drug price because of all the regulation. What we propose is providing more flexibility and reforming some of these rules to allow companies to reprice drugs based, for example, on how it might be being prescribed.

You can argue, well, why would the company discount for one purpose and not discount for another if it wasn’t going to help them in the end? Maybe that’s true. Maybe the incentive of the drug companies would be to use selective discounting to try to maximize their profits. Obviously, that is their financial incentive.

But, if the mechanisms existed, it would allow the purchasers to put pressure on the drug companies to discount. I think that’s where you get vigorous competition, because some big purchaser could say look, I’ll use your drug for this indication. I will put it on my formulary but clearly it’s not providing as much benefit for this user than it is providing for that user. So, whenever it is used for this lower value indication, you are going to have to sell it to me at a different price — otherwise, I’m not putting it on my formulary at all. You will get that kind of negotiation if the laws allowed it. Right now they don’t allow it.

What we propose is a series of changes at both CMS and FDA, as well as the Office of the Inspector General, to allow more flexibility in that regard.

One thing that struck me is that under the ACA and the years of the Obama administration, large influential players and interest groups in health care have done very well as sectors: insurance companies, hospitals. I am just wondering — Ryan, your group — have come up with these market-based proposals, but say there is a Trump presidency and the Republicans hang on to majorities in the House and Senate. Which interest groups are going to sort of whack away at these proposals of yours? I am interested in you putting some of these ideas of market-based solutions through the filter of interest group politics.

I disagree with you. I don’t think that the different constituencies in health care have made out particularly well under the Affordable Care Act, and patients have made out the worst, let’s be honest, and so have providers. I think that there are a lot of elements of the health care market that haven’t done well, and entrepreneurs certainly have not done well.

That said, there will be some reluctance, I think, of a lot of these constituencies to embrace a new plan, in large measure I think, because of the fatigue. They are going to say, look, we don’t like the Affordable Care Act, but it is a structure we have now accommodated our systems to and if you go and change it again on us it’s going to take another five years to rejigger the market and there is going to be dislocation.

The fatigue factor is going to be a bigger issue than the who-wins-and-who-loses factor this time around.

I will accept your analysis that there is going to be fatigue rather than winners or losers. Who is most fatigued and therefore the most likely resist change?

It depends on how big your proposal is. If you try to do what has been proposed by AEI or Paul Ryan, where you address all the different elements of health care, you address Medicaid and Medicare as well as the exchange based sort of private market, there is going to be probably more pushback to that, versus if you just try to address exchanges. I think there is a recognition that the exchange element is not working.

At the same time, I think a lot of consumers, even those who are on Obamacare who are getting coverage through the exchanges, are not happy with it. It is expensive. The networks are narrow. The formularies are restrictive. It is not a good product. I think that if you targeted your reform or your replacement to just address what Obamacare tried to do under the exchanges, it will be easier to get through it. There is really no constituency in my view, other than a political constituency that is wildly supportive of the status quo as it was created by the Affordable Care Act.

Do you see the consolidation of providers and insurers as a trend separate and apart from the ACA that has to do with managing health in a different way or is a product of the ACA?

I think the consolidation is a product of the payment reforms that were embedded in the Affordable Care Act, but those payment reforms have been done on a bipartisan basis and they have been recodified. So, a lot of the elements of the Affordable Care Act that dealt with how we were going to change payment to providers were recodified under MACRA. So, this has been done on a bipartisan basis. There is a sort of urge to push risk onto providers and to find ways to capitate providers to either bundled payment arrangements or ACOs.

I think bundled payment arrangements are going to be the ultimate arrangement that prevails. But, in order to transfer risk to providers, you need to get providers practicing in large enough units that they are capable of taking that risk. So, you want to force providers to consolidate. So, you create financial inducements for providers to consolidate. That is exactly what is happening.

The single biggest troubling change as a result of the ACA is the consolidation of providers.

The reality is that the most likely vehicle for provider consolidation is the hospitals, because there is no private capital coming into the market to do this. So, you are seeing providers consolidate around hospitals. You are seeing the creation of these large health systems where they sort of monopolize the provision of care within local markets. I think this is an extreme problem. I think it is going to drive up costs in the future.

You are extinguishing local market competition between providers. It is going to make it harder to refashion a market-based alternative to Obamacare once you have basically regional monopolies over the provision of care. I think that this is the single biggest troubling secular change as a result of the Affordable Care Act, is the consolidation of providers. It is going to be very hard to unwind this. It has been done on a bipartisan basis. As much as some probably might like to blame Obamacare for the consolidation, I think MACRA is as much of a culprit behind this as the Affordable Care Act.

Capitation and consumer-directed health care — if both of those are cost containment vehicles — do you see them as in conflict or compatible or what?

I think you can have both existing in the market. You can have providers taking capitated risk in certain instances and being the sort of nexus of the cost consideration, because they are capitated and they are on the hook for the actuarial risk of the provision of care, and you can have consumers exposed to some of the costs of their choices so that they are taking costs into consideration. You could have both exist within the same construct and frankly, that would be preferable because that would be a more diverse and competitive market.

I think that at a political level, the idea of consumer-directed health care is so antithetical to progressives that they did everything they could to dismantle those constructs and move the market toward capitated arrangements, where now providers were going to be the ones taking the consideration. To me, that is the worst possible outcome. I think it is more preferable to have the government do it, because at least if the government does it, you see what the government is doing.

If the government imposes a law saying you cannot get access to treatment X, everyone is going to know it, and they have the right to vote out the government. But when the doctor is the one considering costs, it is much more furtive. It is not as transparent to the patient what kinds of considerations might be being made by the provider or the hospital system. I am not saying providers are sinister. I am just saying that they are not going to sit at every point and explain why they made certain decisions based on certain considerations of costs because they are on the hook for the actuarial cost of the decision that they are making.

That is pretty amazing what you are saying — that there is something cloudy and nontransparent about this thing that everybody loves, which is alignment between delivery and cost.

Well, the alignment is one perceived outcome of capitation. The perception is if you transfer risk to providers, they have got to magically align and they are going to introduce all these innovations on how they are delivering care to better coordinate care. That does not necessarily happen. I mean, if you look at a lot of innovation in health care services and where it has come from, it has not come out of large integrated delivery systems. It has come out of entrepreneurial vehicles that pioneered new concepts that were eventually taken up by large integrated delivery systems.

The Mayo Clinic is not the answer for us?

The Mayo Clinic is the answer for their market and there are a lot of markets that function very differently. That is the problem with living in a large diverse country and trying to create a one-size solution from Washington. If you listen to the president’s speeches on Obamacare, I don’t think there was a single speech in advance of its passage that didn’t reference Kaiser, the Mayo Clinic, Intermountain Health, Geisinger, one of those systems. That was the model for the Affordable Care Act.

You are not going to go into every market and recreate a Geisinger or a Mayo Clinic. And, you know what, there are challenges with Geisinger and Mayo Clinic as well. We have not had a full telling of the story of those entities either. They have their own challenges. But they also have unique attributes. They have unique management. They have unique markets. You are not going to be able to replicate that everywhere.

The transcript of this interview has been edited for length and clarity.
Managing Editor Frank Diamond assisted with the interview.