"Big Buyers Push for Steep Cuts From Drug Makers" - Why Is This News?

An article in the Wall Street Journal today had the headline, "Big Buyers Push for Steep Cuts From Drug Makers." Most of the article focussed on how the US Department of Veterans Affairs (VA) has negotiated discounts from pharmaceutical companies. However, the article also reported that private health insurers are also beginning to negotiate drug prices, " Innoviant, a pharmacy-benefits manager in Wisconsin, has negotiated price cuts in blood-pressure pills called angiotensin-receptor blockers. And a handful of large insurers -- including UnitedHealth Group Inc., Humana Inc. and WellPoint Inc. -- that signed up the majority of Medicare beneficiaries for drug plans are now negotiating deals with manufacturers for preferred medicines for 2007."

So why is this news? Health care costs in the use now approach $1.9 trillion. Health care cost increases have exceeded inflation for the last 25 years. Pharmaceuticals account for an ever-increasing proportion of that ever rising cost. (See the statistics here, courtesy the Kaiser Family Foundation.)

The mission of managed care companies is to control costs. UnitedHealth's mission statement includes the goal to "make health care more affordable." "Humana is committed to helping employers moderate their health care costs," according to its web-site. And Wellpoint seeks to "to improve health and health care costs." Why are they just now getting around to negotiating drug prices?

Instead of negotiating hard with pharmaceutical companies, insurers, managed care organizations, and Medicare mainly seem to have targeted physicians, particularly primary care physicians. A new report by the Center for Studying Health System Change showed that "between 1995 and 2003, average physician net income from the practice of medicine declined about 7 percent after adjusting for inflation...." Furthermore, "primary care physicians - already the lowest earning of all physicians - have lost substantial ground (-10.2%) to inflation since the mid-1990s." The reason seemed to be "flat or declining fees from both public and private payers [which] appear to be a major factor underlying declining or stagnating real incomes for physicians. Medicare payment rate increases for physicians amounted to 13 percent from 1995 to 2003, lagging substantially behind inflation, which totaled 21 percent during this eight-year period. While Medicare fees have declined in real terms since the mid-1990s, the trend for private insurer payments has lagged even more. "

It remains a mystery why managed care and Medicare have centered their cost reduction efforts for so long on physicians, and particularly on the least well paid physicians, while apparently willingly paying out ever more for pharmaceuticals, and other health care services. Conspiracy theorists are welcome to have at this. But it might have something to do with leadership of insurers, managed care organizations, and government agencies not really understanding the reality of health care on the ground, and not being rewarded for making it better?

However, the effects of continuing decreases in primary care physicians' reimbursements have not been mysterious. Fewer medical school graduates are going into primary care. Primary care physicians are retiring early. The overall supply of primary care physicians is dropping. As the CHSC report put it, "downward pressure on incomes is also likely linked to the movement of physicians away from primary care." So if this trend continues, soon we will have a health care system that will pay for patients' expensive drugs, but those patients will not have personal physicians who could prescribe them. What sense does that make?