Podcast

speaker-0 (00:00.11)
Welcome to On Background, a podcast where we talk to health policy professionals who served in the federal government. And now that they’re out, they can actually tell us the truth about how everything works. My name is Matt Stoll. I’m joined today by Brianna Meyra. I’m joined today by Brianna Mayer, a pharmaceutical professional. Steve Parente, health economist extraordinaire. And Tom Gunderson, ex-health care analyst for Piper Jaffrey, now Piper Sandler.

who retired and now he only sits on two public boards instead of five. And today we’re joined by Joe Antos, Senior Fellow Emeritus at the American Enterprise Institute. Hello, Joe, thanks for joining us.

Thank you.

Joe, really thrilled that you’re joining us today. One thing that’s always fun is just, it’s great to sort of out a fellow Rochesterian alumnus, you know, from ways back. So at least the economics training. so Joe has been around and someone I’ve worked with a lot in DC over the years, the American Enterprise Institute, which I still think is at the forefront of a lot of what thinking for health policy analysis in this town. Previously, Joe served in.

Medicare and Medicaid services back when it was HIPAA, back in the glorious days of the great healthcare financing administration. At least then it wasn’t confused, right? So it’s like CMS, there’s only one but really Medicare and Medicaid services, it’s always a strange thing. guess, Joe, did you ever hear what Gail Walensky said when they were looking at the name change in 2000, what the original idea was and why they decided against it?

speaker-1 (01:29.814)
actually.

I think it was supposed to be originally the Medicare and Medicaid agency, otherwise known as Mama.

That’s really nice.

that that did not work. did not want to position to be told what their rates are going to be from mama. So maybe papa would be better.

Well, ironically, old name actually is now more appropriate than CMS because CMS now controls all of health insurance. Yes. Or at least a good part of the private sector. Yes.

speaker-2 (02:03.214)
by bits of accident and budgetary processes. So Joe, you have been recently writing a lot about how healthcare costs have been going up and up, which I think we’ve all, you and I had interacted with variety of people over the years where there’s the sense of like, when is enough enough in terms of the percent of the GDP. I guess, let me just, I’m gonna ask a more hopeful question. Do you see anything right now on the horizon nationally that gives you hope as to how this

We know the industry is enormously innovative, but from just a macroeconomics perspective, anything that you see on the horizon that’s hopeful.

Well, you know, I think it’s a stretch, certainly not in the short term, but AI. Everybody talks about AI. The entire health industry is enamored with two letters. What they do is a big question. I mean, there’s certain applications that make sense. An awful lot of administrative work really could be done accurately rather than inaccurately, quickly rather than taking forever, at much lower cost.

if we could train the AI systems to do it. Of course, that requires input of data, and that’s one of our problems. Data, not just billing data, but all kinds of data in the health sector is really inferior compared to industries that are data-driven. The health industry ought to be data-driven. It’s data-driven by mistake.

I’ll follow up one thing that I’m going to hand the baton to Tom. I mean, so you and I know you folks have had me do rework with you on health IT and its innovation. think sadly that report I did with your colleague, Tom Miller, I think now probably nearly it might be 15 years, 16 years ago since I wrote that with Tom. mean, there hasn’t been much that’s changed other than the fact that we can say there’s AI, but the data, there was all this investment that was going to come, but the data remains siloed.

speaker-2 (04:01.122)
Deliberately so, after all that investment, is, hope sometimes people will figure that out, that we have the data, we just don’t have the mechanisms to move it in a useful way. Tom, over to you.

Joe, one of the things Steve did for us is send us a couple of articles that are on pricing. I’m going to go a little off script and I looked at one of your previous chats and was struck by as everybody was kind of getting tangled up in numbers and data and economics, micro and macro. You came out and said, well, remember what we’re looking for is efficiencies that help the patient. Let’s not forget the patient in all of this. And I was struck by that because.

As an analyst for med tech companies, a lot of times we were forced to look at revenues and innovation and R and D and it’s cetera, but the patient kind of didn’t make the equation as often as it maybe should have. The question I have for you is based on that. Can you give me it’s mom and apple pie to say we need to be more efficient. What tangible examples can you see either in recent past or coming up in the future that would help.

on efficiency. Second, do you think patients are better off? How do you think they compare to where they were four years ago when you had this chat and where they are today?

Well, know, the problem with the word efficiency is it depends on who you are and basically what aspect of either insurance or healthcare delivery that you’re focusing on. You know, one important aspect of efficiency, healthcare delivery. So the substitution of advanced practice nurses for much higher cost and much harder to get physician specialists, that’s an improvement.

speaker-1 (05:49.088)
at terms of medical devices, the obvious example of course is stents. You know, we’ve saved a lot of people. Now, not a surprise. When you save people, it adds to cost. It doesn’t reduce cost. You know, that’s part of it. It could really be efficient if we just killed all those old people, but that’s not a good idea. Well, I’m speaking personally now. So, you know, there is this trade-off, yeah, yeah, think of it terms of personnel.

Think in terms of practice. Think in terms of also testing. We have a lot of testing in this country, medical testing in this country. And frankly, there are many, many examples where testing is not appropriate, but is driven by the economics of the situation. For healthy people, do they need, now we’re not talking about us older people like myself, but people in their 30s.

Do they need an annual checkup? That’s what the AMA says. Common Sense strongly suggests that it’s not really that wrong to skip that annual checkup if you had one and basically there was nothing wrong with you and you didn’t deteriorate in the ways that people deteriorate. You basically held your own for a while. Well, skip the next one. They’ll save you money, but it also takes some of the waiting list. It reduces the waiting list for the doctor.

But another good example, something that I’ve focused on a lot in the last few years, there are certain kinds of tests where the usefulness is not clear from a medical standpoint. And the classic example, which goes back decades, economists and others have pointed to this for decades, Jack Wenberg made this point too, the PSA test.

It’s not indicative of cancer in men in any reliable way. There’s a lot of variation in the average test result. It varies by all sorts of things, age or genetic, certain aspects of your genetic background and so on. And so there are really no strong standards there. But what it does is above a certain age, certainly above 65, men will get a PSA test.

speaker-1 (08:11.366)
And almost invariably, you’ll be told, well, you know, it’s a little elevated. We should do something more to check this. And that something more might be painless from a physical standpoint, but painful from a financial standpoint to the system. MRIs are very popular because they’re, who’s going to turn on an MRI? The insurance paid for it. And you know, I’ll find out something more. Well, A, you don’t really find out that much more. And indeed you did pay for it.

Just because you don’t know you paid for it, you didn’t, so did everybody else. So it’s, you know, this is maybe an extreme example, but it’s also a very common example. It happens basically to most men when they get into their sixties. And if they’re not skeptical people, like the people on this program, they’re likely to say, yeah, sure. I’ll come back for another test. Thinking, well, it won’t do any harm, but…

In fact, at some point it might well then cause for a more aggressive intervention, which might not actually improve the health of the patient and might in fact make it worse. So we have these, this is a common example. There are, you know, I’m not arguing against testing, but we want to be sensible about who we test for what, and then in particular, how we interpret the results and then what do we need go for.

Thanks.

Joe, oversaw the study that created Medicare’s physician payment mechanism in the 80s and then oversaw that implementation in the 90s. Can you?

speaker-2 (09:42.958)
I wish we had video. I wish we had video. mean, it’s not polite to describe what we’re seeing from gestures right now, but go ahead.

Can you describe how the physician payment mechanisms have changed and evolved in the last three decades?

Okay, well, I want to be clear with you and the audience that just because I was, I don’t know what you’d call it, I could call it the project officer at what is now called CMS for this study that then became policy.

used to be called Godfather, but that’s it’s a new time there.

Yeah, exactly. Doesn’t mean that I actually agree with it. I fought it every step of the way, lost. Physicians are paid under the Medicare program under something called the Resource-Based Relative Value Scale. Now, I’m not going to get into the details. I’m just going to give an example of how pricing actually occurs in the real world, not in healthcare. When you go to the grocery store and you’re looking at cereal and you find your favorite brand,

speaker-1 (10:49.588)
You see a price there. And what is that price based on? Well, of course, it costs money to produce the cereal, package it, ship it, and so on. There’s rental costs, kind of in the sense of electricity in the supermarket and that sort of thing, staff in the supermarket as well. But in fact, how is that price actually determined? it depends on how much the consumers actually want to pay for it. Do they really love this product? And they were willing to

a lot of money? Are they going to be a little tight on it? Now, I bring up serial because everybody understands that you have lots of choices and you have lots of different prices and you, you know, pick the one you want. A key point is that you’re paying out of your own pocket, you know it. And you’re paying the full price, whatever it is. Okay, now, what about, what about physician services? Well, A, we’re not exactly sure what we’re buying, but B, I don’t get to indicate in any way and neither does any other consumer.

get to indicate how much they would be willing to pay for that service. And instead, this resource-based relative value scale only looks at all of those costs. They’re legitimate costs, if they’re measured properly, but it ignores, that’s the supply side of it. It ignores the demand side. And so what you have is really a completely unbalanced.

situation and because the American Medical Association is a major player in determining the so-called relative values, what that means is, I’ll give you an example, a relative value would be how much more would you pay a specialist, heart specialist over a primary care person. And the way to think about that is that if somebody’s doing heart surgery, that requires a lot of training, but it’s also

An extremely stressful situation not just for the patient, but truly for the physician and the staff and so on. There’s a lot that goes into it. You would naturally think that the heart surgeon should get paid more than the primary care physician for a given service. But it’s hard to say, well, how do you make that comparison? Because what is the primary care guy is not going into my chest. So you really can’t make those comparisons.

speaker-1 (13:09.622)
Net result is that we have a non-market system that is largely driven by the politics of the medical sector, and in particular, the relative strengths of specialists versus primary care. Oddly, specialists win. Now, I’m not arguing that they shouldn’t get paid more. I’m arguing that this is a system that makes it very difficult for the market demand to reveal itself. What does the market want? What do we always complain about?

We can’t get that first appointment. It’s very hard to get appointments with primary care docs. If you lose your primary care doc, good luck finding the next one. Very difficult to find. I’ve had this experience, by the way. Once you turn over 65, you become unwanted if you’re in Medicare, because of course, Medicare is the price controller, so they pay less than commercial insurers. If you don’t have commercial insurance and you lose your primary care doc,

Well, there’s a reason why when you call and you want to be a new patient, the first question they ask is not where you live, but what insurance do you have? And you might get an appointment and you might get one in another year. Who knows? So it’s a really messed up situation that ignores the basic understanding that in a market economy, what matters is in essence, not just the cost of producing something, but also how much do people want to pay?

Is this a very valuable product or service that they’re willing to pay more for? And of course, insurance gets in the way of this because the average person, the average economist really doesn’t know what they’re paying. And they tend to think of it, going on a little bit too long here, they tend to think of it in terms of what am I paying out of pocket? So it’s that $20 copayment rather than the full charge that I’m paying, which is hidden inside of the premiums that I paid for my insurance.

Great. Matt, over to you.

speaker-0 (15:07.126)
back to, Tom was mentioning the articles you had on cost and you talked about drug shortages, I think particularly and referred to Marta Wyszynska and Richard Frank’s paper on manufacturing and how to stop shortages in the generic drug market. think it was specifically on generic sterile injectables. So the Trump administration put out an executive order looking for most favored nation status. And I know that’s running into legal difficulties. How would

Would MFN help curtail some of the cost issues and supply issues that we see in the pharmaceutical market?

Well, you know, there’s nothing like price controls to improve a functioning market. Yeah, absolutely. We all believe that in Washington. you know, the problem with most favored nation, well, maybe we’ll go back to what does it actually mean? And this fits, unfortunately, very well with the current presidential administration. Donald Trump, as you know, as we all know, is very concerned about making sure that America doesn’t get a raw deal.

That’s what I hear.

speaker-1 (16:12.854)
when it buys products or services from other countries. And that might seem kind of plausible. you know, whether applying tariffs really gets you a better deal or not, we’re not discussing that. But let’s talk about prescription drugs and this most favored nation idea. It’s very similar kind of an idea to the tariff policy. And it basically boils down to, well, we shouldn’t be paying more than those European nations because

After all, A, a lot of the innovation occurred here. B, since we paid for a lot of that innovation, why should we also then bear the higher burden of healthcare, of costs for prescription drugs? And isn’t Germany getting a free ride? And that’s basically the idea. eight, one of the many problems is access to new products. And so in the case of Germany, the one that I kind of know the best, if a pharmaceutical country…

company wants to introduce a new medicine, they can do so. They have a period of time, I think it might be a year or two, to offer it. But eventually there is a regulatory board that determines what it’s worth. Now, it’s interesting that it’s the regulatory board that determines what it’s worth, and it’s relative to existing treatments. And there’s an attempt to adjust a little bit for that the new treatment might

be better in some respect, but that is a very, very hard thing to put a dollar number on because new treatments often do work better in some ways, but may have other side effects, other problems, may not be applicable to everybody with a certain disease and so on. It’s a very complicated thing, but government regulatory bodies can cut through all of that confusion by just saying, okay, we’ll let you sell it in Germany, but you’re going to have to give us an X percent discount.

and take it or leave it. Because if you don’t give us that discount, then you won’t be able to sell it at all. In contrast, in this country, we don’t have that system. We tend to believe that if any company has produced a product that consumers want to buy or that doctors want to prescribe and that works very well and fact works better than what’s already available, that American patients ought to be able to have access to that. And we could turn that around by adopting most favored nation.

speaker-1 (18:37.1)
because we would basically be adopting the processes that we see in Europe that limit the entrance of new products into the market. And it’s not just that it’s going to limit what’s now available or what becomes available in the short term, but it’s a strong signal that we should not invest in innovation in the drug industry or for that matter, the device industry.

Or for that matter, the research into kind of the hands-on treatment. How do doctors do complicated things? It’s not just devices and drugs. It’s also, we’re going to undermine medical education in this country. Because of course, if you learn to do something more sophisticated, you might want to charge more. Well, that is kind of antithetic to what we’ve all thought we wanted on our health system, which is an efficient system that actually works.

that actually produces good results, but ideally does it in an efficient way that doesn’t end up costing us money unnecessarily. And it’s the unnecessarily part that’s really important. So we’re paying for access and we can reduce our payment for access, but if we do that, we’ll reduce our access.

Follow up on that question. You talk about we’re paying for access and we’re, how do I put this? In the G20, we pay the most of any other developed country for the worst outcomes. So on paper, that’s a system engineered for profit, not for health. So how do you reconcile that?

Well, I’ve always found this comparison to be not very useful.

speaker-1 (20:19.342)
Part of the issue is that we buy a lot of things in this country at very high prices, partly because we can. It’s a very wealthy country. We don’t have to stint. We don’t have to tighten our belts that much. We’re very fortunate in that regard. But we’re also buying convenience. This is sort of saying, well, everybody should be buying that cheap flip phone that we had 20 years ago because it’s cheaper and that’ll keep our costs down.

instead of going to a phone that really has a lot of uses. There’s a reason why people buy iPhones, even though they probably are overpriced compared to their competitors. But there’s a reason for it. Is it the look? Maybe it’s the functionality? Whatever the reason is, it’s a consumer-driven market. And to some extent, a lot of what we do in healthcare is also consumer-driven, ideally informed by a knowledgeable physician.

But there’s a lot of consumer demand in what we do. In Europe, the consumer is kind of the last thought. in particular in Britain, we see on an all too frequent basis strikes in the National Health Service. And that’s not just a question of having, you know, having to just go to somewhere else in the National Health Service. If there’s a strike, there’s nowhere else to go. Many European countries solve that problem by selling private insurance.

So you can go to a doctor who may be in the National Health Service, but runs a private practice, and you’ll buy your way into greater access, but you don’t necessarily get full access. so, you know, to make a long story short, we may be spending money inappropriately, certainly inefficiently compared to European countries in many ways, but part of it is driven by a physician and consumer demand.

Part of it is the inefficiency of our paperwork system, which is not hidden in a government program that doesn’t count as health insurance or doesn’t count as health expenditures. That’s the other thing that I guess I didn’t articulate very well. All of our health expenditures, including the administrative expenses, we count as health expenditures. In many European countries, the administrative costs may not show up in the national health accounts in quite the same way.

speaker-1 (22:41.376)
It’s hard to say, and certainly the waiting periods and so on for waiting for that specialty treatment is certainly not factored in any monetary way in European countries or Canada for that matter, getting an MRI is really very, very difficult unless you’re extremely ill. Whereas getting an MRI in this country is a walk in the park as long as you have insurance and you can cover the rest of the cost.

taking it back to pharmaceutical costs. by your logic, we’re paying more for pharma because we can because they can charge it. I mean, just for reference, Lilly did what 10 billion in net income on 40, 45 billion in revenue last year. And I know a lot of it’s being juiced by the GLP ones right now. Nobody’s starving it at Lilly. There’s plenty of powder for innovation. Even if you cut that back devil’s advocate.

There’s plenty of room to drop pharmaceutical prices and nobody at Eli Lilly starves. So it looks extortionist on paper.

Well, the question is, who do you want to extort and who wants to be the extortionist?

I mean, on paper, I don’t want the American people to be the extortionists or extortees because it’s coming out of our pockets.

speaker-1 (24:04.15)
So the issue really has to do with the highly uncompetitive nature of health insurance in this country and the dominance of the Medicare program for people over 65. People do not understand what they’re paying for when it comes to health insurance in this country. Several reasons for that. Most people under 65 or who are working at any age have coverage through their employer. And so a large part of the cost of that

coverage is paid for by employers, paid for in quotes by employers. What that really means is that it’s taken out of your pay because your salary would have been higher had you simply paid the full shot of the premium. So the first problem is that people with employer coverage don’t really know how much they’re paying for their insurance. They tend to think that it’s the premium that’s coming out of their paycheck every two weeks or every month. That used to be true. Now,

People are not even clear about how much is coming out of their paycheck because we don’t have, it’s all done electronically. And what does, what do people think about? They think about what’s leftover to spend. They tend not to think, well, how much came out for state taxes, for Medicare and Social Security taxes, for federal taxes and for insurance and for other things. They’re just looking at the bottom line. So we have a situation that really funnels people into

health insurance products that tend to be very generous and maybe more generous than certainly lower wage workers would be willing to pay if they had the choice. So that’s part of the problem. We have a system that drives us to spend more for what might be more convenience or greater access, but it’s spend more. This trade-off that we see in the supermarket between the name brand Rice Krispies and the store brand

Price Crispies doesn’t happen in healthcare, doesn’t happen in health insurance very often, certainly not in employer sponsored, it’s in employer sponsored care. On top of that.

speaker-2 (26:12.366)
I want to get Tom a chance to get in a question, but Tom is like, no, no, keep going.

Okay, so that, mean, one other factor that is often overlooked is that the federal government does not tax the employer for an important part of the compensation of its employees, namely its contribution to the cost of health insurance, which is a very, very sizable number. I think the average cost of health insurance family plan is around $22,000, $23,000 a year now for employer coverage.

I have to say, just as a FYI, Joe, know, kind of last administration was in the White House. I did try to at least see if we can put in the economic reports of the president just like, here’s an idea. This is actually something you and AEI sponsored when Chuck Thompson and came and talked there about if we get rid of the exclusion and return it as a drop in marginal tax rates across the board to try to like right size the market, if you recall.

And that actually stayed in the economic report to the president all through the staff sec review process of the administration until five hours before final publication deadline when it was personally removed by the treasury secretary of a Republican administration to have one of the largest marginal tax rate reductions ever. Not this administration, but a previous one. I mean, I guess my question to you, Joe, and you’ve been around this town a lot, so this is like, why?

is why we know why Medicare is a third rail. Why is the employer sponsored exclusion still or has become a third rail? mean, you know, I know the McCain campaign got ridiculed by it, but I mean, it’s the largest, largest subsidy this country has. It’s bigger than mortgage. It contributes to all the issues that are saying that are wasteful. think too, I think you’re in agreement probably with that. mean, yeah. Why is it a third rail?

speaker-1 (28:04.716)
Why is it a trail? Right. So the number’s $300 billion. A year. So, you know, why do we stick with this? I think it has something to do with, well, we’ve been doing it for so long, we couldn’t imagine doing anything else. It’s human nature. I regret it.

Right, a year, a year.

speaker-0 (28:27.022)
quick, if I’m cynical, it’s leverage. Right? I mean, if you if you decouple self insurance from employment, you give employers less to offer their employees in retention, and I guess in attraction and retention.

Well, exactly. But let’s go back to the f****s when this really came on strong in the United States. And the answer actually was not the employers, it was the unions. The unions really wanted this benefit. This was a good bargaining point with employers. And I’m not arguing that health insurance is a bad idea. I think it is a good idea. But I’m just saying that answering Steve’s question, why are we doing this? answer is that it started…

with union pressure because they needed another sort of argument in terms of collective bargaining. And obviously it’s pulled back quite a bit, but the tradition is still there. And I don’t see it going away anytime soon. And in particular, because members of Congress and presidents really don’t want to touch this because this is not a health issue. This is a political issue. This is a, am I going to get elected again next time? This is, this is, this is.

one of the third rails that they’re not gonna be able to touch until we have a true crisis. And you know, it’s right around the corner.

speaker-4 (30:36.28)
favored nation drug policy and kind of what that discussion looked like. But I know that might be a long answer.

I don’t know. Sure. Let me make a quick comment about GLP-1s though. You know, $900, Liz Price, what does that mean? The fact is that the actual price that a lot of people were paying for quite some time until recently when the FDA has been clamping down has been in the small hundreds. And because they’re buying them from compounding pharmacies, which are not fly-by-not operations operating out of

somebody’s garage. They’re legitimate organizations with reasonable standards. They’re producing what is essentially a, you know, after the innovation, this is a product that is relatively simple to produce. And so lo and behold, for a few brief months, we had competition. And now, thank God for the government, we’re eliminating them.

The from the manufacturer is not what the consumer most often thinks.

But the 270 is way more than it needs to be. mean, it’ll… Look, there will be downward pressure all along. I mean, assuming that people find that this really does work for them and there aren’t horrible things that we don’t know about now. But the fact is that because of the government intervention, it’ll never get down to a true competitive price.

speaker-2 (32:02.606)
Actually, Tom, do you have anything that you want to wrap us up with? Because I know you’re thinking about something. I could just see it there.

speaker-1 (33:12.814)
Yeah, I think this also brings up the point that, a lot of it in this country is driven by what consumers want, not by what bureaucrats want. And you’re absolutely right. Consumers do not want to stick a needle in themselves. They want a pill. that, apparently, as a scientific transition, that’s a very difficult thing to do. That’s going to be accomplished because that’s what consumers want, and that’s what they’ll pay for.

That is a functioning market. mean, I guess for all the regulatory stuff deserve there is still the drive for innovation for another form of convenience, however we’re going to do it. And, you know, it is fortunate we live in a wealthy country that actually is more or less, we will the venture banking structure for most medical innovation in the entire world. You know, whenever we are, whenever we have our students look at early stage med tech, it’s always basically of a target to figure out what’s the reimbursement strategy.

And it’s usually not to sort of say, well, what’s the reimbursement strategy that’s going to improve health outcomes and basically make us, you know, have the GDP to bet ratio of, you know, Malaysia is that’s, that’s, that’s typically not what we’re looking for. But Joe, I just want to thank you on behalf of the whole team here at OnBackground for this. And I, I, we do want to invite you back to have a further conversation and really appreciate your, your insights into this. And if nothing else, a lot of truth telling along the way as well. So thank you.

Thank you very much, I look forward to.