Experts forecast continuing crisis in health care costs

By DON McINTOSH, Staff Reporter

At a day-long April 23 conference in Portland, health care experts told some of Oregon's top labor leaders that they see no end in sight to double-digit annual increases in health care costs. Those increases have become the most serious threat to workers' wages, and paying for health care has become the most contentious issue in union contract negotiations.

"Health care is a dysfunctional economy," said Barney Speight, a Kaiser Permanente health policy expert who has worked for the Oregon Health Plan. "We [in the United States] pay more than anyone else, but it's not well spent. We have 18 percent and rising uninsured. Many who are insured have poor access. And many who have good coverage worry about whether they will still have good coverage in three to five years."

Speight and others identified numerous factors driving the increases in costs: An aging population requires more care; physicians order more tests to avoid being sued for malpractice; hospital administrators want to buy the latest, most expensive medical technology; a growing labor shortage in health care is leading to rising labor costs; and Medicare and Medicaid cap payments and the growing number of uninsured don't always pay their way, thus shifting costs to other payers.

The biggest factor in rising health care costs, however, is increased spending on prescription drugs. Drug costs are going up an average of 13 to 18 percent a year; in 2001, the increase was 17.1 percent.

According to a study by the non-profit National Institute for Health Care Management, spending on drugs increased last year for three reasons: more prescriptions were written; prescriptions were shifted to newer, more costly drugs; and the average price of prescriptions jumped 10 percent.

The "market" for pharmaceuticals is unlike any other, explained pharmacy benefit consultant Craig Stern. Public money supports much of the initial stages of new drug research, but then drug companies complete the development of the drugs and get a 17-year monopoly under U.S. patent laws. Unlike other industries where the price of products is based on a "cost-plus" formula - the cost to produce a product plus a reasonable profit - pricing in pharmaceuticals seems to be based on what the payer is willing to pay, Stern said. Thus, prices for the same drugs vary enormously depending on who is paying, and where.

This has contributed to the unrivaled profitability of the pharmaceutical industry. On average, the top 10 U.S. drug makers reported 18.5 cents profit on every $1 of sales last year, eight times higher than the median for industries represented in the Fortune 500. And while the overall profits of Fortune 500 companies declined by 53 percent last year due to the recession, profits of the top 10 U.S. drug makers increased by 33 percent.

Drug expert Gerry Purcell said new direct-to-consumer advertising, allowed only since 1997, is succeeding in creating demand for expensive new drugs that may work only marginally better than previous older drugs.

More and more, Purcell said, patients are seeking treatment, and doctors are writing prescriptions, for chronic conditions like allergies, asthma, and depression. And the drugs they prescribe treat symptoms, rather than cure the conditions. Purcell said today about 60 percent of visits to the doctor result in prescriptions being written, and for every 100 office visits, 146 drugs are prescribed.

"When the annual growth rate of the cost of any economic endeavor consistently exceeds a society's capacity to generate wealth or levy taxes, then something's got to give," Speight said.

What's giving, at those companies that provide health care, is worker wages and employer profits, as well as quality of coverage.

A recent survey by the Oregon AFL-CIO of 41 affiliate unions found that over the last five years most unions have accepted wage increases below the increase in the consumer price index in order to maintain employer responsibility for health care costs. The survey found that in order to contain costs, union health trusts and employer-sponsored health plans are tending to shift costs to workers - increasing deductibles and co-pays and requiring employees to share the cost of premium increases above a negotiation.

Parts of the April 23 conference focused on how unions can respond to the crisis in health care costs. Several speakers said unions will have to work with employers to come up with ways to cut costs, such as: pushing preventative health measures; bargaining hard with pharmacy benefit management companies; and creating preferred lists of generic drug alternatives and requiring patients to pay more out-of-pocket if they insist on more expensive branded drugs.

But ultimately the solution to the crisis will have to be political, Speight said. Each of the four times in the last 40 years that private health spending per capita dipped slightly coincided with a political change - the creation of Medicare and Medicaid; government wage and price controls in the early 1970s; an appeal by President Jimmy Carter for voluntary health care price controls; and the threat of health reforms during the first Clinton Administration. Speight thinks the burden of paying for health care will have to get much worse before demands for reform overcome the political clout of the pharmaceutical and health care industries.

"Until the American middle class and their children have to ask themselves if they want to pay health care costs out of their disposable income, we won't be able to confront the fundamental questions about how health care is organized and funded," he said.

Midway through the conference, Governor John Kitzhaber appealed to attendees - union leaders, negotiators, and health care trustees - to work with employers to reduce costs and improve outcomes, instead of fighting over who will pay increased costs.

"Employers, at the end of the day, don't pay insurance premiums; workers do," Kitzhaber said.

"I think we've got to get past the way of thinking that views health care as an economic commodity. We've been obsessed with the delivery of health care rather than the improvement of health."

One approach would be to begin to look at how much improvement in health patients are getting for what's being paid. At the governor's initiative, a state task force has begun studying the effectiveness of several classes of drugs. The results of the study will be used to favor procedures and medicines that cost a great deal less while producing about the same results.

Kitzhaber said the best way to get at the political part of the problem is by building a new coalition between labor and employers.

Tim Nesbitt, president of the Oregon AFL-CIO, said the federation is developing such a coalition under the name "Partnership for Affordable Health Care." One project of this alliance would be to form a prescription drug purchasing pool to save money by purchasing in bulk.

Nesbitt is forming a labor committee to come up with more specifics before the June convention of the Oregon AFL-CIO.

May 3, 2002 issue

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