Tuesday, 17 September 2013 04:37

Institutional Fraud: The American Medical System

by Manuel Rodriguez
The American medical system is perhaps the largest, "free-market" fraud being perpetrated on an otherwise, unassuming populace. This parasitic model continues to undermine our business competitiveness.

If I described a market with little to no transparency in its pricing mechanism, purposeful price manipulation, extraordinary barriers to entry created by market participants themselves, little competitive bidding, severe influence peddling by lobbyists and pricing that has no relationship to the underlying costs, I would essentially be describing a market severely manipulated by anti-competitive cartels and likely subject to antitrust regulation by federal and state authorities.

In fact, these characteristics describe the institutionally corrupt and highly manipulated “free-market” of the American medical system. In a series of articles published by the New York times, here, here, and here, the Times outlined the dirty secrets characterizing this purportedly free market system, and the severe disparities in costs to the consumer between the United States and the rest of the world.

As outlined below, what emerges is a portrait of an institutionally corrupt medical cartel that purposely distorts pricing, making meaningful evaluations between providers nearly impossible. Rather than going down, as prices invariably do as markets become commoditized, medical costs in the United States typically escalate over time.

Medical manufacturers dole out hundreds of millions of dollars annually for consulting, royalties and other activities to physicians in an effort to buy loyalty. The Justice Department has, in the past, accused medical manufacturers of paying kickbacks, and has assessed hundred of millions of dollars in fines.

While the government targets overt fraud perpetrated by criminals on the Medicare and Medicaid entitlement programs, it has failed to even acknowledge the presence of the institutional fraud that has been “baked” into the system by the pharma-medical device complex. As a result the United States has the highest medical costs of any established country, and essentially subsidizes the entire world, most of which has enshrined cost constraints and price caps into their medical systems.

The Unites States has long refused to acknowledge that price constraints, enacted by every major first-world country, are necessary and vital in controlling costs. Instead, the pharma-medical device and insurance industry complex continues to advocate and push for “denial-of-care” or service limitations as the primary tool in controlling costs. Denial of care has essentially become the only cost cutting tool available in the arsenal, while medical cost inflation continues unabated. The federal government has consistently refused to intervene directly, as Medicare has never negotiated directly with manufacturers, but offers instead all-inclusive payments for surgeries to hospitals to prompt them to bargain harder for better prices.

The extreme undesirability of imposing price constraints and caps on medical devices and drugs reflects the quaint notion that the American medical system is somehow a “free-market” and market driven. As the Times illustrated, the entire system is essentially manipulated and pricing is artificially inflated through coercive intrusion and pricing irregularities.

One such pricing irregularity is the American medical billing system, where every procedure, every drug, every medical device and virtually any unique item is billed, or coded, individually rather than collectively, as part of a bundled service. This practice, generally not used by other first world medical systems, virtually ensures significantly higher prices than bundled billing.  Coding, or unitized billing, amounts to institutionalized fraud, as amounts billed are always higher than typical bundled, or flat rate billing. It is the piecemeal manner of American billing that encourages over-treatment, with doctors and other service providers gleefully recommending additional and costly procedures.

Institutionally, the entire medical system has been corrupted by corrosive special interests. Unitized billing has incentivized every service provider and device manufacturer to separate and itemize every item, purposely ensuring that every procedure is overbilled and that consumers have no practical basis upon which to compare prices between different service providers. It is the functional equivalent of complete opaqueness and purposeful diversion from meaningful comparison.

A summary of the Times series corroborates these conclusions:

• Cost of Angiogram: US, $914, Canada, $35; Colonoscopy: US, $1,185, Switzerland, $655; Hip replacement: US, $40,364, Spain, $7731; Lipitor: $124, New Zealand, $6; M.R.I scan: US, $1,121, Netherlands, $319.

•    The United States is far and away the leader in medical spending, yet studies consistently conclude that Americans do not receive superior care.

•    A list of drug, scan and procedure prices compiled by the International Federation of Health Plans found that the United States came out the most costly in all 21 categories, and often by a huge margin.

•    The costs of hospital stays in the United States are about triple those in other developed countries, even though they do not last any longer.

•    The United States spends about 18 percent of its GDP on health care, nearly twice as much as other developed countries.

•    Consumers, the patients, do not see prices until after a service is provided, if they see them at all, preventing any meaningful comparison shopping between providers. In many countries, price lists of common procedures are publicly available.

•    If the American health care system embodied a true free market, the increased volume of colonoscopies, which rose by 50 percent from 2003 to 2009, would have brought down costs significantly, as economies of scale, competition and other market efficiencies would have prevailed. Instead, costs and prices have skyrocketed for this procedure.

•    Generic or foreign made joint implants have been kept out of the United States by trade policy, patents and expensive Food and Drug Administration approval processes that deter start-ups form entering the market. US companies keep the barriers to entry, and therefore, competition, quite high.

•    In the United States, nearly all hip and knee implants are made by five companies, which some economists describe as a cartel.

•    In the United States, generic or foreign-made joint implants have been kept out of the country by trade policy, patents and an expensive Food and Drug Administration approval process that deters start-ups form entering the market.

•    Joint implant device makers typically require doctors’ groups and hospitals to  nondisclosure agreements about prices, which means institutions do not know what their competitors are paying. This secrecy erodes bargaining power.

•    Increased volume and competition, typical of free-market system, has not lowered joint implant prices.

•    Cost controls in other first-world countries limit the pricing of joint implants, but that has not deterred American manufacturers from competing in those countries for distribution rights.

•    Joint implant manufacturers have paid enormous fines in the United States to settle accusations by the Justice Department that they are paying kickbacks to surgeons who used their devices.

•    In most other developed countries, comprehensive maternity care is free or cheap for all, considered vital to ensuring the health of future generations.

•    New mothers in France and elsewhere often remain in the hospital for nearly a week to heal and learn to breast-feed, while American women tend to be discharged a day or two after birth.

•    In almost all other developed countries, hospitals and doctors receive a flat fee for the care of all expectant mothers.

•    Despite its lavish spending, the United States has one of the highest rates of both infant and maternal death among industrialized nations.

•    Coding of individual costs encourages overtreatment and overspending in the United States.

The institutionalized, systemic fraud that has been woven into the fibers of the American medical system is so embedded into this system that any discussion of reform is inevitably colored and politicized by accusations of party favoritism and factionalism, and descends into zealous partisanship. The dialogue descends into a xenophobes dream, America versus the rest of the first world. American free-market ingenuity versus old-school European socialism.

What is lost in this argument is the conclusion that based on nearly any benchmark or selective measurement criteria, the American medical system is, in fact, the least cost effective system in the first-world. The effectiveness of this system, as contrasted to other, modern first-world systems, is deplorable, and often constitutes a medical danger to its recipients.

The overarching institutionalized biases that perpetuate this system self-regulate to prevent systemic changes. The regulators, manufacturers, government entitlement programs, and insurance companies that are market participants have no incentive to radically re-allocate resources and benefits to the ultimate beneficiary: the taxpayer and citizen. Incentives are maximized such that market participants redistribute those resources only among themselves while maximizing wealth transfers away from the taxpayers and citizens.

Until and unless the United States imposes cost controls and price regulation into the medical distribution system, our costs will be hopelessly misaligned with medical outcomes, and our first-world cousins will continue to surpass the effectiveness of our seemingly “free-market” system.

This institutionalized fraud constitutes a significant cancer on the American empire, and is insidiously destroying businesses’ ability to cost-effectively compete on a global basis. Denial-of-care, the current cost-saving model, is merely a band-aid to this systemic crisis, and will simply delay the day of reckoning. That day is fast approaching, as American competitiveness continues to wilt mercilessly under the multiple institutionalized assaults facing it. Rome knew no bigger enemy than those from within.

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