ICYMI: Warren Calls for Expanding and Improving Medicare by Cracking Down on Corporate Profiteering
Anticompetitive Behavior, Price Gouging, and Patent Abuse from Corporations Costs Medicare and Consumers Billions
Washington, D.C. — In case you missed it, during a hearing of the Senate Finance Subcommittee on Fiscal Responsibility and Economic Growth, United States Senator Elizabeth Warren (D-Mass.) questioned witnesses about how corporate profiteering in the pharmaceutical, insurance, and financial industries is contributing to excessive costs for Medicare. Senator Warren called out big pharma and insurance companies’ tricks to squeeze taxpayers and Medicare beneficiaries. Cracking down on corporate exploitation of the Medicare program could generate more than $900 billion over 10 years to help expand coverage to include dental, vision, and hearing benefits or lower the Medicare eligibility age.
Senator Warren called out the pharmaceutical industry’s role in using monopoly power to drive up costs for Medicare and squeeze billions in profits from the government. From 1995 to 2015, the leading 60 pharmaceutical companies consolidated into just 10. In industry after industry, greater consolidation stifles competition and leads to higher prices. But that’s not enough: drug companies have also abused the patent system and engaged in pay-for-delay schemes to prevent competitors from entering the marketplace.
“We see in industry after industry, research shows us that monopoly power leads to higher prices – and the pharmaceutical industry is just no exception to that. We should strengthen enforcement of our nation’s antitrust laws, we should crack down on anti-competitive behaviors that huge drug companies use routinely to keep their prices high, and we should save Medicare billions and billions of dollars as a result,” said Senator Warren.
Senator Warren also called for passage of the Build Back Better Act, which includes provisions that could generate an estimated $297 billion in savings, including by giving the Department of Health and Human Services the authority to negotiate prices on some high-price drugs.
Transcripts and videos from three rounds of Senator Warren’s questions below:
Transcript: The Hospital Insurance Trust Fund and
the Future of Medicare Financing
U.S. Senate Committee on Finance Subcommittee on Fiscal Responsibility and Economic Growth
Wednesday, February 2, 2022
Round 1 of Questions below and video HERE:
Senator Elizabeth Warren: Medicare spends too much money on prescription drugs. The program is barred from negotiating prices, which means that seniors and taxpayers pay way too much just to improve the profits of giant drug companies.
Build Back Better would change this by giving HHS the authority to negotiate the prices of some high-priced brand-name drugs. That’s not all: it would also penalize manufacturers that raise prices above inflation and restructure Medicare’s drug benefit to make drug companies and insurers do more to cover the costs of prescription drugs. Now, I’m all in for these ideas. These are good ideas.
It’s really great, the drug pricing provisions in Build Back Better will save an estimated $297 billion. That's a lot of money. But, that’s not all we can do. We can drive down drug costs in Medicare by enforcing current competition laws. Drug companies use a host of dirty tricks to limit competition, to extend their monopolies, and keep prices high—and we should put a stop to it.
So, if I can, let me start with you, Professor Kapczynski. Econ 101 tells us that a healthy market is one where lots of companies compete with each other to attract customers, and that that drives prices down. Does that describe the current state of the pharmaceutical industry?
Professor Amy Kapczynski, Professor Of Law, Yale Law School: You know it really doesn't. And two reasons really one is, as with many other industries, we really have seen a wave of consolidation in recent decades. And this kind of consolidation and concentration in the industry does lead to problems and it can threaten innovation here as elsewhere. A colleague of mine here at Yale, Florian LAST NAME, and colleagues did a study showing that a substantial number of pharmaceutical acquisitions between 5 and 7%, are aimed solely at shutting down innovation that competes with the portfolio of the company purchasing, and those are killer acquisitions, and they affect the development of new drugs. But there's a broader problem too. And that is even without traditional kind of industry consolidation. The pharmaceutical industry has monopoly power baked into it, and that's because of the role of patents and other kinds of exclusive rights that the government grants and that the companies can take advantage of. So they can, as you suggest, spend their energy not on innovating, but on creating thickets of patents around their profitable drugs to delay generic entry, they can abuse the, the profits that they get investing in patent lawyers to pay their competitors to stab the market and pay for delay deals. And so we really don't have a market that functions in a conventional competitive way. Instead, it's sort of riddled with opportunities to expand and exploit monopoly power.
Senator Warren: So that’s really powerful. Let me just break that apart into both pieces. First about the consolidation in the industry. As I understand it, between 1995 and 2015, the 60 leading pharmaceutical companies merged into 10. So that’s how much concentration there was. Drug companies, we know, are getting bigger and bigger, which stifles competition and elevates prices. But, as you say, drug companies do even more to boost their profits: so they game the system to extract as much as they can and you, you mentioned about the patent system already baked into it and then on top of that, there is the abuse of the patent system.
So in a competitive market, we’d expect to see drug companies fund new scientific discoveries, get a patent to protect their monopoly for a few years while they earn a rate of return on it that covers their initial expenses until the time runs out on the patent and competitors can get in and drive down the price of that drug. That would mean that the vast majority of new drug patents would be issued for new drugs to be brought to the market. That's what a competitive market would look like and that's how the system was supposed to work.
Professor Kapczynski, is that how the system works? Are new patents more likely to be issued for new drugs coming onto the market or are they mostly issued for old drugs that are already being sold?
Professor Kapczynski: Yes, it's a terrific question. Many people think drugs are patented and that means there's a patent on the compound. Like the active ingredient, the thing that actually cures you or helps you. That's really not the case. So drugs are commonly patented with dozens, sometimes even more than 100 patents and they'll make you one on the active ingredient. But there'll be many others as I said, sometimes dozens, on other kinds of things in the, in the sort of academic literature, we call these secondary patents. They are patents on things like a formulation, a particular dosage, a tiny alteration in the chemical structure that maybe provides no therapeutic benefit. But that allows another patent that you can then use to sue and try to extend the years of life, so I did a study about this in 2012 with some colleagues, and we found that it was more common for drugs to have patents of these trivial, sort of, these secondary types and it was for them to have compound patents in particular. And in fact, the patents come later these trivial secondary patents and so if you in the study that we did these patents could extend patent life for the drug as a whole anywhere from about six to seven years.
Senator Warren: Wow.
Professor Kapczynski: Okay, so that, why is that a problem? Well, that kind of evergreening and thickening you know, these are not therapeutic benefits and you still get 20 years for those patents, right? So it adds more years of monopoly. And we can see that it happens more with drugs that are more expensive. And when you have drugs that can charge Medicare billions of dollars a year, you add a couple of extra years onto that and of course, you get a really serious fiscal problem.
Senator Warren: So in other words, drug companies are racing to protect the profits from their old drugs with more and more patents – not because there’s something special about those drugs, but because they want to use the patents, that is this protected period of time, to stop competitors from being allowed to make them. And the longer they have a total monopoly on the drug, the longer they can keep prices sky high and rake in money from the taxpayers through the Medicare program.
So let me just ask you, Professor Kapczynski, is there any information on how much some of these tactics have cost Medicare?
Professor Kapczynski: You know, there is there have been a few studies of this one found that for a drug that was made by Advi, called HUMIRA that delayed generic entry. That just one drug cost Medicare over $2 billion between 2016 and 2019. There was another study that just came out about delayed generic entry of a multiple sclerosis drug, and that costs Medicare up to $6.5 billion in excess spending over two years. And as you say, this is a problem because we're also incentivizing, this system incentivizes companies to do trivial innovation instead of really substantial innovation is costing Medicare billions of dollars.
Senator Warren: So, just two drugs that you mentioned. That’s $8.5 billion in excess Medicare spending just, just from two drugs.
Another trick drug companies use is to engage in “pay-for-delay” schemes, in which they pay potential competitors not to produce generic versions of a drug because the generic version would undercut prices for their own drugs.
Professor Kapczynski, is there any research on how much these “pay-for-delay” schemes are costing Medicare?
Professor Kapczynski: Yes, there's actually been some research on that as well. And once again, we're talking billions of dollars, so a professor named Robin Feldman recently did a study that calculated that pay for delay deals, costs the federal government between $2.3 and $13.5 billion as measured by list prices. So that's a tremendous of savings there as well if we could really curb his attempts to keep generic companies off the market.
Senator Warren: So that could be $130 billion over ten years. Enough to pay for hearing and vision benefits for all Medicare beneficiaries. So I think of this as imagine if we put an end to all these tactics. And force drug companies to actually function in a competitive market. We'd generate even more savings, and that’s not counting the savings taxpayers could get from Medicare actually being able to negotiate prices.
This is not something special to the pharmaceutical industry. We see in industry after industry, research shows us that monopoly power leads to higher prices – and the pharmaceutical industry is just no exception to that. We should strengthen enforcement of our nation’s antitrust laws, we should crack down on anti-competitive behaviors that huge drug companies use routinely to keep their prices high, and we should save Medicare billions and billions of dollars as a result.
Round 2 of Questions below and video HERE:
Senator Warren: So, we were talking earlier about drug companies, but they're not the only ones who have figured out how to game the rules and drive up costs. A few decades ago, Congress started letting private insurance companies administer Medicare for seniors who opted in. The insurance companies claimed, when they first were getting permission to do this, that they would run Medicare better than the federal government – more benefits at less cost. That was the promise.
But over the past twelve years, Medicare Advantage – the part of Medicare where insurance companies have the biggest role – has actually cost the federal government $143 billion more than traditional Medicare. Meanwhile, insurance companies have soaked up, literally, billions and billions of dollars in profits from undertaking this.
Now one serious problem is how Medicare pays insurance companies. So let’s imagine a specific patient who goes to the doctor for her heartburn. It turns out that this patient had shoulder surgery a few years ago. She also has exercise-induced asthma. Dr. Chernew, would the patient’s surgical history or her asthma diagnosis affect how her doctor gets paid for this visit in traditional Medicare if she is covered by traditional Medicare? Dr. Chernew?
Dr. Michael Chernew, Chair, Medicare Payment Advisory Commission: I'm here.
Senator Warren: There you go. Go ahead.
Dr. Chernew: Sorry. No. In fee-for-service, physicians get paid for the visit and related tests and services that they provide. Which in this case would likely be limited to the patient's heartburn or whatever condition they went in for. Not a bunch of conditions that happened in the past that's not what they're being treated for at the time of the visit.
Senator Warren: Okay. So let's keep building on this. So in traditional Medicare, doctors are paid for the services they provide. And for this patient, if her doctor doesn’t need to take an x-ray of her shoulder or prescribe her a new inhaler for her asthma, then those diagnoses may not even appear on her record. That could mean that doctors in traditional Medicare under-report diagnoses, but Medicare Advantage has the opposite problem. Dr. Chernew, how would discovering those additional two diagnoses change the way that Medicare pays Medicare Advantage for patient care?
Dr. Chernew: Sure. So, because Medicare Advantage gets paid more for patients that have more diagnoses. At least in the following year, they get paid more, they would generally get paid more if they're able to record more diagnoses. If I could, let me illustrate with a slightly different example which is, so I'm working with a colleague of mine, Tom McGuire, did suggest that for every hundred patients in fee-for-service with congestive heart failure, only about 75% have reported congestive heart failure in the following year. Because Medicare Advantage plans have the financial incentive, they devout resources to identifying those patients and by adding that code, the plans, therefore, get paid more from identifying undiagnosed congestive heart failure or preventing previously diagnosed congestive heart failure dropping off in subsequent years. And that leads to higher Medicare Advantage payments because the risk adjustment system, as you point out, is poorly calibrated.
Senator Warren: Okay so this risk adjustment means that payments are going to go up. And I get the underlying logic that a sicker person is going to use more healthcare services so Medicare is going to compensate for the additional risk. But I take it that what you're saying, Dr. Chernew, is that having a higher risk score in Medicare Advantage does not necessarily mean that the patient is either going to get more care or better care. Is that what you're saying here?
Dr. Chernew: They might not necessarily get more or better care, or they might. It's a calibration issue, but yes you're correct. They might not-- those added codes may not actually be treated. That is true.
Senator Warren: Okay. And Medicare Advantage plans. They're not finding new diagnoses so they can help people get more care. They're doing it so they can make more money from Medicare because that's how the system is set up. In fact, an entire industry has been created to help them do exactly that. And as a result, Medicare ends up paying more for a beneficiary's care in Medicare Advantage than it would pay for exactly that same beneficiary's care in traditional Medicare. So, Dr. Chernew, you've studied this for a long time. If the federal government cracked down on these insurance company practices, how much money would it save Medicare?
Dr. Chernew: So, the Medicare program already takes some money out to adjust for this miscalibration. The Commission believes that is insufficient, so if you take out another three to four percentage points, for example, which is our estimate of the added payment, in 2021 you would have saved about $10 billion.
Senator Warren: Wow. Yeah, and you know, actually, we were looking into this, my team and I, it turns out other experts have even put the number higher. Some say as high as $600 billion over the next eight years. Think about it - that one change alone creates more money than the Hospital Insurance Trust Fund’s entire projected shortfall through 2031. And that’s not even the only scam Medicare Advantage plans use. We could save almost $200 billion more by eliminating some of the other tricks Medicare Advantage plans use to squeeze money out of Medicare. That would be enough to make a down payment on lowering the Medicare eligibility age or adding dental benefits to Medicare.
Insurance companies have promised more competition and lower costs for decades, but instead, they have cost Medicare billions. And that’s because the goal of giant insurance companies isn’t to save the government money. The goal is for the insurance company to make profits for themselves. And more often than not, they do that by ripping off the federal government and denying people the care that they need.
I think it’s time for Congress to put an end to this kind of corporate profiteering.
Round 3 of Questions below and video HERE:
Senator Warren: So ordinarily at this point, I would hand the questions back over to Senator Cassidy, but we’re trying to manage votes at the same time, so Senator Cassidy’s not here. So I’m gonna turn around and go to another round of questions. I’m not going to let you all waste any time at all.
So here's where I'd like to start on this one. And that is in 2019, the Trump administration announced a new Center for Medicare and Medicaid Innovation (CMMI) initiative to allow private plans to use the same scams that they’ve perfected over in Medicare Advantage over and import those into traditional Medicare, once again driving up costs for taxpayers.
Now, under CMMI’s “Direct Contracting” model, Medicare beneficiaries will be assigned to a “direct contracting entity” (DCE). We heard about this earlier in direct testimony here. These are called DCEs. And like the insurance companies in Medicare Advantage, DCEs will receive a fixed payment to cover a beneficiary’s care – but then they get to pocket virtually all of the money that they don’t spend on patient care.
This has set off a global gold rush on Wall Street. So beneficiaries are enrolled in DCEs based on their primary care provider, so that insurance companies, private equity firms, and institutional investors are scooping up primary care practices so that they can get in on the deal. And these investor-owned doctor’s practices use the same playbook as Medicare Advantage to squeeze more money out of Medicare.
Dr. Rogers, you've spoke about this. You have studied this. Of the 53 direct contracting entities that CMMI has already approved, how many are owned by private investors and insurance companies, as opposed to hospitals, doctors, and other health care providers?
Dr. Susan Rogers, President, Physicians for a National Health Program: Thank you Senator Warren for this question. There are 28 DCEs, and out of that there are 28 DCEs that are investor-owned, and there are six that are owned by four Medicare Advantage insurers. So these are the ones that are there for the profit, and to me, there's clearly a conflict of interest if you are there just to provide health care, but your mission is to make money. It's a conflict of interest and it-its not going to ever be equal. And unfortunately who is going to lose are patients. Denial of care is the way they will control costs. They will limit access. Pre-authorizations. There's a lot of mechanisms that are there. One of the things that have been done too, and we talked about the upcoming and how patients are made to look sicker. It's embedded in the software so as a physician I can't sign off on the chart until I've clicked enough boxes so that they can upcode.
Senator Warren: Wow.
Dr. Rogers: So, it's part of the infrastructure now. So that it's not what I want to diagnose them as their provider or their physician. It's embedded in the structure.
Senator Warren: And- and this is by design. I mean, what you're talking about when you say it's embedded in the structure. The majority of these DCEs are investor-owned, and CMS has said that one of its goals for the direct contracting model is to bring in organizations, and I'm gonna quote them here, that currently operate exclusively in the Medicare Advantage program, to bring that into traditional Medicare, and to make the deal even more attractive for these private actors, CMMI has weakened key guardrails that will allow insurers and investors to pocket even more profit through the direct contracting model than they can now do in Medicare Advantage. So let me, let me ask another question around this, under Medicare Advantage plans are legally required to spend at least 85% of their revenues on patient care – essentially sets a 15% cap on total profits. So Dr. Rogers, does the same cap exist in the DCE programs?
Dr. Rogers: Well it's a very much smaller cap. I can tell you that. Because the DCEs only have to be, they can keep up to 60%. So-
Senator Warren: That’s right. So, in other words, they can make 40% in profit.
Dr. Rogers: They need to spend 60%. I had that backwards.
Senator Warren: Yeah.
Dr. Rogers: They need to spend 60%. But they're able to take, keep 40%. So that, I mean, when we talk about trying to control cost, they're not adding anything to care. These are investors. They know nothing about health care delivery. These are investors who are making money and to me, I think healthcare should be off the buffet table when investors come in and decide what they want to put on their plate.
Senator Warren: Well, you know-
Dr. Rogers: There’s not room for them.
Senator Warren: I want to say on this, I support coordinated care and I appreciate the potential that coordinated care models have to lower costs and improve the quality of care. But give me a break, on what's happening here. Wall Street is not racing to buy up clinics because they want to expand coordinated care models and limit profits. Private equity and insurance companies want the eye-popping profits that are possible when the federal government lets them pocket what they can avoid spending on seniors and people with disabilities who need health care.
Dr. Rogers, right now, as you know, we are in a demonstration project phase on this. If this demonstration project is allowed to proceed, does it effectively amount to a privatization of Medicare?
Dr. Rogers: Totally. Totally. If you look at our health care system now, Medicaid is very much privatized, private insurance is privatized, there’s several other things. And then the other big one is Medicare, which is becoming privatized. And by privatized, I mean public monies are going into an entity and giving total control of that entity to those dollars. That is complete privatization.
Senator Warren: So privatization, and let much just ask, over the 35-year history of Medicare managed care, including Medicare Advantage, have these private sector arrangements ever delivered the cost savings taxpayers were promised when the plans started?
Dr. Rogers: Never. Never. Never. They paid billions and in fact, there’s managed care companies that pay hundreds of billions more than if people had been in traditional Medicare. Remember, traditional Medicare has an overhead of 2%. There’s nobody working in DC and CMS that’s making millions of dollars a year as their salary. So you’ve got a whole different system in the private system, and that’s where all the money is going and even if we look eight years ahead because the DCE from CMMI, they must have moved everybody into traditional, they wanted everybody enrolled into non-traditional Medicare to these DCE by 2030. And that will cost us more than $600 billion dollars. So this is not about providing care, I mean, you know, this is all about making money.
Senator Warren: Thank you, Dr. Rodgers. It is completely baffling to me that the Biden Administration wants to give the same bad actors in Medicare Advantage free rein in traditional Medicare. Without intervention, the 53 existing DCEs will enroll as many as 30 million of the 36 million beneficiaries who are now in traditional Medicare. That means that 80% of Medicare will be privatized. And the new owners of Medicare will use the same scams they’ve been using for years in Medicare Advantage to drive up costs of traditional Medicare.
My view is that President Biden should not permit Medicare to be handed over to corporate profiteers. Doing so is going to increase costs and put more strain on the Hospital Insurance Trust Fund. The Biden Administration should shut down the Direct Contracting model immediately.
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