The Great Health-Care Heist

Early in his presidency, Barack Obama tried to get the youth involved in the fight for health-care reform with events like this 2009 rally at the University of Maryland.
Early in his presidency, Barack Obama tried to get the youth involved in the fight for health-care reform with events like this 2009 rally at the University of Maryland. Daniel Borman/Creative Commons

The Great Health-Care Heist

It was the winter of our discontent, 2009. A season of bank failures, massive layoffs and $5-a-gallon gasoline.

Finally, a fractured country could at least agree on one thing: This had to change.

So President Barack Obama set out to deactivate the next bomb awaiting the U.S. economy, the one ticking inside our bloated, beleaguered health system.

Since the 1990s, insurance premiums had averaged double-digit annual increases. America was spending over $7,500 per person per year — 50 percent more than Norway, the next-largest contender. Health spending alone was chewing up one-sixth of the U.S. economy, double that of competitors like Japan, and putting American employers at a severe disadvantage.

Worse, we were paying Maserati premiums for something that looked a lot like a used Kia. Though pols like House Speaker John Boehner loved to bray that America had "the best health-care delivery system in the world," it wasn't remotely so. The World Health Organization ranked us an embarrassing 36th, behind such notables as Costa Rica, Colombia and Saudi Arabia. Other rankings routinely put the U.S. near the bottom of the industrialized world.

"We spend one and a half times more per person on health care than any other country, but we aren't any healthier for it," Obama told Congress in 2009. "This is one of the reasons that insurance premiums have gone up three times faster than wages."

Big Medicine had done its best to keep it that way. Since 1999, it had spent nearly $6 billion on lobbying — three times what the next-largest industry, insurance, had spent. An obedient Congress had allowed it to build a system in which millions couldn't afford coverage, huge swaths of the country were essentially served by monopolies, and prices continued to go up and up.

"In the decade up to 2009, 79 percent of all the growth in household income was absorbed by health care," says Dr. Brian Klepper, CEO of the National Business Coalition on Health. "Everything in Washington is rigged, but the thing most rigged is health care, because they have even more money than the banks. Both sides take money at a rapid clip from the industry in exchange for getting their own way. So everything is done in the special interest, and nothing is done in the common interest."

But that spring, with an enraged electorate and the economy in tatters, Obama was given a once-in-a-lifetime chance to break Big Med's stranglehold. He vowed to do it the old-fashioned way: by introducing competition, forcing Big Med to earn its keep.

Everyone would sit "around a big table," Obama had told a crowd in Virginia the year before. "We'll have doctors and nurses and hospital administrators, insurance companies, drug companies. They'll get a seat at the table. They just won't be able to buy every chair."

Five years later, it's hard to argue with Obamacare's success. Some 8 million people have signed up for insurance. The sick can no longer be barred from coverage, nor can the chronically ill be kicked to the curb.

Yet Republicans still rail that Obamacare is some socialist perversion. Democrats, meanwhile, often treat the plan as an illegitimate child they'd rather not acknowledge.

What both sides neglect to mention is their complicity in sabotaging the bill, selling out an unprecedented opportunity to the very guys who created the time bomb in the first place.

The president's ultimate goal was coverage for the country's 48 million uninsured. In places like Europe and Canada, the government pays basic health-care costs for all citizens. This type of insurance is often called "single-payer," because one payer, the government, covers basic medical care.

Anyone wondering how it might function need look no further than Medicare, which runs all senior health care in this country. It's arguably the most popular government program in America, and one of the more cost-effective.

Start with the cost of administration. Medicare's ranges between 2 and 5 percent of its budget. For private insurance, the average is 12 percent. The Government Accountability Office once estimated that this simple savings alone would be "more than enough to offset the expense of universal coverage."

Moreover, a single provider would have the size to negotiate better prices from providers and pharmaceutical companies. According to a New England Journal of Medicine study, this would save another $400 billion — and provide a boon for American business, reducing labor costs by 10 to 12 percent.

A CBS poll found that 59 percent of the public favored a government health plan. Unfortunately, the body politic is more impressed with power than with the will of the people. One of the biggest players in Congress — the insurance industry — wasn't about to get squeezed out of its lucrative role as middle man.

Insurers treat single-payer like Israelis do the Palestinians: as a threat to their very existence. With a single-payer system, most health insurers would vanish overnight. So the industry set out to ensure that such a program never saw the light of day.

"Of course they don't want it," wrote Robert Reich, a former Secretary of Labor in the Clinton administration, in a 2009 opinion piece. "A public option would squeeze their profits and force them to undertake major reforms. That's the whole point."

Congress, naturally, would not allow a frontal assault on the insurance industry. So Senator Ron Wyden, a Democrat from Oregon, pitched the Healthy Americans Act, which had several Republican sponsors and significant support on both sides of the aisle.

It was a simple plan: Instead of supplying insurance to employees, companies would give that money to workers to shop for policies on their own, allowing them to pocket any savings. With so many shoppers flooding the marketplace, insurers would be forced to truly compete.

Obama's first big mistake was delegating the plan's creation to a cabal of senators and health-care lobbyists — some still employed by the industry, some recent additions to the senators' staffs. They met behind closed doors, hashing out the details and squeezing other legislators out of the process.

Leading the effort was Senate Finance Committee chairman Max Baucus, a Democrat from Montana, who, from 1999 to 2005, accepted more special-interest money than any other senator. He delegated the real lifting to his chief health aide, Liz Fowler. Baucus described Fowler as overseeing "the 87-page document which became the basis, the foundation, and the blueprint from which all health-care measures in all bills on both sides of the aisle came."

Fowler, as it would happen, was a former vice president at WellPoint, the country's largest health-insurance carrier. She returned to Baucus' staff just for this occasion. As the Guardian would later write, "Few people embody the corporatist revolving door greasing Washington as purely as Elizabeth Fowler."

Meanwhile, Big Medicine donated heavily to Democrats, who suddenly began to see the industry in a far less menacing light.

Obama also started back-pedaling. "We don't want a huge disruption as we go into health-care reform, where suddenly we're trying to completely reinvent one-sixth of the economy," he said. Avoiding a single-payer setup and Wyden's plan not only kept the donations flowing, but allowed the president to make his famous claim that people could "keep the plan that you have."

In exchange for maintaining the status quo, hospital groups pledged $150 billion in Medicare and Medicaid savings over the next decade, while insurers agreed to limit their overhead to 20 percent. Anything more would have to be rebated to customers.

"Clearly, we made a mistake in taking so much off the table before we ever started," says Democrat Congressman John Yarmuth of Kentucky. "We should have left single-payer on the table just so people had an idea what the extreme really was. I'm sure that was just a bone to insurance companies to get them on board."

Of all the participants in health reform, the fattest cats came out of it smelling the best — a telling indictment of Obama and Baucus.

Drugs are the most profitable sector of health care. Pharmaceutical companies make more than $1 trillion annually, a third of that in the U.S. Their profits not only dwarf those of other health sectors, but pharamaceutical ranks seventh highest out of 215 industries tracked by Morningstar, an investment-research company.

For years, the drug makers' consigliere was Louisiana congressman Billy Tauzin. He was a conservative Democrat who rose to the position of assistant majority whip, only to switch sides after Republicans won the House in 1994, comparing the situation to reaching a fork in the Yellow Brick Road.

"I had one hand on a party that desperately needed a brain and another on a party that desperately needed a heart, and I had to make a choice," he says today. "I decided to go with the party that needed a heart, because heart-transplant surgery was possible."

In 2003, Tauzin helped shepherd through one of the great corporate giveaways in American medicine: President George W. Bush's Medicare Part D prescription-drug plan.

The rationale for Part D was noble enough. It was designed to ease the squeeze on seniors who saw fixed incomes eaten up by the cost of their prescription drugs, which were rising at a double-digit clip.

But instead of running the government-subsidized program through Medicare, where it could have been administered at a fraction of the price, Republicans handed the job to the insurance industry. They also teamed with Democrats like Baucus and Senator John Breaux, a Democrat from Louisiana, to ban Medicare from negotiating prices.

That meant that instead of using Medicare's massive size to extract price breaks, taxpayers would have to pay whatever drug makers felt like charging the insurers. According to the Congressional Budget Office, it amounted to a $137 billion giveaway over ten years.

When the bill took effect, drug makers saw a 34 percent spike in profits. By then, not surprisingly, Tauzin had left Congress to become the president of the Pharmaceutical Research and Manufacturers of America (PhRMA), the drug industry's trade organization. Breaux left a year later to open a lobbying firm, where he received a $300,000 contract to lobby for Big Pharma.

On the campaign trail in 2008, Obama blasted Part D's ban on negotiating, promising to get tough.

"We'll tell the pharmaceutical companies, 'Thanks, but no thanks for overpriced drugs,'" Obama had said at a Virginia campaign stop in 2008. "We'll let Medicare negotiate for lower prices. We'll stop drug companies from blocking generic drugs that are just as effective and far less expensive. We'll allow the safe re-importation of low-cost drugs from countries like Canada."

After all, there was ample evidence that U.S. consumers were being gouged. For example, in France, which negotiates prices, Eli Lilly and Company charged patients $47 for a one-month supply of Cymbalta, a medicine used to treat depression and anxiety. The cost in America was $176.

Pfizer charged Canadians $53 for Celebrex, an anti-inflammatory pain-killer. The bill for Americans: $162.

In one TV ad, Obama blistered Tauzin for the kind of inside corruption that's made Washington famous.

"The chairman of the committee, who pushed the law through, went to work for the pharmaceutical industry, making $2 million a year," Obama announced to the camera, his sleeves rolled up for action. "That's an example of the same old game-playing in Washington. You know, I don't want to learn how to play the game better; I want to put an end to the game-playing."

A year later, he would find that game not so unpleasant after all.

After he became president, Obama would indulge Tauzin in the same closed-door dealings he once lambasted. The drug industry agreed to taxes and rebates involving $80 billion in savings over ten years. In exchange, Obama welshed on three crucial promises: to speed generics to market, to allow the importation of cheaper drugs, and to retain the right to negotiate Medicare drug prices.

Senator Bill Nelson, a Democrat from Florida, was among several congressmen who tried unsuccessfully to maintain negotiation rights. He proposed a bill that would have forced drug companies to match prices offered to other government programs (Medicaid, Veterans Administration) that do negotiate.

"I'm not here picking on PhRMA," Nelson said at the time. "I just think, philosophically, that Medicare patients shouldn't be paying more than Medicaid beneficiaries."

But three Democrats — Senator Baucus and senators Robert Menendez of New Jersey and Tom Carper of Delaware — teamed with Republicans to ensure that Nelson's bill was stillborn in committee. They were more interested in keeping their word to the drug makers than in their duty to the American people.

"A deal is a deal," Carper explained.

A less-noticed provision gave pharmaceutical companies the right to extend patents on biologic drugs to twelve years — compared to the five years that conventional drugs receive. This may prove to be the greatest budget-buster of them all.

Biologics are the industry's new cash cow. They're more difficult to manufacture because they're grown rather than chemically assembled. This is the pretext for setting prices 22 times higher than those of ordinary drugs. Some prescriptions cost as much as $100,000 annually.

"Unfortunately, both the administration and leadership felt they should put a moratorium on Medicare being able to buy in bulk and access generic drugs," says Democrat Congressman Raúl Grijalva of Arizona. "In doing so, they locked in a price scheme that is many times out of control. That concession was painful to many of us, because we allowed the fox to control the henhouse."

Congress and the administration also repeatedly balked at the most direct route to lower prices — greater competition — even though much of the country was without it.

An American Medical Association study found that one insurer controlled more than half the market in 30 states. "In Alabama, almost 90 percent is controlled by just one company," Obama told a crowd in 2009. "And without competition, the price of insurance goes up and quality goes down."

Hit the hardest were rural residents, typically poorer and less healthy than the rest of the country. Metro areas offered the greatest profit, so big insurers and hospital groups had little incentive to compete for nickels and dimes in the countryside. Absent competition, premiums and hospital prices soared.

Many Democrats pushed for a public insurance plan, which would compete with companies like Aetna for customers. But Republicans rallied to insurers, claiming it was unfair to make them compete with government. Never mind that they represented some of the most unhealthy and least competitive stretches of the country, particularly in the South.

"We shouldn't have ever called it a public option," says Kentucky congressman Yarmuth. "We should have called it 'Medicare for all,' and then people would have been for it, because 'public option' was too vague."

Senator Kent Conrad, a North Dakota Democrat, proposed a compromise by creating nonprofit insurance co-ops to compete with monopolies and provide coverage to rural areas. Actuaries suggested that $10 billion in grants would be enough to get co-ops started in every state. Yet the marionettes in Congress began to strip away their effectiveness almost immediately.

Senator Ben Nelson, a Democrat from Nebraska, is a former insurance exec and one of the wealthiest members of Congress, withheld his vote unless the grants were changed to loans, making sure the co-ops were saddled with debt from the beginning.

Others sneaked in measures barring the co-ops from competing for the more lucrative business of large employers and banned them from using the government loans for marketing. It was as if Congress merely wanted fig-leaf competition while quietly sabotaging any chance to actually compete.

The $10 billion in loans was continually sheared away. Democrats repeatedly agreed to deals with Senate Minority Leader Mitch McConnell to strip the money away.

In the end, only 23 co-ops received funding. "They don't want to do anything to make the situation in the states better," says Yarmuth. "Instead, they're actively undermining the programs."

Nobody gave the co-ops much of a chance. They had to put together plans overnight, win competitive pricing from providers and get word of their existence out without spending any of the government loan money.

Still, many were run by real pros with decades of experience. Take Dr. Martin Hickey, CEO of the New Mexico Health Connections co-op and a former executive with Cigna and Blue Cross. "This wasn't just a do-gooder thing," he says. "This was people who understood business, understood insurance and what it was going to take to make this really work. Hope is not a strategy."

Soon, co-ops were offering the lowest premiums in a third of the states in which they operated. And even when they weren't the lowest, they were providing enough competition to drive down all premiums by 8 percent.

In New Mexico's case, Hickey found that hospital groups had a motive to expand competition.

"We were able to sit down with large groups and say, 'This market is consolidating, and the last thing you want is one or two major players, because they'll hammer the hell out of you,'" he says. "I used to work at one. I know. 'It's in your interest to give us a good rate to give us a foothold in the market. We're physician-oriented and physician-led. We get it.'"

The most thriving co-op is Maine Community Health, which has taken 80 percent of the new market from Anthem Blue Cross Blue Shield (a WellPoint subsidiary), despite comparable prices. Co-ops in Nebraska and Iowa secured more than half the market, while Kentucky's co-op grabbed 60 percent.

The latter proved a bitter irony for McConnell, who was instrumental in eliminating funding for 26 other states. Next year, the Kentucky co-op will expand into West Virginia, one of three moving into neighboring states.

"We don't need to own the whole market," says Julia Hutchins, CEO of Colorado Health Insurance Cooperative. "There's an opportunity to push the entire industry in a direction more focused on consumers, and we can do that even with a very small market share."

Of course, not every co-op has been successful. Minuteman Health in Massachusetts, Evergreen Health Co-op in Maryland and Oregon's Health CO-OP were hamstrung by faulty websites. Others wound up on the wrong side of price, such as Arizona's Meritus Health Partners, which was dramatically undercut by private insurers.

Some, such as the Louisiana Health Cooperative, have already run into trouble. Former CEO Terry Shilling tried to turn it into a money grab for his former health consulting firm, Beam Partners, proposing a four-year contract whereby Beam would receive a $3.3 million consulting fee, a 20 percent performance fee, and up to 50 cents for every person who signed up for the plan.

Moreover, there remains the question of what happens when some of the co-ops inevitably fail. Republicans, who have attempted to subvert Obamacare at every turn, are sure to turn such failures into Benghazi-sized incidents on FOX News. Those on the frontlines don't possess much faith that Obama will have their backs.

"How do you spin that?" asks Hickey. "It is spin, and I'm not trying to be critical, but up until now, the administration hasn't done a great job of spin on any issue with the Affordable Care Act. So that worries me."

There's little doubt that Obamacare achieved some remarkable things. Given that Congress can barely agree on whether to pay its bills, the simple act of helping 8 million people get insurance is extraordinary in itself.

And there is reason for optimism.

Brookings Institution scholar Thomas Mann is an expert in political dysfunction. He co-authored It's Even Worse Than It Looks: How the American Constitutional System Collided With the New Politics of Extremism. Considering the "Republican party's swing to the right and decision to oppose anything," he believes it's important to take a long view of Obamacare.

"He succeeded where presidents for a half-century have failed, so it wasn't going to be pretty," Mann says. "And it wasn't going to be easy."

Every expansion of the social safety net has been contentious. None kicked off without difficulties. The question is whether Democrats will be willing to wade back into the fight to address Obamacare's woes — particularly the lack of cost controls and competition — while taking endless fire from Republicans, who've shown no interest in repairing health care at all.

As Mann sees it, Obamacare is but the first battle.

"Sometimes it takes something that looks godawful to set things in motion for some steps that will eventually give us a better system," he says. "To the right it looks like communism, but to more rational observers, these are constrained, incremental changes. But they could add up to something quite non-incremental."

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