If you’re like us, you were taught in high school civics class that lawmakers care about the interests of the general public and will spurn those who seek to exploit public power for private ends. Like us, you were snookered.
In reality, health care politics is a constant and unremitting fight to the death over who will pocket the trillions of dollars we spend every year. Contrary to the high-school-civics view, lawmakers are not trying to restrain providers and insurers. In reality, politicians and providers are co-conspirators against the public interest.
Consider the case of Dr. Salomon Melgen. Our story begins in the mid-1970s, when the Carter administration released the names of physicians and group practices that received more than $100,000 in Medicare payments. Providers didn’t want anyone to know how much money they were making, so the AMA and the Florida Medical Association persuaded a federal district court judge that disclosing this information invaded physicians’ privacy interests. Their argument should have been laughed out of court. Information about government payments to public contractors and employees is disclosed as a matter of course. Only top-secret programs are exempt from the public’s right to know.
For some strange reason, the court issued the injunction that organized medicine wanted. Then something even more surprising happened. Instead of appealing, seeking corrective legislation, or otherwise attempting to limit the impact of the injunction, the U.S. Department of Health and Human Services (HHS) did a complete reversal. It abandoned all efforts to make Medicare’s payment information public and spent the next 30-plus years relying on the injunction as a basis for treating all provider-level payment information as top secret. Stated differently, for more than three decades the federal government and health care providers worked together to conceal an ocean of waste, fraud, and abuse from the taxpayers who were footing the bill.
The injunction was finally lifted in 2011 thanks to a lawsuit filed by The Wall Street Journal (WSJ). The WSJ had obtained limited data from Medicare and used it to produce a series of reports on fraud, waste, and abuse. However, the injunction prevented the WSJ from revealing the names of the involved physicians and from calling attention to HHS’s persistent failure to adequately address these problems. So the WSJ sued to have the injunction set aside—the exact thing that HHS had refused to do. The WSJ won, and after a two-year delay, HHS released information on all Medicare payments to physicians in 2012.
The impact was immediate. In 2014, the WSJ identified a raft of physicians with suspicious billing patterns. One who stuck out was Dr. Salomon E. Melgen, an ophthalmologist who practiced in North Palm Beach, Florida.1 Dr. Melgen was Medicare’s heaviest hitter, with $21 million in payments in 2012 alone. Most of Dr. Melgen’s billing was for Lucentis, a drug used to treat macular degeneration in the elderly. (We explained the financial incentive he had to use expensive Lucentis instead of much cheaper Avastin in Chapter 3.) But Dr. Melgen’s charges for Lucentis were way out of line with that of his peers. What happened next offers a case study of the politics of fraud control.
How on earth did Melgen make so much money from Medicare? In fairness, he didn’t pocket the full $21 million. For physician-dispensed pharmaceuticals, Medicare pays the physician the acquisition cost of the drug plus a 6 percent administration fee. A sizable chunk of the $21 million represented the acquisition cost of the Lucentis Melgen dispensed. But Melgen allegedly charged Medicare four times for each vial of Lucentis he used. The vials contained enough medicine to treat four patients, but standard medical policy was to use a fresh vial for each patient and discard the excess. Melgen had a different idea. He used the same vial to treat multiple patients and then billed Medicare as if he had purchased a new vial for each person. As a result, he was “reimbursed $6,000 to $8,000 for a vial that cost him $2,000,” plus the 6 percent fee he was also entitled to. Could the use of the word “reimburse” be less apt?2
Melgen’s $21 million one-year haul was not his first brush with overbilling. Years before, HHS had pegged him as an outlier and concluded that he had overbilled Medicare by $9 million during 2007–2008. Melgen had actually billed $13.5 million for Lucentis during that period, but HHS sought to recoup only two-thirds of that amount. HHS did not try to throw Melgen out of the Medicare program for ripping it off to the tune of $9 million, or even scrutinize his subsequent billings before paying them. It says something about the government’s interest in punishing bad actors and its interest in protecting taxpayers that HHS kept paying Melgen’s Medicare claims for new patients at a feverish pace while his 2007–2008 case went through multiple levels of appeal.
As was his right, Melgen put on a full defense. He hired the former head of the Department of Justice’s Medicare fraud task force as his attorney. He called on his political protectors, enlisting the aid of Sen. Robert Menendez (D-NJ) and Sen. Harry Reid (D-NV), who was then the Senate majority leader. In 2009, Menendez “called Jonathan Blum, the Medicare director at CMS [U.S. Centers for Medicare and Medicaid Services], to express concern. . . . Menendez brought up Melgen’s case . . . in the context of broader concerns about [Medicare’s billing] guidelines.” A Menendez staffer also contacted a CMS official and allegedly pressured him to back off, stating, “bad medicine is not illegal. Medicare should pay these claims.” The point is worth repeating. One federal employee told another that the taxpayers should pay for what both of them understood to be “bad medicine.”3
In 2012, Menendez “raised Melgen’s case again at a meeting with CMS Acting Administrator Marilyn Tavenner.”4 Frustrated that he was getting nowhere, Menendez asked Reid to arrange a meeting with HHS Secretary Kathleen Sebelius. That meeting was held on August 2, 2012, in Reid’s office. Secretary Sebelius brought along Jonathan Blum. At that meeting, Menendez again pushed for Medicare to drop the overbilling charges, allowing Melgen to keep the disputed $9 million.5
Menendez claims not to have known that Melgen was under ongoing investigation and insists he did not request any specific action. But why on earth did a senator from New Jersey feel the need to intervene on behalf of a Florida doctor? And why did the Senate majority leader, who was from Nevada, feel the need to help? Perhaps it had something to do with the fact that Melgen donated more than $700,000 to Reid’s political action committee, a fair chunk of which was reportedly spent on Menendez’s reelection campaign. Melgen donated additional money to Menendez directly. Plus, Melgen threw in several flights to the Dominican Republic on his private jet, where Menendez had stayed at Melgen’s seaside mansion.6
In 2015, a federal grand jury indicted Menendez, charging that he “accept[ed] gifts from” Melgen “in exchange for using the power of his Senate office to benefit Melgen’s financial and personal interests.”7 According to the U.S. Department of Justice, Menendez “accepted up to $1 million worth of lavish gifts and campaign contributions from Melgen” and sought to influence “the outcome of Medicare billing disputes worth tens of millions of dollars.” Bribery charges were also filed against Melgen, who was subsequently indicted on additional grounds by a second grand jury.
Both Melgen and Menendez asserted their innocence. At a press conference, Menendez complained that federal prosecutors “don’t know the difference between friendship and corruption.” That remark led the famously cynical novelist Carl Hiaasen to pen a column entitled, “It Wasn’t Corruption—It Was a Bro-Mance.”8
At Melgen’s criminal trial, federal prosecutors contended that he’d stolen up to $105 million from Medicare.9 About $41 million was attributable to his practice of billing for the same drug vials repeatedly. The rest was connected to a different type of fraud. Melgen, they contended, intentionally misdiagnosed patients’ medical conditions so he could bill Medicare for treating them. According to Dr. Adam Berger, who testified as an expert witness for the prosecution, Melgen reported “almost every patient he saw” as having wet age-related macular degeneration (“wet AMD”). “But in the courtroom, experts called by federal prosecutors saw no signs in the scans to confirm Melgen’s diagnoses of wet AMD, and even the defense’s own witnesses who looked at the same images struggled to find evidence of the disease.” The diagnosis of wet AMD is also easily and cheaply made by means of an optical coherence tomography machine—a machine that Melgen “did not even own . . . despite the fact that virtually every retina specialist in the country uses this technology to diagnose their patients and make sure they are responding to treatment.” Melgen also used “a highly controversial and unapproved laser procedure” to treat patients for wet AMD, then disguised what he was doing by billing Medicare under a code for a different procedure—15,000 times. As Berger wryly remarked, “That explains the private jet.”10
The jury found Melgen guilty on all counts and the trial judge sentenced him to 17 years. Menendez fared better at his bribery trial. After hearing evidence for 11 weeks, the jury deadlocked and the judge declared a mistrial.11 After some post-trial maneuvering, federal prosecutors decided to drop the case. The line between bromance and bribery may always be blurry. The larger problem is that political control over health care spending increases both the incentives and the opportunities for bribery.
Perhaps Melgen’s example is just an isolated case about a single bad physician. Maybe Menendez was overzealous in aggressively advocating for Melgen. Maybe Reid shouldn’t have facilitated the meeting at which Menendez pressured HHS employees to drop the case. Surely most politicians know better and will do everything in their power to ensure that the government buys the highest quality health care at the lowest possible price. Right?
Not even close. Both the political corruption of medicine and the medical corruption of politics are pervasive, long standing, and bipartisan. Providers ceaselessly lobby Congress and state legislatures to ensure that the flow of taxpayer money continues undiminished, and that no one holds them accountable for what they do with it. No matter how egregious the fraud, waste, or abuse, or the exploitation of consumers, providers and their lobbyists have a stock set of plausible-sounding justifications for leaving the payment and regulatory systems exactly as they are. They then plow much of that money into political contributions at both the federal and state levels. Melgen’s sizable contributions to Reid and Menendez are chump change compared to the aggregate amount that health care providers spend on politics. These outlays help to ensure public officials will tinker with the payment and regulatory systems as little as possible. As the Melgen-Menendez bromance shows, they also buy protection in the rare event that bureaucrats try to clamp down on the worst excesses.
Consider spending by pharmaceutical companies and their lobbyists. Between 1997 and 2015, the pharma sector “donated” $3.3 billion (in nominal dollars) to congressional campaigns—43 percent more than the second-largest contributing industry.12 Hospitals and nursing homes contributed another $1.4 billion. Physicians and other health professionals added still another $1.2 billion. All in, that works out to about $735,000 per legislator per year.
One way to view these payments is as kickbacks or bribes, where providers grease politicians to keep the money flowing. Another interpretation is that contributions are protection payments made because politicians use their control of providers’ revenue streams to extract money from them.13 Still another possibility is that political contributions are a form of speech. On this account, providers sincerely believe they are doing the right thing by supporting politicians who favor their industry. All three things could be happening at the same time, of course.
Either way, what emerges is an unholy alliance between providers and politicians against the common good. Examples abound. Consider one from 2009, when President Obama was busily selling his health reforms and telling everyone that his proposal would bend the cost curve downward. According to the WSJ, Peter Orszag, the White House budget director, went to meet with a small group of House Democrats:
The meeting started well, with one lawmaker after another echoing his message that spending controls were critical to any health-care overhaul. . . . Then one member said her top priority was winning higher payments for oxygen suppliers, the officials say.
Mr. Orszag was taken aback. Officials had been trying for years to cut payments to suppliers of oxygen and other medical equipment, which critics say are inflated. Yet when a new competitive bidding process was set to take effect last year, industry supporters in Congress were able to delay the plan. They are still fighting to block changes.14
Medicare’s spending on oxygen and other durable medical equipment (DME) is small potatoes, but to DME suppliers and the members of Congress they support, those dollars matter a lot.
The negotiations that preceded the enactment of Obamacare provided plenty of opportunities to nurture the bromance between providers and politicians too. In one reported instance, the pharmaceutical industry offered to “give back” $80 billion out of its expected future sales and to sponsor up to $100 million in ads supporting Obamacare in exchange for the Obama administration’s abandoning plans that would have cost the industry even more.15 Michael Cannon described this, and other deals that were cut, as a “protection racket.”16 Stated differently: nice place you got here—be a shame if anything happened to it. Obamacare’s architects cut special deals that protected or enriched providers and other businesses in multiple states.17
Another example shows how providers use their political muscle to keep payments flowing when the administrators at CMS try to cut back on waste and fraud. In 2011, the Journal of the American Medical Association published an article focusing on implantable cardiac defibrillators (ICDs). ICDs are used for the treatment of cardiac arrhythmias. Using a database of more than 100,000 ICD procedures, the study found that “roughly one-quarter of patients who had devices implanted did not meet guideline-recommended criteria for receiving them.”18 With more than 100,000 ICDs being implanted every year at an average cost exceeding $35,000 per procedure, HHS was blowing almost $800 million a year on just this one form of unnecessary cardiac surgery.19
HHS responded by announcing it would start auditing claims for “several big ticket cardiology and orthopedic procedures” in 11 states before paying them.20 In Florida, Medicare would review all claims relating to stents, percutaneous cardiac intervention without stents, ICDs, pacemakers, and other vascular and circulatory-system procedures before paying the claims to ensure they “complied with all Medicare payment rules,” including medical necessity. This is exactly what credit card companies do when they identify questionable charges: block payments and investigate. But for Medicare, which normally pays claims first and asks questions later, if ever, this was a radical change. Because prepayment review would greatly decrease cardiac care spending, stock prices for affected health care companies dropped by up to 10 percent.21
But Wall Street misjudged the political power of the medical profession. Industry groups representing cardiologists, orthopedists, hospitals, and device manufacturers mobilized their members to pressure the government to back down. And they succeeded. First, HHS delayed the start date for prepayment review by about half a year. Then it reduced the fraction of Florida claims that would undergo prepayment review from 100 percent to 30 percent.22 Then it dramatically limited how many cardiac-related categories would be subject to prepayment review. Finally, it cancelled the entire project in 2013—a full and unconditional surrender before the health care industry. As far as we could discover, no prepayment reviews ever occurred. If any did, the results were never published.
HHS backed down because the industry mounted a brutal multifront counteroffensive.23 The AMA pressured HHS directly to drop the audit plan, claiming that it would jeopardize seniors’ access to medical services by discouraging doctors and hospitals from treating them. The American Hospital Association pursued relief in federal courts, claiming that HHS was refusing to pay for medically necessary care. In Congress, the industry sought to clip the wings of the recovery audit contractors (RACs) that Medicare uses to screen claims for improper payments. The RACs had irritated hospitals, cardiologists, and other health care providers by recouping over $5 billion in overpayments on Medicare claims from 2009 to 2013. The medical propriety of claims for cardiac procedures was consistently one of the reasons most often identified by the RACs as a reason for rejecting claims. The industry convinced lawmakers in the House and Senate to introduce bills changing the way RACs were paid and limiting their ability to demand records from hospitals. It got more than 100 members of Congress to sign a letter to HHS Secretary Kathleen Sebelius denouncing abuses by RACs and demanding they be brought under control. Faced with this kind of overwhelming political opposition, is it any surprise that HHS caved?
That was hardly the only time the federal government attempted to restrain health care spending, only to surrender to the industry. In 1997, Congress revised the way Medicare pays doctors. The new formula, known as the sustainable growth rate (SGR), provided that, if Medicare spending on physician services grew more slowly than GDP, doctors would automatically receive more. But, if payments to doctors grew faster than GDP, payments to physicians would automatically be reduced.24 The object was to prevent the deficit from exploding by ensuring that Medicare spending on doctors grew at the same rate as the rest of the economy.
In 2002, the SGR formula triggered a payment cut of 4.8 percent. Physicians were not happy. They responded with substantial campaign contributions and aggressive lobbying, both peaking in intensity around the time the SGR cuts were scheduled to occur. Physicians wanted to eliminate the cuts and repeal the SGR. That would have caused the deficit to mushroom, however, so Congress was not willing to go that far.
Instead, it responded with a temporary measure that became known as the “doc fix.”25 Rather than eliminate the payment reductions that were due to occur, Congress rolled them over into the next year. Then, when 2003 arrived and the SGR required additional cuts, Congress enacted another doc fix and rolled all of the prior years’ cuts into 2004. This process repeated itself year after year. Congress delayed the SGR cuts 17 times, and in many years, it sweetened the doc fix by giving doctors a raise.
As Congress kept delaying the cuts and stacking them up, the potential impact on both doctors and the deficit became huge. By 2015, the delayed cuts and the new cost growth would have required Medicare to reduce payments to physicians by 25 percent. A cut of that magnitude would have had catastrophic effects. Thousands of doctors would have immediately withdrawn from Medicare, leaving elderly patients scrambling for access to care. Angry seniors would have besieged Congress and voted against anyone who didn’t fix the problem immediately. Congress went through that experience with the Medicare Catastrophic Coverage Act in the late 1980s, and it had no interest in repeating the experience.26 So, Congress had to fix the SGR—but how? The AMA wanted Congress to repeal the SGR in its entirety. Once that happened, the cuts would vanish and money would continue to flow.
But there were two big hurdles. One was the enormous cost of swallowing the accumulated deferred cuts. In 2012, the Congressional Budget Office put the cost of repealing the SGR at $316 billion. No one knew where that money would come from, but the AMA did not care. Its object was to make doctors richer. Whether the money came from college loan programs, food stamps, environmental protection, or deficit spending didn’t matter. But conservative members of Congress wanted a plan to pay for the SGR repeal, so the repeal was stalled for years.
The second obstacle was that the annual doc fix was a “bell ringer” that generated substantial campaign contributions for politicians and huge fees for K Street lobbying firms.27 Physicians needed a new fix every year, and they had to bribe Congress to get it. Both Congress and the lobbyists had an interest in making the repeal process as profitable for themselves as possible, which they did by forcing the medical profession to live with a series of one-year bills.
Doctors finally triumphed when Congress passed MACRA (the Medicare Access and CHIP [Children’s Health Insurance Program] Reauthorization Act of 2015) with bipartisan support. The SGR was gone. Instead of facing a future filled with payment cuts, doctors were guaranteed raises through 2019. The beast was fed, as everyone knew it would be eventually. The money needed to pay for MACRA was never found. Ninety-seven percent of the cost of repealing the SGR was plowed into the deficit.
The fight over the doc fix demonstrates all of the pathologies we have discussed in this chapter. Health care providers feel entitled to lots of money—the more the better. From their perspective, government exists to make that happen. Occasionally, Congress will make a half-hearted attempt to keep the annual spending increases at some reasonable level—say, growing only as fast as the rest of the economy—and providers will promptly crush it. They will pay handsomely to eliminate any impediments to the continued flow of taxpayer dollars. Given how the battle over the SGR turned out, it is unlikely that Congress will soon gin up the courage to fundamentally reform the health care payment system. The more money the government spends on health care, the more dependent the health care sector becomes on the government. And, the more dependent the health care sector is on the government, the more aggressively it lobbies to ensure that the flow of money continues—and increases.
If we assume that politicians are running a business and that health care providers are some of their best customers, it quickly becomes clear why there is an epidemic of unnecessary medical treatment. Unnecessary treatments are the reward for the health care sector’s lavish political spending. And the reward is enormous. In 2015, health economist Paul Keckley and his coauthors observed that unnecessary medical care, “usually associated with excess testing, surgical procedures or overprescribing[,] accounts for up to 30% of what is spent in health care.”28 With total spending now north of $3 trillion, this means Americans waste $1 trillion on health care in just one year. That’s $400 billion more than the U.S. government spends on national defense.
Keckley’s 30 percent figure is an all-in number. It includes things like fraud losses and costs stemming from failures to deliver appropriate medical services, as well as overtreatment. It’s a conservative estimate too. In 2012, the Journal of the American Medical Association published an article by Donald Berwick, the former acting CMS administrator, and Andrew Hackbarth, a researcher at RAND. They concluded that a reasonable midpoint estimate of the all-in total for waste was 34 percent of national health care spending.29 Berwick and Hackbarth put the high end of the range at 47 percent, a shocking $1.4 trillion in 2015. The Institute of Medicine put it this way:
Unnecessary health care costs and waste exceed the 2009 budget for the Department of Defense by more than $100 billion. Health care waste also amounts to more than 1.5 times the nation’s total infrastructure investment in 2004, including roads, railroads, aviation, drinking water, telecommunications, and other structures. To put these estimates in the context of health care expenditures, the estimated redirected funds could provide health insurance coverage for more than 150 million workers (including both employer and employee contributions), a number that exceeds the 2009 civilian labor force. And the total projected amounts could pay the salaries of all of the nation’s first response personnel, including firefighters, police officers, and emergency medical technicians, for more than 12 years.30
The only way to waste that many dollars is by overusing just about everything the health care sector has to offer. As ludicrous as that sounds, that’s what we do. Overuse is so widespread that Robin Hanson, a clever health economist who also has degrees in physics and philosophy of science, has seriously argued that we could reduce medical spending by 50 percent without doing damage to our collective health. “Our main problem in health policy,” he contends,
is a huge overemphasis on medicine. The U.S. spends one sixth of national income on medicine, more than on all manufacturing. But health policy experts know that we see at best only weak aggregate relations between health and medicine, in contrast to apparently strong aggregate relations between health and many other factors, such as exercise, diet, sleep, smoking, pollution, climate, and social status. Cutting half of medical spending would seem to cost little in health, and yet would free up vast resources for other health and utility gains. To their shame, health experts have not said this loudly and clearly enough.31
Later in the same article, Hanson reiterates this claim in boldface, stating, “we could cut U.S. medical spending in half without substantial net health costs. This would give us the equivalent of an 8% pay raise.”32 Cutting medical spending in half would mean saving $1.7 trillion every year. Imagine the good that could be done with that amount of money.
Even associations of medical professionals, which exist mainly to promote their members’ interests, admit that medicine is overused and have been shamed into calling for cutbacks. In connection with the ABIM Foundation’s “Choosing Wisely” campaign, 70 societies of medical specialists issued lists of procedures that their members should perform less often. The America Urogynecologic Society discouraged OB/GYNs from removing ovaries during hysterectomies performed on premenopausal women with normal cancer risk. The American Society for Reproductive Medicine discouraged fertility doctors from prescribing testosterone to men attempting to initiate pregnancy. The Society for Post-Acute and Long-Term Care Medicine discouraged gerontologists from prescribing anti-psychotic medications to patients with dementia and from recommending screenings for various forms of cancer in patients whose life expectancy is less than 10 years. The variety of recommendations on the Choosing Wisely website reflects the pervasiveness of overuse in the medical sector.
Prestigious medical journals have lent their support to the movement. In 2010, JAMA Internal Medicine launched its “Less Is More” campaign, which emphasizes that patients often do better when treated less intensively. In other words, unnecessary medical services do more than cost money. They kill and injure patients too. The deaths of 30,000 Medicare recipients each year have been attributed to overly aggressive medical treatments.33 Think about that: almost 100 seniors a day die from medical procedures they didn’t need and shouldn’t have received.
Neither the Choosing Wisely campaign nor the Less Is More campaign has done much to discourage overuse.34 Shannon Brownlee, whose book Overtreated focused attention on the problem in 2004, was still lamenting in 2015 that “rampant overuse deprives the health care system of money”—hundreds of billions of dollars, she believes—“that could be better spent making sure patients have care they do need. . . . Overuse perpetuates the status quo—a system devoid of transparency, in which clinicians are paid to do more, not better.”35 Exhortations to do less have little effect when the economic incentives encourage providers to do more.
The contrast between medicine and other service sectors is striking. No one contends that plumbers install more toilets than homeowners need, that electricians install too many light fixtures or ceiling fans, or that lawn care companies fertilize or mow their customers’ yards too often. Nor are associations of lawyers, accountants, insurance adjusters, engineers, or other professionals calling upon their members to cut back. The medical sector is the only one in which there is an epidemic of overuse. Not coincidentally, it is also the only one in which control over spending rests mainly with government officials and other third-party payers.
The project of moving as many taxpayer dollars as possible into the health care sector is a joint undertaking in which the repeat players all conspire against the public. Government and medical providers are on the same side. The lesser cheats, by which we mean the criminals who commit the most blatant frauds, simply see the doors to the treasury unguarded and decide to join the raid. The conspiracy between public officials and health care providers has already cost the public trillions of dollars. It will not stop on its own.