By Newt Gingrich

How Much Is Heath Care Really Worth? Patients, Not Bureaucrats, Should Decide.

When I met with several Republican senators this week, it was clear that they recognize Americans’ desire to have practical solutions for the cost of health care. The combination of pressure from constituents and a direct challenge from President Trump is focusing their attention on immediate reforms which could be enacted – even with a Democratic House. Republicans also realize their alternative to “Medicare for All” must be built on a larger, positive vision. It is clear that fixing health care may be the biggest issue in the 2020 election.

Republicans should think of this health care challenge in two boxes.

The first is to provide immediate relief to constituents worried about coverage for those with pre-existing conditions, few choices and high premiums in the individual marketplace, and high out of pocket costs for individuals who need to use their insurance.

The second is to fix the underlying structural problems in the health care system which are at the root of the health inflation problem.

On this latter priority, it is important that we define the problem that must be fixed. In fact, our most fundamental challenge is not that we pay too much for health care – but that we have no idea how much health care is worth.

In a normal marketplace, as Edward Deming wrote, innovators create products and customers define value. An innovator may create something they think is impressive, but it is the customer who gets to decide how much they are willing to pay for it. They make this decision based on how much they value the product over other ways to spend their money. It is this interplay between innovators creating new products and customers defining their value which makes the magic of the marketplace work. It is why in most free markets with sound intellectual property protections, we get a continuing virtuous cycle of innovation which leads to higher quality and lower cost.

Health care, however, is not a normal market.

It is not normal because the consumer of the product, the patient, is not the one purchasing the health care (deductibles, co-insurance, and co-pays notwithstanding). Instead, the purchaser is the insurer, employer, or the government from whom the patient receives health coverage.

So, in health care, who is the customer – the payer or the patient? And who should determine value?

I believe, and I think most Americans would agree, that the patient’s voice should be more important than the payer’s. This is especially true because the patient is usually directly or indirectly the source of money for the payer. Since the patient is the one receiving the health care, we want the patient defining value.

That’s why I advocate eliminating third-party payments in health care as much as possible. The rise of direct primary care practices, for example, is a promising development which liberates doctors to be accountable directly to their patients by replacing third-party payers with direct payment by patients.

Still, the unpredictable nature of life requires some sort of health insurance for unexpected, large medical expenses. This means that for a significant portion of the health marketplace, the third-party payment model is unavoidable.

The question then becomes: How do we make this third-party payment system as accountable as possible to the patients, so they can define value even though a third-party is paying?

The answer is by making that interplay between the patient, payer, and provider as simple and transparent as possible. Establishing this right to know will really begin to improve the value of the system.

Unfortunately, for the past 40 years, most health reforms in Washington have taken the opposite approach. They have led to more middlemen, more opacity, and more complexity in the system. It is no surprise then that as the patient’s ability to determine value was submerged in a mountain of bureaucracy, that the health inflation problem became worse, not better.

Source: Foundation for Economic Education

So, as we evaluate possible reforms, we need to establish the “Patient Power Test.” It asks a simple question: Does the reform increase or decrease the patient’s power to define value?

I will be returning to this idea several times over the next few months. But for now, let’s apply this test to some of the proposed reforms to lower drug prices.

I have written before about the Trump administration’s proposal in Medicare Part D to require all discounts and rebates provided by drug manufacturers to pharmacy benefit managers be passed directly to patients at the pharmacy counter. There is now legislation in Congress to do the same in the private marketplace.

By making the result of the negotiations between manufacturers and PBMs more visible and responsive to the patient through their out-of-pocket costs, it helps break up the cycle of drug price inflation caused by manufacturers responding to PBMs’ desire to seek bigger discounts and rebates they use to pad their bottom line.

This reform increases the patient’s ability to define value, because his or her out-of-pocket expenses for the drugs are based on the actual price of the drug rather than an inflated list price. It saves patients money and passes the Patient Power Test.

Contrast this reform with two similar efforts to reduce drug spending in Medicare.

One is a proposal being floated by Speaker Pelosi to have a so-called neutral arbiter have the final say on prices in Medicare. Currently, Medicare prices are based on what insurers negotiate with drug manufacturers in the private marketplace. As we’ve discussed, the private marketplace has its issues and needs reform. But since patients often choose their insurance based on the availability of their medications, that private marketplace incorporates some of the patients’ needs into the value of a drug.

Pelosi’s arbitration idea, by contrast, is totally removed from the real-world input of the patient in a marketplace. It has the same problem as Obamacare’s Independent Payment Advisory Board, which earned the incendiary moniker of a “death panel.” The board was officially repealed on a bipartisan basis in 2018. Americans do not believe that unelected bureaucrats should be the ones to determine whether a drug or medical procedure that could save or dramatically improve their lives is worth the taxpayer money it would cost.

By removing the patient entirely from the process of determining the value of a drug in Medicare Part B, arbitration fails the Patient Power Test.

Another set of somewhat similar proposals that fail this test are those put forth to base Medicare Part B prices on what other countries pay for drugs. I have been very supportive of the steps Secretary Azar and the President have been taking to reform health care, but both the HHS and similar proposals in the Senate miss the mark.

International reference pricing has all the problems of arbitration and IPAB – and then adds the fact that the unelected bureaucrats deciding the value of the therapies are in foreign countries. This model is even further disconnected from the needs of the American patients Medicare Part B is serving.

Health care is extremely complex, and there are many things to consider when trying to enact fundamental reform. However, as Republicans develop their health platform, they should be sure to not let this complexity distract them from basic principles of what works and what doesn’t. The Patient Power Test is a good place to start.