"Prescription Prices, V3" by Chris Potter

Steve Brill’s TIME Cover Story “Bitter Pill” Under Fire

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"Skyline of the Texas Medical Center, outside Houston" by David Daniel Turner
The sprawling Texas Medical Center just outside Houston — Steven Brill’s source of inspiration for the TIME cover story, “Bitter Pill”. (Complete photo credits are located at the end of this article.)
Have you read Steven Brill's TIME magazine cover story, "Bitter Pill: Why Medical Bills Are Killing Us"?

On February 20, 2013, TIME magazine published Bitter Pill: Why Medical Bills are Killing Usa scathing 36-page exposé by Steven Brill about the skyrocketing cost of healthcare in the U.S.1  In the piece, Brill gives us a disturbing glimpse at the culture of unchecked profiteerism that has infected our national Healthcare marketplace, perpetuated by health services institutions and pharmaceutical companies alike.  He then suggests some sensible regulatory measures that would go a long way towards repairing this rigged system.  But, as is often the case where vast sums of money are concerned, those who would stand to lose push back against the currents of change, damming up the possibility of reform by employing all of the tools that are typically favored by those with vast resources — e.g., misinformation, intimidation, quid pro quo lobbying of policymakers — in the hopes of stemming the tide for as long as possible.

The opening salvo of dissent for Bitter Pill came in the form of a webpage titled “Setting the Record Straight on TIME’s Article …“, published by the American Hospital Association (AHA).  Not surprisingly, the orchestrators of this page hit all the right notes of feigned shock and dismay at having been so wrongfully accused by Brill, maintaining that his article ” … [C]ontains some inaccurate or misleading statements.” Also, that “Our health care system is important to every American …”  When asked about the AHA’s response to Bitter Pill in an interview for the Columbia Journalism Review, Brill called the webpage “hilarious”.2

1st Air Cavalry cases colors for upcoming deployment (Photo courtesy of the U.S. Army)
In the wake of “Bitter Pill”, corporate apologists ran roughshod over Brill with the fervor of charging cavalry.

In the days, weeks and months that followed Bitter Pill’s initial release, shock-waves reverberating from the Healthcare sector reached the pro-business community at large, causing  a trickle down effect wherein a slew of Big Business apologists would heed The Bugle of Capitalism’s call to rally, and charge to the defense of their beleaguered pharmaceutical and health-services-providing brethren like the Union cavalry at Little Big Horn.  Armed with jaded research reports and statistical data removed from context, these clean-cut, smart-suited, corporate horse-soldiers ran roughshod over many aspects of Brill’s article, distracting focus from the central obstacle to real and lasting Healthcare reform — i.e., the lack of government oversight — with a familiar cure-all prescription calling for deregulation of the free market (as well as smaller government in general).  

One columnist in particular seemed to organize the most popular of the free-market-centric arguments against Bitter Pill into a comprehensive whole, and over a series of three (successively more critical) blog posts for Forbes he laid out his case against the TIME cover story.  In these posts,  Christopher J. Conover — author of American Health Economy Illustrated (2012) and Research Scholar at the Center for Health Policy and Inequalities Research (CHPIR) at Duke University — sought to clarify what he alleged were “myths” perpetuated in Brill’s “opus” criticizing U.S. Healthcare.3,4,5  While I will concede that Conover makes a compelling argument on two tangential points — i.e., the relative effectiveness of American healthcare (regardless of cost) to other countries and Brill’s having overstated Medicare’s efficacy in claims processing in his exposé — several of his objections to Bitter Pill were born of faulty reasoning.  Specifically, three core conclusions in Brill’s TIME cover story are wrongfully singled out and ridiculed by Conover.  These are:

  • The U.S. spends 27% more per capita (on Healthcare) than other countries
  • Drug prices in the U.S. are, on average, 50% higher than in other developed nations
  • Excess prices = Excess profits

What follows is my analysis of the case made by Mr. Conover against Mr. Brill on these points, as well as my counterargument.  As I will show, inconsistencies in Conover’s logic ultimately leads him to contradict himself, thereby weakening his overall thesis that an uninhibited free market can work efficiently within the American Healthcare economy.  Also, many of the reports and statistical data cited by Conover in his Forbes blog posts were either taken out of context, largely irrelevant to the discussion at hand or written by authors of questionable objectivity.  Furthermore, in seeking to attack the validity of the pro-regulatory conclusions drawn by Brill in Bitter Pill, Conover betrays a frame of reference that is rooted in corporation-friendly dogma.  But as I argue in the following paragraphs, corporate protections should not be the primary consideration in making Healthcare policy decisions.  Simply put: “People before profits.”

The U.S. spends 27% more per capita (on Healthcare) than other countries

 

"World Map w/ Country Flags" by Nemo
Annual Healthcare spending in the U.S. outpaces China and 14 other OECD nations.

The study used by Brill in Bitter Pill to back up this claim — Accounting for the cost of US health care: A new look at why Americans spend more —  was published by McKinsey & Co.’s economic research arm, the McKinsey Global Institute (MGI) in 2008.  Specifically, Exhibit 1 (pg. 13) in the report plots an x-y graphical comparison between average spending per capita (i.e., per person) versus GDP per capita between 14 OECD (that is, the Organization for Economic Co-operation and Deveopment) countries in 2006.  The United States topped that graph with a whopping $6,300 per capita health care spending for that year, with a nationwide total of $2.1 trillion in spending.

However, Conover contests these figures on the basis that the McKinsey report used a simple linear regression line rather than a semi-logarithmic plot to map the data.  The simple line is inappropriate for the data, argues Conover, and he cites a semi-log regression line derived from “the same” OECD statistics used in the McKinsey study, taken from The Business of Health (pg. 8) by Robert L. Ohsfeldt and John E. Schneider (2006). (Note: The slideshow presentation, “How Does the U.S. Health-Care System Compare to Systems in Other Countries?” gives an abridged overview of the data used in Ohsfeldt and Schneider’s book, including the semi-log graph referenced by Conover, in Figure 1-2, pg. 9.)

Additionally, Conover says that the McKinsey report fails to adequately account for the drastic differences in GDP among nations, due to the U.S. being so much larger than many of the OECD countries in the study.  As such, argues Conover, an alternate graph which breaks down the U.S. GDP by state ought to be included to grant perspective.  He then refers to Figure 19.4b from his 2012 bookwhich does just that. (Note: Figure 19.4b is also included in a freely available Power Point slideshow based on data from Conover’s book, ‘American Health Economy Illustrated’.)

But, Mr. Conover’s logic shows some spotting:

First of all, the data from Ohsfeldt and Schneider’s book was taken from 2000, not 2006.  The report cited by Brill uses more recent data from the OECD, which is relevant due to McKinsey’s assertion in its report that “In 2006, we found that US health spending totaled … an increase of $363 billion from 2003 …” (pg. 13).  If national spending on healthcare increased by such a notable margin in three years — from 2003 to 2006 — what may we infer about a report citing data from six years before the time of the more recent (McKinsey) study?

Secondly, regardless of whether a linear regression line or a semi-log regression is incorporated into the graphs (for the 2000 or 2006 OECD data), the U.S. is still going to turn up as the nation spending the most per capita on healthcare out of the 14 countries considered — by the amount specified by Brill in Bitter Pill for the 2006 data and by a pretty fair margin for the 2000 data, as well!  All Ohsfeldt and Schneider’s model really shows is that a semi-log regression line follows the scatter plot data more closely than a linear line.  But Conover uses this revelation to imply that ” … U.S. spending is exactly where it should be given its higher GDP per capita.”

Apparently, he is basing this claim on the belief that the semi-log line may be used as a predicator for what countries “should be” spending (per capita) on healthcare based on GDP.  This is an erroneous assumption, though, as the model cannot be reliably employed to make such a prediction.  A semi-log regression line on a scatter plot regarding annual Healthcare spending by nation (versus GDP) does not draw normative conclusions about what each country ought to be paying for Healthcare, nor does it purport to.                

However, to Conover’s credit, he walks his earlier assertion back a few paragraphs later:

” [T]his … does not imply that there is no waste and excess in the U.S. health system: I am merely objecting to the claim that virtually all other countries do a better job in controlling costs simply because the U.S. is an outlier in the standard [i.e., linear] model. The standard model is wrong.”

But Mr. Conover is still missing the point.  Whether you fit a linear regression line or a semi-log regression line to the OECD scatter plot data has little to do with the price of tea in China. (Incidentally, McKinsey’s study informs us that the U.S. outspends China on healthcare, too.)  In fact, I would even go a step further and submit that average per capita spending on Healthcare (again, versus GDP), as detailed in the McKinsey and Ohsfeldt/Schneider reports really says little about the core issue here.

Most people don’t understand the high cost of Healthcare unless they are unlucky enough to suffer from serious injury or disease.  Then, reality sinks in when they find that their insurance will not cover a significant amount of the total medical charges for treatment (which, as Brill explains in Bitter Pill, is likely for most people with low to mid-level insurance).  Moreover, combining what everyone in the nation pays for Healthcare per year — including those who haven’t paid much beyond policy fees and deductibles because they haven’t been sick, those who don’t require continuous medication, as well as those with no insurance at all who have not been to the doctor recently — into one big group for the purposes of extrapolating a national spending average, does not accurately reflect the disproportionate financial burden that has been imposed on people who have had to pay for comprehensive treatment out of pocket.

Drug prices in the U.S. are, on average, 50% higher than in other developed nations

"Prescription Prices, V3" by Chris Potter
Patented and generic medicines distributed by hospitals are frequently marked-up by over 100% of their fair market values.

Here, Conover attempts to call Brill to task for not praising the (relative) merits of the generic drug market in the U.S., as compared to other G7 countries, in Bitter Pill.  He provides a lengthy synopsis of generic sales across several nations — referencing International Prices and Availability of Pharmaceuticals in 2005, and Cross-National Evidence on Generic Pharmaceuticals: Pharmacy vs. Physician-Driven Markets,  by Patricia Danzon, PhD, and Michael F. Furukawa, PhD to back up his claims  — ultimately reaching the conclusion that America is near the front of the pack as regards the accessibility and affordability of generics.  However, as fascinating as this is, it really has little to do with the problems in the Healthcare industry laid out by Brill in Bitter Pill.

Combining data on over-the-counter (OTC) and prescription generic drug sales with bulk healthcare facility purchases (for in-house dispensation during treatment) nationwide says nothing about the prices that hospitals then turn around and “sell” the medication to patients for.  As Brill explained, it is not uncommon for hospitals to charge vastly inflated sums for trivial items like single tablets of acetaminophen and disposable alcohol swabs.  But even these fast and loose prices pale in comparison to the cost of non-generic medicines.

Indeed, one of the most shocking revelations in Bitter Pill was the unregulated “mark-up” culture pervasive among the pharmaceutical companies that develop patented medicines and the hospitals that dispense them.  As anyone who has ever been (or known someone else who has ever been) the unfortunate recipient of a cancer diagnosis can attest, newly developed life-saving medications often come attached with a hefty price tag.  But Brill demonstrated just how unreasonable the companies producing these medications have become in their quest to maximize profits.

Under current laws, companies that produce new drugs are entitled to an exclusive (and time-limited) selling period during which the drugs cannot be reverse-engineered and produced/sold from another source.  Therefore, innovators of medicines have the opportunity to become the sole proprietors of products for which there is an extraordinary need.  As such, they are free to set the prices as high as they wish.

Economics 101, right?  But here’s the problem: patent laws essentially work the same way for medicines as for other technological breakthroughs like microwave ovens, cordless telephones, DVD players and faster computer processors.  That is — products of convenience/pleasure that are not essential to life.  No matter how many of us steadfastly believe that we cannot live without our smartphones, the fact is that people don’t just drop dead when their wireless carrier shuts off service for a missed payment.  And when push comes to shove, if the cost of cell service becomes unreasonably high, there is always the option of giving up the phone and carrying on without one.

Companies intrinsically understand this.  The knowledge that there is a maximum threshold or total dollar amount that a person will ultimately be willing to pay for a product or service stops providers from raising prices so high that no one is willing to buy from them.  Additionally, savvy entrepreneurs know that you can damage long-term profits by fostering resentment among the populace at large with unreasonable price hikes.  It’s just bad business. (I.e., You can sheer a sheep many times, but you can only skin it once.) Thus, markets based on non-essential products for entertainment, convenience, etc., have “built-in” safeguards, and this remains true for companies who enjoy the exclusive privileges that come along with time-limited patents for (non-essential) items.

Contrarily, a person who is dying of cancer cannot just refuse to pay the extravagant price that a pharmaceutical company and/or hospital has set for the medications/treatments that will save his or her life, and then carry on as though nothing has happened.  The patient pays, or the patient dies.  Period.

In Bitter Pill, Brill gives us heartbreaking examples of this hard truth, with stories upon stories of teachers and school bus drivers, tradesman and businessmen, newlyweds and widowers, mothers, fathers and grandparents who are forced into a Faustian bargain with health service providers that offer more life in exchange for certain financial ruin.  The alternative?  Death without treatment.

Even people with little more than a cursory understanding of ethics can see the flaws inherent in a system where buyers are forced to do business with sellers who hold all the power.  The potential for price gouging and predatory behavior is logarithmic!  It is absurd to define such a lopsided market as “fair”, or indeed to call it a market at all.  For a market to exist, there must be choice.  Absent that, what you are left with is little more than enslavement.

A partial remedy for this perverted system is to do as Brill has done in Bitter Pill.  That is, shine a light into the dark corners of hospital accounting offices, and let patients know just how much they are getting charged for services rendered.  If enough people become aware of the problem and demand that elected representatives act — e.g., outlaw incomprehensibly coded billing statements, prevent regional hospital monopolies that prevent fair market competition — then the U.S. will be well on its way towards reforming Healthcare.

But, that still leaves the question of pricing restrictions on patented medicines.  People like Chris Conover would argue that we must pay the unreasonable prices set by pharmaceutical companies in order to make the R&D necessary to create new medicines financially attractive.  Citing a short article called “The Effect of Price Controls on Pharmaceutical Research“, by David R. Francis (which is based on a longer work titled The Cost of U. S. Pharmaceutical Price Reductions: A Financial Simulation Model of R&D Decisions by Thomas Abbott and John Vernon), Conover maintains that it costs $1 billion to bring each new drug to market.

He doesn’t stop there.  In another article by Daniel P. Kessler (The Effects of Pharmaceutical Price Controls on the Cost and Quality of Medical Care: A Review of the Empirical Literature), Vernon states that price regulation on patented pharmaceuticals in the United States would result in a 23.4%-32.7% drop in R&D.  As such, argues Conover, “If we measure health gains and mortality reductions in monetary terms, the estimated return-on-investment in pharmaceutical research is 18 percent!” Not in actual ROI, per se, he clarifies (in a footnote) — but in “monetized years of life”, which he cites Columbia economist Frank Lichtenberg, PhD, as having assigned the value of $150,000 for each added year, “representing societal willingness-to-pay.”

Extrapolating from these (ironically in-human) positive economic calculations regarding the financial value of human life — and from another economist’s report predicting that an upset of the status quo in pharmaceutical pricing regulations in the U.S. would result in the loss of “5 million life-years annually” — i.e.,  The human cost of federal Price negotiations: the medicare prescription drug benefit and pharmaceutical innovation by Benjamin Zycher, PhD — Conover sagely concludes that the world would be better served by leaving pharmaceutical companies alone, so that they can continue to invest in the business of saving humanity from the ravages of disease.

“Who would want to kill or cripple this golden goose?” he asks rhetorically, impressively adding that pricing regulations on the drug statin in Europe have “led to the loss of literally tens of thousands of lives” (according to the not-quite-objective paper Price Controls and the Evolution of Pharmaceutical Markets, Figure 4, written by then-director of the conservative policy think tank AEI, Ken Hassett).

Baloney.

While pricing regulations on patented medicines may have an effect on total corporate profits in the short-term, rest assured that the pharmaceutical sector would still have more than enough belt room left over to splurge on every Stradivarius in the world, the professional violinists to play them, the grand concert hall for them to play in as well as the conductor to direct a melancholy tune depicting the Healthcare industry’s unjust persecution — and still have enough left over to pay executives a top-tier salary while recording enough annual growth to keep shareholders happy — if such legislation were ever to overcome the pitfalls of a heavily-lobbied Washington and become signed into law.  That seems unlikely though, considering the “corporation-approved” rhetoric that has been coming out of our capitol for years (demonstrated succinctly in this 2007 memo from the Congressional Budget Office).

But even if none of the above were true, and pricing regulations on patented medicine could somehow “force” pharmaceutical companies to abandon a significant portion of their research in order to ward off angry creditors —

Well, then … So what?

Plenty of scientific breakthroughs are made independent of Proctor & GamblePfizer and Cisco’s annual shareholder meetings.  Did Fleming demand assurances that corporate earning potential would never be regulated before giving penicillin to the world?  Did Watson and Crick refuse to unravel the secrets of DNA until they had it in writing that Medicare would never have the power to negotiate on drug prices?

When people like Chris Conover and other free market fanatics try to assign a monetary value to things that cannot be reduced to a dollar amount (e.g., life, love, curiosity, ambition, hope, compassion) they betray a fundamental lack of respect for the intangible forces that drive the human spirit.  They are those that fuel our desire to question the natural world, to challenge assumptions, to grow beyond our understanding — to evolve.  Our ancestors didn’t crawl out of the muck and learn to walk upright for the sole purpose of one day achieving maximum corporate profits!  To put it plainly, financial reward is not the primary motive for innovation and discovery.

If anything, drug companies are responsible for exploiting the great minds that put the work into making great medical breakthroughs, by quickly patenting and cashing in on their discoveries.  The actual scientists who come up with new drugs don’t have any rights to the medicines they develop — their bosses do!  How many Nobel laureates have moonlighted as pharmaceutical sector executives?  To argue that corporate profits must be safeguarded in order to foster an environment where innovation is encouraged, is to insult the work of countless natural philosophers (past and present) the world over who have contributed to the betterment of our species for its own sake.

Excess Prices = Excess Profits

Businessman Clutching Moneybag (Photo by 'thenotoriouskcg)
Factors like regional hospital monopolies and the lack of pricing transparency (e.g., overly-technical billing codes) have allowed healthcare providers to get away with overcharging patients for years.

Taking issue with the real-life horror stories examples of medical over-billing documented in Bitter Pill, Conover tries to discredit this central thesis of Brill’s argument by shifting focus away from people in favor of a businessman’s cool analysis of the Healthcare industry.  He states: “ … [N]early all of Mr. Brill’s examples are for inpatient hospital care, which generates an average operating profit margin of 2%!”  The implication here seems to be that since hospitals don’t realize the largest percentage of their profits by bilking the uninsured (and those with substandard insurance) for every cent that they have, we should ignore the ruinous financial effects on the unlucky people who suffer from such practices.  To lend credence to this argument, Conover cites conservative columnist Reiham Salam’s blog — specifically, a guest post by Oren Cass entitled “What Brill Gets Wrong About the US Healthcare System” — which suggests that the total yearly net operating margins for nonprofit hospitals (i.e., the “2%” singled out by Conover for inpatient care, plus all other sources of net revenue) — which Brill reports in Bitter Pill as in excess of 10% on average — isn’t spectacular, because “most major companies do better.”

False.

Sustained 10% average yearly returns are excellent from an investors point-of-view.  In fact, the entire stock market has historically returned an AYR that is just shy of 10%!  To put that in perspective, an individual who invested $10,000 twenty years ago and enjoyed a comparable ROI (Return on Investment) would have $67,275 today — more than six and a half times their starting principal.

Continuing to build upon this faulty premise, Conover next switches tracks, smoothly substituting his strategy of cherry-picking statistics in order to grant his argument false weight, by zooming out for a macro snapshot of one sector of the healthcare industry (for-profit health services facilities) to accomplish the same feat.  Alleging that the calculations used by Brill to estimate the average profitability of nonprofit healthcare institutions are out-of-context and overly generous, Conover then obfuscates the matter by referencing an overly-generalized smorgasbord chart from his book — The American Health Economy Illustrated, Figure 8.6a — that paints a much different picture.  This “statistical sleight-of-hand” is performed by piling reports for facilities like nursing homes and medical labs on top of for-profit hospital reports, to arrive at a figure that is much reduced from Brill’s estimate.

Even though Conover clarifies that his analysis is not representative of all health services institutions, his inclusion of such irrelevant data in the first place is illogical.  The major distinguishing attribute between the nonprofit hospitals that Brill focuses on in Bitter Pill and the for-profit institutions that Conover talks about in Myths about Bitter Pill (Parts 1 & 2), is that nonprofits are not publicly traded companies.  This, Brill argues, makes a huge difference due to the tax-loopholes and various other legal exemptions that such facilities take advantage of in their quest to maximize profits (often at the expense of ordinary people who must go to them for medical services).  But Conover completely sidesteps this distinction, focusing on data about publicly traded companies as the cornerstone for his rebuttal.

He justifies his reasoning simply:

“Admittedly, [my] figures do not include nonprofit hospitals that Mr. Brill says have even higher profits than their for-profit counterparts. But … does anyone seriously suppose that nonprofits have a substantially higher profit rate?”

Apparently, Steven Brill and the fact-checkers over at Time magazine do!  More to the point — Mr. Conover provides no compelling evidence that would suggest otherwise.

Going a step further, Conover attempts to target Brill’s method for calculating nonprofits’ profits (so to speak) altogether, by mimicking a tap dance routine regularly employed by the AHA regarding the effect of depreciated assets on overall profitability.  In short, Brill counts depreciation as a form of income.  For example, if equals operating revenue , equals total expenses, equals depreciation and equals operating profits:

(R – C + D)/R = P

Conover rejects this formula, instead relying on the AHA’s method for calculating operating profits, as seen on this chart, which categorizes the depreciation of real assets as an expense:

(R – C)/R = P

However, he provides little in the way of explanation for his decision to use a formula that is favored by nonprofit organizations who, it could be argued, have a vested interest in reporting smaller profits (i.e., the “non-” in “nonprofit”); merely stating:

“I won’t rehash the debate between Mr. Brill about whether his figure is a better measure of profitability than the  … figure favored by the American Hospital Association (AHA)”, and, ” … [M]any non-profit facilities elect to fund depreciation rather than have to borrow every time something needs replacing (emphasis added).”

Conover instead seems to take the matter on faith, directing readers to two other articles (How Much Cash Should Your Hospital Hold by William O. Cleverley, PhD, and Top Reasons Why EBITDA is a Big Fat Lie by Ted Gavin) before washing his hands of the matter.  As we will see a bit later, though, citing the latter of these two articles in order to reinforce his argument only serves to help Conover contradict himself again, because he next employs information derived from a Valueline report that is actually based on the very system that Gavin’s article condemns (EBITDA).

Nevertheless, Conover plows ahead, repeatedly trotting out the AHA’s ambiguous and highly conservative figure representing the annual operating profit of healthcare facilities for the rest of the article, all while failing to account for the differences between for-profit and nonprofit hospitals (or even the differences between hospitals and other facilities like nursing homes and medical laboratories, as mentioned earlier).  I can only assume that Mr. Conover was hoping to cover his tracks in order to protect such “research” from scrutiny, by filling his articles with a near indecipherable quagmire of conflicting reference information, statistical hoop-jumping, irrelevant charts and lengthy footnote citations.  But as every high school algebra student knows — you cannot compare apples to oranges.

One relevant statistic to include from the for-profit healthcare sector (as pertains to the case against the healthcare industry laid out in Bitter Pill) would have been the astronomical profits that are routinely raked in by pharmaceutical companies, as this particular component of the healthcare-industrial complex is a major target in Brill’s piece.  But Conover ignores this sub-sector completely in his next set of calculations.  Citing data extracted from a 2014 Valueline survey  representing approximately 50 Fortune 500 market sectors, he attempts to advance his argument by stating that the healthcare industry as a whole is not as profitable as Brill claims it is — even going so far as to state that healthcare is actually less profitable than the struggling newspaper business!

Again, there are several logical fallacies inherent in this line of reasoning. Firstly, in keeping with his system of comparing dissimilar entities, Conover once again substitutes data for publicly traded companies in lieu of data for the nonprofit hospitals that Brill called out in Bitter Pill.  Second, after running the numbers in a variety of ways to try and match Conover’s figures (he doesn’t elaborate on his methodology for extracting the Valueline data), I can only conclude that he combined and averaged profits from several different facets of the healthcare industry into one group, in order to derive a representative yearly profit margin for (what he claims is) the “whole” industry.

As mentioned previously, though, he neglected to account for the average profits of pharmaceutical companies in his calculations.  But setting that aside for the moment, the individual pre-tax lease-adjusted margin — presumably the metric employed by Conover from the survey — for all but one of the healthcare related sub-industries that he includes from the report are still high enough to make any reasonable investor happy: Healthcare Equipment (20.30%); Facilities (10.76%); Products (10.65%); Services (4.99%) and Information/Technology (13.02%). (Recall that 10% AYR is excellent from an investment point-of-view, contrary to Conover’s assertion that “most major companies do better.”)

Moreover, note that the lowest pre-tax margin of 4.99% comes from the “Healthcare Services” sub-sector.  This name is actually something of a misnomer, as it includes companies like Accretive Health Inc. (NYSE: AH) — which is one of the largest collectors of medical debt in the U.S.  In his article, Conover glosses over the inclusion of such companies, subtly describing the Health Service category in a footnote as ” … a combination of [for-profit] hospitals … long-term care facilities … health insurers … medical laboratories … medical professionals … and other miscellaneous services” (emphasis added).

If you read Bitter Pill, then you know that the only time Brill mentions debt collection agencies is when he cites real-world examples of hospital accounting clerks unleashing these pit bulls on the working poor, and/or people with substandard insurance, when they can’t keep up with their medical bills.  If anything, the futility of such aggressive collection practices (i.e., trying to get blood out of a turnip) represented by their apparent reduced average profits — that is, as indicated by Valueline’s comparatively low figure (4.99%) for the heterogeneous Health Services sub-sector — only serves to reinforce Brill’s argument that the healthcare system employs a billing system that is nonsensical and counterproductive for everyone involved.  For example, litigation brought against Accretive by the Minnesota state attorney general for illegal collection practices actually resulted in the company having to pay out a $2.5 million settlement in 2012.6  This doesn’t exactly lend credence to Conover’s argument that we are dealing with a more optimal, market-efficient business model than Brill would have us believe.

Also note that private insurance companies are included in the Healthcare Services category.  Similar to for-profit hospitals, such companies (e.g., Aetna Inc.) were largely not a target in Brill’s medical industry exposé.  In fact, Bitter Pill demonstrated the plight of private insurers who have been out-leveraged by hospitals and physician groups that form de facto monopolies. The reason for this, as Brill explained it, is that these entities acquire so much of the seller’s market that they are able to maintain high pricing that smaller (relative to Medicare), private insurers don’t have the clout to negotiate.  Again, judging by the low aggregate profits for Healthcare Services indicated in the Valueline report that Conover references, it would certainly seem that Brill was onto something!

Furthermore, as alluded to previously, Conover’s decision to withold the data regarding pharmaceutical companies in the Valueline report from his self-styled “representative compilation of publicly traded firms” (for the entire healthcare industry) is rather dubious.  Perhaps his reluctance is understandable, though, considering that the average pre-tax operating margin profits for such companies is listed at over 25% in the report, which certainly would have inflated his lo-ball  estimates while simultaneously deflating his argument that the healthcare industry produces less profit than newspaper sales.  Or maybe he felt that his earlier argument disputing Brill’s claim that pharmaceutical prices are too high in the U.S. was sufficient enough that he needn’t say any more on the matter.  But as I have already explained, his conclusions regarding that particular point were also misguided. (Incidentally, “Newspapers” don’t have their own industry category in the Valueline report, as Conover implies in his article.  The actual market sector described combines publishing houses and newspapers.)

Lastly, Conover contradicts himself by employing the Valueline report’s data in the first place.  Recall that one of the articles he cited to reinforce his claim that that the AHA’s formula for determining average net operating margin (by listing the depreciation of real assets as an expense rather than a form of profit) for healthcare facilities was titled “Why EBITA is a Big Fat Lie”, by Ted Gavinson.  But curiously, the Valueline data that Conover employs to beef up his argument is based on EBITA!

This represents the healthy sneeze that finally brings Conover’s house of cards crashing down.  Selective statistical analysis and data misrepresentation can only get you so far, after all, as any reasonable individual can see the truth about our healthcare industry any time he or she is left holding the bag on a hospital bill.  That is, a select few are profiting off of the plight of ordinary people, by cornering the market on services that everyone requires, and jacking-up prices into the stratosphere (in an act of rank opportunism) with no regard for the social consequences.

If you have not yet read Steven Brill's TIME magazine cover story, "Bitter Pill: Why Medical Bills Are Killing Us", do you now plan to after reading this editorial?
  

Resources

1. Brill, Steven. Bitter pill: why medical bills are killing us [Internet]. Time Magazine; 2013 Feb 20 [cited 2013 Apr 14]. Made available by the University of Texas at Arlington: http://www.uta.edu/faculty/story/2311/Misc/2013,2,26,MedicalCostsDemandAndGreed.pdf

2. Lieberman, Trudy. ‘Bitter pill’ — the aftereffects [Internet]. New York, NY: The Columbia Journalism Review; 2013 Jun 11 [cited 2014 Apr 19]. Available from:  http://www.cjr.org/the_second_opinion/bitter_pill–the_aftereffects.php?page=all

3. Conover, Chris. 5 myths in Steven Brill’s opus on health costs – Part 1 [Internet]. New York, NY: Forbes; 2013 Mar 4 [cited 2013 Apr 12]. Available from: http://www.forbes.com/sites/chrisconover/2013/03/04/5-myths-in-steven-brills-opus-on-health-costs-part-1/

4. Conover, Chris. 5 myths in in Steven Brill’s “bitter pill” – part 2 [Internet]. New York, NY: Forbes; 2013 Mar 7 [cited 2013 Apr 14]. Available from: http://www.forbes.com/sites/chrisconover/2013/03/07/5-myths-in-steven-brills-bitter-pill-part-2/

5. Conover, Chris. 5 take-aways from Steven Brill’s Time tome on health costs [Internet]. New York, NY: Forbes; 2013 Feb 28 [cited 2014 Apr 3]. Available from: http://www.forbes.com/sites/chrisconover/2013/02/28/5-take-aways-from-steven-brills-time-tome-on-health-costs/

6. Silver-Greenberg, J. Medical debt-collector to settle suit for $2.5 million [Internet]. New York, NY: New York Times; 2012 Oct 7 [cited 2013 Apr 17]. Available from: http://www.nytimes.com/2012/07/31/business/medical-debt-collector-to-pay-2-5-million-settlement.html?_r=2&

Photo Credits

1. “Prescription Prices, V3” by Chris Potter at www.stockmonkeypic.com (CC-BY 2.0, 2012 Dec 11, via Flickr)

2. “Skyline of the Texas Medical Center, outside Houston” by David Daniel Turner (CC-BY-SA 3.0, 2013 Oct 27, via Wikimedia Commons)

3. “First Air Cavalry at Fort Hood, TX” by The U.S. Army (CC-BY 2.0, 2009 Mar 25, via Flickr)

4. “”World Map w/ Country Flags” by Nemo (Public Domain, 2012 Nov 29, via Pixabay)

5. “Businessman Clutching Moneybag” by thenotoriouskcg (CC-BY-ND 2.0, 2008 Dec 14, via Flickr)

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