Expensive living through chemistry

Hospital costs are skyrocketing. Tenet executives are getting rich. The sky is falling. So what?

BY DANIEL BLACKBURN

Bursting forth like springtime dandelions in fecund soil, replete with themes of health, hope, and happiness for an appreciative American public, and just a few words of warning about potential side effects, pharmaceutical drug commercials are on the air.

And in a peculiar way, these expensively produced entreaties may be subtly but steadily undermining the very underpinnings of the nation’s health care system. Care is diminishing, costs increasing.

Like the weather, everyone talks about erupting costs of medical care, but no one seems to be doing much of anything about it. It is easy to see the problem, difficult to solve it.

There are no simple answers to this growing social quandary that eventually will wrap its problematic limbs around us all. For this problem, maybe, there is no answer.

In a nutshell, this is what faces Americans: Prescription drug costs are going higher, eating into hospital profits and jeopardizing the fiscal health of nearly half of the medical facilities in this country.

But there are always exceptions. Those few hospital corporations able to capitalize on this emerging phenomenon are reaping profits amid a sea of competitors’ red ink. Tenet Healthcare Inc., with a huge presence in San Luis Obispo County, is high on the list of the successful.

There is no geographical relief, though, for medical patients in San Luis Obispo County, who face the same uncertain and expensive future as people in most other U.S. communities.

"Some people are depleting their savings and retirement accounts just to stay healthy," said Charee Gillens, spokeswoman for the SLO County American Association of Retired Persons (AARP). The association hosted a forum May 29 to help county seniors deal with their pharmaceutical needs in months and years ahead.

Miscellaneous external factors such as housing and other cost-of-living expenses may be particularly high in this county, yet there are other, more universal, reasons for skyrocketing hospitalization costs.

Even higher charges for beds don’t save some hospitals from financial ruin. A casual read of the medical care industry’s current status reveals its uncomfortable predicament; nearly half of its institutions, public and private, are in serious financial straits.

According to a survey last May by the American Hospital Association (AHA), the aggregate hospital profit margin sunk last year to 4.7 percent, its lowest level since 1994.

The survey, said Carmela Coyle, AHA’s senior vice president of policy, is considered by hospital professionals to be the most reliable source of hospital financial data because it is based on all the nation’s hospitals, not just a sampling.

Coyle called "significant" the survey’s finding that 48.6 percent of U.S. hospitals reported profit margins of less than 3 percent.

Hospitals with profit margins of less than 3 percent "don’t have the financial resources they need to maintain their infrastructure and prepare for the future," she said.

And more than 32 percent of all U.S. hospitals lost money in 1999, up nearly 8 percent from the previous year.

But while legions of patients may be uneasy at the prospect of shuttered hospitals and clinics, a select few medical care executives in this country are as happy as clams on a closed beach, watching huge profits accrue to those facilities that can be called exceptions to the rule.

Tenet, for example, which operates two San Luis Obispo County hospitals, has been able to leverage itself onto very solid fiscal footing. Last year, the company posted nationwide profits of $678 million, higher than ever before, although recording steady profit growth since 1998.

And just six months ago, the corporation reported its strongest quarterly earnings ever and boosted its fiscal 2002 outlook. Tenet’s second-quarter 2002 operating profit rose 47 percent, attributed largely to increased patient load, reduced payroll, and higher drug prices.

Tenet owns both Sierra Vista, in San Luis Obispo, and Twin Cities Community Hospital, in Templeton, employing more than 1,200 people locally. Overall, the company owns and operates 116 hospitals in 17 states, making it one of the nation’s largest hospital management enterprises. It also is one of the most profitable.

TRACKING A MYSTERY

The difference in success-to-failure ratio probably lies in the disbursement of drugs.

This is not as straightforward and simplistic as those slick, government-sponsored messages would have you believe–that America’s biggest drug problem is simply the age-old plague of banned substances like heroin, pot, crank, ‘Ludes, acid, ecstasy, cocaine, opium, and ‘shrooms.

No, this is a matter of too little, too expensive: Prescription drugs have evolved into one of America’s most pervasive and tenacious problems. And problems with high pharmaceutical pricing–particularly for inpatient use–are severely impacting the entire health care system.

Crisis in the medical system is not new. A seemingly simple doctor-to-patient relationship is muddied by all kinds of business-related turmoil. Blame Medicare and Medi-Cal’s slow payments to physicians. Blame the doctors, poor hospital management, the nurses, the greedy corporations, or the media.

But the real culprit skulks elsewhere.

A recent study by a California-based institute analyzing national health care policy suggests that slow-paying government entities–the most popular scapegoats–are not having the deadly financial effect on the medical system claimed by some.

"The claim by the hospital and HMO industries alike that the ‘1997 reduction in Medicare payments has been the principal cause for recent reduced profits’ is at best incorrect," according to the study’s authors at the Institute for Health and Socio-Economic Policy (IHSP) in Orinda.

The biggest impact on reduced hospital profits for most institutions in the U.S. is created by burgeoning pharmaceutical costs.

"It’s the part of the budget that is breaking the bank," Dr. David A. Kessler, former head of the Food and Drug Administration and now dean of Yale University School of Medicine, told the study’s authors. "Ask any hospital administrator, ask any HMO. Prescription drug price is the one sector that is out of control."

Anyone who thinks research, development, and mass production will ultimately lead to lower prices isn’t looking at the pharmaceutical business.

Pharmaceutical companies are the most profitable businesses in America, Forbes magazine reported recently. Return on revenues was highest, 18.5 percent, and profits were three times greater than the average of all other industries in this country. These numbers were enhanced by huge tax breaks given the pharmaceutical industry by the government.

Drug prices will rise by an estimated 17.5 percent this year alone. The most commonly used drugs are increasing in price at twice the rate of inflation.

Yet even as profits skyrocket, a clamor grows from within the pharmaceutical industry seeking ever-greater margins.

The reason for higher costs to the consumer, according to industry mantra, is the higher cost to the company for research and development of new drugs. This initial, often great, cost keeps charges high over the long life of a drug’s sales, as the company attempts to recoup its original investment. The industry standard for developing a successful drug is, by its own measure, more than $500 million.

However, the industry’s claim is based on its own data, which is forbidden to outside eyes. That causes some skepticism among critics.

Dr. Nelson Levy, a pharmaceutical industry and government consultant specializing in research and development, refutes the claim by industry officials.

"That it costs $500 million to develop a drug is a lot of bull," he said, noting that advertising and promotional expenditures are included in overall costs, and usually exceed actual R&D costs. According to Kaiser Family Foundation research, the pharmaceutical industry spends three times as much on marketing and administrative expenses than on R&D.

In 1999, the prescription drug industry spent, by its own estimate, $13.9 billion on promotion. One company, Schering-Plough, wrote out checks for $136 million to hype its asthma drug, Claritin, more than either Coca-Cola or Budweiser spent during the same period.

While there may be less actual justification for higher and higher pharmaceutical drug prices, there is little incentive for anything to change. Some hospitals are reeling under the weight of fattened pharmaceutical expenses. Some are adapting nicely. And in the meantime, hospital stays get a little farther out of reach for more and more people.

PRESCRIPTION FOR RICHES

One success story that stands apart from the general misery is that of Tenet Healthcare’s chief operating officer, Jeffrey Barbakow, who apparently figured out how to solve the pesky problem of high cost prescription drugs eating into corporate profits.

Barbakow has been the point-man in producing Tenet’s turnaround, and as a result he has been rewarded handsomely. His income last year, including a $26.4 million stock option value, was $31,125,988. That, somewhat ironically, puts his compensation squarely among the most elite of U.S. pharmaceutical company executives.

Barbakow prodded Tenet into reaching its current lofty financial position in at least two visible ways.

First, he engineered a schedule of inpatient drug charges that are among the highest in the nation. This, almost by itself, eliminated potential red ink for the corporation.

Sierra Vista, in San Luis Obispo, charges 1,841 percent over cost for inpatients’ drugs. That places the local facility at the top of Tenet’s 12 California hospitals in that category. Twin Cities, the county’s other Tenet hospital, charges 1,057 percent over cost.

The national average is about 650 percent.

Hospitals making an average markup in drug costs are punished, then, by rising prescription drug costs, and often try to make up the difference by reducing the on-site numbers of health care givers.

A significant majority of hospital administrators queried in that survey by the AHA said they were willing to publicly state that increases in drug prices may lead to reduction in patient-to-nurse ratios in the midst of a nationwide nursing shortage with no foreseeable end. This, the survey’s authors said, "is a clear and present danger to public health that the nation can ill afford to ignore."

But despite its fiscal success, Tenet has more than its share of problems with its shrinking nursing staff.

Nurses at Sierra Vista walked out twice in March and are still unhappy with heavy workloads and reduced patient contact.

Why, one might be left to wonder, are local Tenet nurses fewer in number, while corporate profits have never been higher?

Chalk that one up to CEO Barbakow, too, for his initiation of internal management procedures which restructured, downsized, and consolidated to reach an economy of scale. A most obvious victim: nurses.

Nursing shortages are not new. But according to the IHSP report, "the shortage that has grabbed headlines across the country in recent years is unique and threatens to be far more enduring."

According to IHSP researchers, plans to redesign hospitals "were intended to de-skill and disempower direct caregivers." The impact has been real, because California hospital nurse numbers are now 30 percent below levels called "acceptable" by a state nurses’ association.

At the federal level, there is little interest in making radical changes in the health care industry, yet that is what many say is necessary if hospital costs are to be corralled, and nursing staffs are to be mollified.

Drug costs for U.S. consumers, for example, may not be regulated for many years, if ever.

Prescription drug commercials on television will multiply, along with those scary disclaimers.

And the spiraling price of pharmaceuticals, it would appear, will continue to cloud the medical care future of America. Æ

‘New Times’ news editor Daniel Blackburn can be reached for comment or story ideas at [email protected].