In the July 6, 2011, issue of The Wall Street Journal, Roger Bate has written a column entitled “Beware the Risks of Generic Drugs.” He specifically zeroes in on drugs produced from ingredients sourced in China.  Although this story is about the issues associated with generic drugs, the bigger question it raises is why pharmaceuticals would cut corners on such critical processes as the sources of ingredients for their drugs. At least one of the root causes is the relentless pressure governments, insurance companies, and employers feel to reduce costs by reducing the acquisition prices of drugs.

When governments, private insurers, and self-insured health plans try to drive drug prices down and, specifically, to convert patients from using generic drugs instead of branded drugs, there is a limit in terms of cost-saving opportunities available, without putting patients at risk.  To push cost savings beyond that point inevitably raises a huge risk of acquiring generic drugs priced at a level that does not optimize patient safety.

We cannot solve our health care cost crisis entirely primarily by driving prices down for drugs, supplies, devices, and medical services.  We have to reduce unnecessary usage of the health care system, and to drive the healthier behaviors that are the most sustainable way of reducing health care system usage.

Publicly held businesses and governments under stress for excessive costs often have the tendency to flex their muscles in procurement processes to demonstrate their ability to save money.  The unit cost savings are visible, the savings opportunities are often immediate, and the purchasers can present themselves as fiscally responsible.  Moreover, it is far more comfortable for payers to beat up on suppliers through the procurement process than to deal with the messy questions associated with inappropriate usage of the health care system, or driving people to engage in healthier behaviors.

There are two things wrong with relying on procurement strategies as the primary cost reduction tool:

• Unless there are tight controls on what is purchased, cost reductions are often covered by sellers cutting corners in what they are providing, or reserving the right to charge for what had been given away.  Government contractors have mastered the process of low-balling initial contract price offers, and then making huge profits from “extras” which are inevitably required by the government at a later time.  The so-called savings are phony; they are merely costs that are deferred to a later time and are often higher than a more comprehensive competitive bid.
• The sellers who agree to accept lower prices and try to honor them according to their terms often find themselves unable to perform profitably.  Over time, the pool of sellers willing to bid on business that is consistently likely to be unprofitable shrinks.  Eventually, the purchaser has no competitive options.

In the pharmaceuticals context, the corner cutting can be fatal to patients, as was the case with heparin.  Although I obviously cannot know what happened in every health plan procurement negotiation, I would not be surprised that purchasers which drove a hard bargain on pricing for generic drugs created an environment in which the supply chain functions of pharmaceutical manufacturers attempted to acquire ingredients for the drug at a price that could not be supported with the extra cost of a tightly controlled supply system.

There are no “magic bullet” ways to take drug prices down beyond a certain point.  Major drug manufacturers are administratively inefficient; they spend excessively on marketing and sales; and they may still have less efficient research and development processes.  However, beyond a certain point, cost cutting will cause people in their organization to take actions that put processes at risk.

Employees of pharmaceutical companies are not excessively evil or reckless compared to other businesses or governments; this is true of every large organization.  Employees under severe pressure anywhere to cut costs make stupid and reckless decisions to keep their jobs.  They particularly cut costs in areas in which the consequences are less visible or more likely to appear at a later time, especially if they can transfer the risk to someone else.  They are unlikely to go after the most sustainable cost reductions, which involve messy structural reform of their organizations.

In the health care marketplace, this was illustrated particularly with the Johnson & Johnson manufacturing safety problem in the last few years.  Much of the publicity about that case demonstrated that the root cause was a culture that, over time, became excessively focused on cost cutting at the risk of patient safety.

Relative to other areas of health care, the same principle applies: there is no free lunch when costs are cut excessively in the procurement space.  One major firm was very happy with the fact that its insurance plan administrator significantly reduced the payments due to physicians, hospitals, and other healthcare providers. The plan administrator secured a very good long-term contract because it presented itself as having a better ability than other administrators to negotiate prices with providers.

Unfortunately for the Company, the consequence of this hardball negotiation process was that many providers left the network and stopped treating patients with whom they had long-term relationships.  As a result, the Company lost in two ways:

• Some patients stayed with these providers, who were now out of the network and were charging much higher prices.  Even with lower reimbursement percentages for out-of-network care, the Company still paid more.  Out-of-network costs shot up.
• Some patients changed providers, received disruptive and suboptimal care, and were very unhappy with the Company for causing this to happen.

As a CEO, I was never comfortable with strategies based predominantly on procurement-based price reductions.  They tended to work for 2-3 years, and then fell apart.  The better strategy was to work with vendor-partners to get better products and services through sustainable cost reductions.  For example, I always liked solutions in which parts were re-engineered or packaging was reduced, or a less expensive, but equally reliable, way to ship the product was found.  These kinds of cost reductions were more challenging, but they worked.  Cost reductions based solely on price concessions struck me as a very lazy way to reduce costs.  I supported them, but, to a limited degree and for a limited period of time.

Ultimately, the challenges of reducing health care costs will require us to make deep and broad structural changes on how we live our lives, and allocate societal resources.  The move from branded to generic drugs is a small step in health care cost reduction, but, like every other, it has limited value and has to be managed with great care.

Why don’t more Americans go into public service?  This is a most important question, because the public sector is being crippled by mediocre, sometimes poor, and, infrequently, but too often, corrupt leadership.  When I was young, my parents strongly encouraged me to consider either a career in public service or taking on periodic assignments in public service. I do not want to romanticize government officials in the past, because many of the pathologies we see today have been around for centuries and even millennia.

Nevertheless, I grew up reading about historical figures like the Roman leader Cincinnatus who left his farm to serve in a leadership position, fulfilled his public responsibilities, and then returned as quickly as possible to his farm and his family.  George Washington was admired because he completed his two presidential terms, and then went back to his Virginia home.  Both of these leaders represented a set of values which placed public service above personal ambition.

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Upton Sinclair, the author of The Jungle, and a renowned journalist from the early 20^th century, once said that “it is difficult to get someone to understand something when the continuation of his livelihood depends on him not understanding it.” This is a profound, but simple, truth.

Whole industries and marketplaces, and often political and social paradigms, depend on people willfully denying reality.  In health care, the stubborn myth is that more care is always better care.  This myth enables health care providers to make more money, not have to make tough end-of-life decisions, and appear to be giving the patient what he or she wants.

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In the March 5-11 issue of The Economist, there was an article entitled “The Perils of Property.” The author made the point that buying a home is the biggest single financial bet most Americans will ever make.  As all too many Americans learned in the recent financial meltdown, buying a home can be a very risky bet.

Our government not only subsidizes home ownership through the home mortgage interest deduction, but it has created a variety of tools to enable lenders to make home mortgage loans to more people.  Lawmakers have always believed that broad-based home ownership is an inherent societal benefit, because they believe it creates a greater stake in the well being of the community.  Independent of whether owning a home is a good investment, American lawmakers want as many Americans as possible to own, rather than rent, their residences.

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In the Sunday, January 23, 2011, New York Times magazine, there was an article entitled “The White House Looks for Work,” written by Peter Baker, a reprint of an article that appeared in the New York Times online version on January 19, 2011. The article contains some hard-hitting photos of people residing in Rockford, Illinois, a city that clearly has faced some very difficult times.  The people pictured in the article are all gainfully employed, but they all comment on how difficult life in their community has become, and how many people are unemployed around them.

One of the most difficult things for people in that situation to understand is that the key to reducing unemployment is to figure out how to create businesses and jobs that bring money in from outside the community.  To do this, a community has to come together, figure out what people somewhere else with extra money to spend need most, determine what they can offer those people, and then develop and implement plans to create businesses and jobs to meet the needs of those distant customers.

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The iconic image, whether a photo or video clip, often shapes the perception of events in profound ways.  As I am learning as a film producer, those who market films specifically look for that one still photo or freeze frame that not only captures the essence of the film, but creates dramatic power.  In an article in the January 20, 2011, issue of The New Yorker, called “The Toppling,” author Peter Maass makes the point that the iconic images of Iraqis tearing down the statue of Saddam Hussein in Baghdad’s Firdos Square on April 9, 2003, was largely a media-staged event.

The significance of these images is that they seemed to convey a sense that Iraqis were ecstatic about the overthrow of the Saddam Hussein regime.  Many commentators compared the statue toppling to the images of Berliners tearing down the Berlin Wall in 1989, or the Rumanians tearing down the statue of their totalitarian dictator Nicolae Ceausescu.  However, whereas these other cases were largely spontaneous expressions of joyous citizens of Germany and Rumania reflecting their newly found freedom, the Baghdad celebrations were clearly premature and, as a result, reflected a strange mix of a few Iraqis, a few media people, and few military personnel.  The power of the images of Iraqis celebrating the American liberation by the symbolic act of toppling Saddam Hussein’s statue may have kept Americans from questioning the wisdom of how the Iraqi war was conducted for quite a while.

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In the early 1980’s, shortly after George Harvey became the Chairman and CEO of Pitney Bowes, I asked a more senior colleague why he thought George was the best candidate among those who vied for the CEO position.  He talked about George’s wisdom and track record, but he also said: “Unlike many adults who collect a paycheck, he actually makes tough decisions.”  He went on to explain that many highly-paid, well-credentialed people are afraid to put themselves at risk by making difficult decisions, but that no leader of a major organization could afford to be afraid to take the risk of being wrong or pretend to be taking certain actions.

That comment has not only stuck, but seems more astute than ever.  I have been both more admiring of people who stick their neck out, and more frustrated with those who should, but do not, when tough situations occur.  In the last few years, we have moved into the most difficult economic environment since the 1930’s.  It has effectively “smoked out” whether people want to embrace tough decisions and engage others in constructive conflict, or whether they will develop even more elaborate ways to avoid those decisions.  I have seen more of both kinds of people in the last three years than ever before, especially the non-performers who have learned to survive by “pretending” to perform.

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Catherine Rampell of the New York Times wrote an article that, unfortunately, reports on an all-too-common problem, the increase in the long-term unemployed population, on December 2, in a story entitled “Dwindling Prospects.” I know people who fit her description. In fact, I have spoken to a local support group of individuals who are part of the long-term unemployed population, in one of the wealthiest communities in the world, Darien Connecticut.

I was effectively unemployed once in my life, for about a 4-month period  (January, 1979, through May, 1979) between my second law firm job and my hiring by Pitney Bowes.  I was told in October, 1978, that I would not be offered a partnership, was given a few months to look for a job while on the payroll, and then was put in an “of counsel” status, meaning that I would be hired only for hourly project work. I had a little work, but nowhere near enough to support my family.  It was initially scary, and I felt all the self-doubt that Ms. Rampell described in the people she profiled.  When I became unemployed, despite a Harvard Law degree, I did not know when I would be hired to work again.

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My work in health care-related issues has evolved over the past year to advocacy for broad-based employer health programs to much more targeted initiatives in four areas:

• Prevention and wellness, especially programs that have rapid and significant return on investment, such as immunizations;
• Wellness programs;
• Providing information to patients that improves their engagement in managing their health more effectively; and
• Hospital patient safety.

This last subject, patient safety in hospitals, is of broad interest to the federal government because the number of deaths occurring in hospitals because of deficient patient safety practices exceeds 200,000 people a year.  If these deaths occurred in spectacular airplane crashes, it would be equivalent to 10 fully loaded 747’s crashing every week and having every passenger die. Unnecessary deaths in hospitals are the third-leading cause of death in America, larger than every cause than cancer or heart disease.  More people die in one month in American hospitals than have died in the entire history of the Iraq and Afghanistan conflicts combined.

This is a particular area of focus for Dr. Don Berwick, the new head of CMS, the federal government agency responsible for both Medicare and Medicaid programs. I am going to do my best in 2011 to make sure it is of equal importance to hospitals, health plan administrators, and those who pay for hospital care, namely, businesses and individuals.

The New York Times highlighted this issue in the November 25, 2010, issue with a front-page story reported by Denise Grady, entitled “Hospitals Make No Headway in Curbing Errors.” In the article, Ms. Grady reports on a five-year study conducted in 10 North Carolina hospitals, which found that harm to patients was common and that the number of incidents did not decrease over time.  According to my good friend and colleague at the Harvard Advanced Leadership Institute program, Dr. Chuck Denham, the founder and head of TMIT, a non-profit devoted to transforming health care, there are three root causes to patient safety issues:

• Hospital acquired infections;
• Adverse drug events; and
• Deficiencies in care transitions or hand-offs (between emergency rooms and the remainder of the hospital, between shifts, between caregivers, between acute care and care after people leave hospitals, and from one hospital to another).

The Society of Actuaries, in a 2008 study, just focusing on the documentable costs at hospitals, found that hospital patient safety errors cost almost $20 billion a year, and it is highly probably that this estimate significantly understates the total cost. There are many cost-saving opportunities in the health care system that will be resisted, because they involve cutting payments to health care providers, reducing health care capacity, reducing health insurance coverage, or requiring people to pay more for health care.  However, no one can defend spending money on health care that kills or injures people, or results in serious, hospital-acquired infectious diseases. Saving money by reducing the frequency of bad hospital care practices is a no-brainer.

Dr. Denham pointed out that, while the airline industry has never had this intolerable unsafe record, it was far more dangerous to fly 40 years ago than it is today.  He referred me to a book by John Nance entitled Why Hospitals Should Fly.  Nance points out that many of the solutions to the patient safety are relatively easy, low-tech solutions, such as the consistent use of checklists, a practice that airline pilots and air traffic controllers have used for decades.  Many hospital errors occur simply because humans forget to check or recheck something they need to do.

Safety across all activity sectors also requires the elimination of excessive error-prone steps in processes in which errors create risks.  The simple substitution of putting bar codes on drug containers that eliminate human key entry errors reduces the frequency of people administering the wrong medicines.

This past summer, my daughter worked in a research lab and made an error frequently made in hospitals.  She picked up the wrong glass vial to commence an experiment.  When she described what happened, I pointed out to her that she made an error for the same reason errors are often made in hospitals: the vial was not color-coded to help remind her of its contents.  Hospitals make this same mistake with much deadlier consequences, by having health care workers confuse medications with saline solutions or water, because the containers are not clearly marked.

The incidence of hospital-acquired infections is often a result of health care workers not attending to a process of washing their hands frequently enough.  While it is easy to blame them, the opportunity to make hand washing easier is easy to create. At Pitney Bowes, we put hand-sanitizers everywhere, and we reduced the frequency of seasonal influenza, as well as upper respiratory infections.

Hospital workers and doctors sometimes believe that taking the time to wash hands reduces their productivity in terms of the number of patients they can see during the day, but increasing staffing to give everyone time to wash their hands is an investment that easily pays itself back.

The other big issue, which the recent health care reform legislation makes an effort to address, is the problem with preventable readmissions.  Many people end up back in the hospital for the simple reason that they fail to comply with the instructions hospitals provide them when they are discharged.  Early this year, I visited a major academic medical center that had a world-class electronic health information system, thanks, in part, to the work the brother of a close friend of ours had done.

However, despite the world-class information system that existed within the hospital, the discharge instructions provided to the patient upon discharge were in paper form.  There was no easy-to-use and standardized system for getting these instructions to the primary care physician for the patient or to whoever could most closely help the patient manage the post-hospital health care process.

The health care reform legislation will provide incentives to those hospitals,which do the best job in reducing preventable readmissions.  This is a welcome change in the law, but we have to go much further if we are going to reduce and eventually eliminate this problem.  Dr. Denham has done a wonderful and hard-hitting documentary entitled Waiting for Zero, which eloquently portrays the problem, with the help of actor Dennis Quaid, who, despite his wealth and influence, and his ability to secure what he believed to be the best available for his twin daughters, almost lost both of his twins because of hospital errors several years ago.

The hospital safety problem is the largest piece of a broader systemic problem of sloppy, error-prone health care in our country.  The solution is not a single-payer, or single-provider, system, or consumer-directed health care, but a relentless focus on error-free care delivery in every part of the health care system.

I should note that health care errors do not just happen in acute care settings.  In 1989, we lost a son at birth because of a poorly-administered lab test that prevented physicians from from diagnosing a condition that would have led to a early, planned, and, most likely successful cesarean birth.  Medical errors can happen anywhere and have devastating results.

Regardless of what else I do in 2011, I would expect that focusing on patient safety will be a high priority.

On the set of the film From the Rough, which I am producing and which is in production until November 5, I spoke with the film’s costume designer.  She told me that there is a shortage of tailors, shoe repair people, and weavers everywhere she goes. I can believe what she says, because it is consistent with my experience.  When my wife and I lived in New York City between 1981 and 1991, I needed to get a tear in a nice suit repaired.  A Saks Fifth Avenue sales professional referred me to a weaver, an elderly Italian woman, who was the only weaver he could identify.  She had a four-week backlog of work, and had hundreds of suits, trousers, and coats piled in her small retail space.

When I hear or read about the latest unemployment statistics, which, by the way, are significantly understated (the real unemployment rate is probably about 15-16% instead of 9.6%, since someone who is “discouraged” from seeking work is still unemployed, even if he or she is not formally applying for jobs), I get frustrated with the inflexible and short-sighted way in which governments and individuals are addressing the problem.

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