The American Prospect #333

I D E A S, P O L I T I C S & P O W E R

THE BUSINESS OF HEALTH CARE

How corporatization is cracking the medical system Maureen Tkacik • David Dayen Luke Goldstein • Suzanne Gordon Steve Early • Krista Brown • Sara Sirota Stephanie Arnold • Harold Meyerson AUGUST 2023 PROSPECT.ORG

BUYER BEWARE Online retailers like SHEIN, Temu, and Amazon are known for their low prices. But their “great buys” come with hidden costs.

These companies stand accused of horrible practices such as operating sweatshops, stealing intellectual property from designers, damaging the environment, and selling goods containing toxins like lead. There are even credible reports of forced labor in their supply chains.

America’s own trade laws are giving these brands an unfair advantage, and at the same time, are also undermining our manufacturers and workers.

The “de minimis” loophole allows packages valued under $800 to enter the U.S. duty-free.

Because SHEIN and others send their cheap goods directly to consumers, they are able to dodge import duties, even though they ship hundreds of thousands of packages to the United States every single day.

It’s time to reform de minimis.

Let’s ensure SHEIN, Temu, and Amazon pay their fair share.

ADD YOUR VOICE:

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16 Patient Zero

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Tom Scully is as responsible as anyone for the way health care in America works today. By David Dayen

28 Health Care’s Intertwined Colossus

How decades of policy failures led to the ever-powerful UnitedHealth Group By Krista Brown and Sara Sirota

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36 The Oliver Twist

How orphan drugs became big business for Big Pharma

By Maureen Tkacik

46 My Life in Corporate Medicine

Meet a millennial family physician who is also a onewoman antidote to private equity and the forces that have destroyed compassionate treatment for patients.

By Stephanie Arnold

52 When M.D.s Go Union

The wave of professionals who are joining unions has now reached the ranks of physicians. By Harold Meyerson

Prospects 04 A Sick System By Maureen Tkacik and David Dayen

Notebook 07 Discount Health By Luke Goldstein 10 Gunning for More VA Privatization By Suzanne Gordon and Steve Early 13 Beachfront Roulette By Gabrielle Gurley

Culture 59 Catherine L. Fisk on the Writers Guild strike 62 Ryan Cooper on The Problem of Twelve: When a Few Financial Institutions Control Everything and Our Lives in Their Portfolios: Why Asset Managers Own the World 64 Parting Shot: Top Ten Things I’d Give Up for Free Health Care By Francesca Fiorentini Cover art by Richard Borge JUNE 2022 THE AMERICAN PROSPECT 1

On the Web

Visit prospect.org/ontheweb to read the following stories:

America’s system of checks and balances is supposed to work by each branch of the government contesting for power with the others. That is not remotely how the government works today. Instead, the judiciary exercises dominion over the other two branches. —Ryan Cooper on the out-of-control Federalist Society judiciary

“It’s easily the most unsafe site I’ve ever walked on.”

— Luke Kasper, sheet metal worker Lee Harris writes about TSMC’s $40 billion semiconductor facility being constructed in Phoenix.

The ruling was no surprise.

It is part of a decades-long campaign from the right not just to resegregate higher education, but to end race-based initiatives in other aspects of American life, including employment diversity programs, corporate board diversity quotas, and government contracting requirements.

— Miles Mogulescu on the SCOTUS affirmative action rollback

The airline industry is using mustpass legislation to unravel air travel price transparency laws that have been on the books for the last decade.

—Jarod Facundo on the FAA funding renewal bill Will this kind of business and consumer pressure make any difference? The closest analogy is North Carolina’s now-repealed bathroom law. A tally by the Associated Press in 2017, a year after the “Public Facilities Privacy and Security Act” was enacted, calculated that the direct cost to the state’s economy was $3.76 billion and growing.

— Robert Kuttner on the DeSantis culture war

So sizable were these gains among low-wage workers that they were the only group of workers over the past two years who have seen wage increases that outpaced the rise in inflation.—Harold Meyerson on Bidenomics and the Great American Quit 2 PROSPECT.ORG AUGUST 2023

What should not be ignored is the way in which the nation’s highest court relies on dodgy theories and facts not in evidence to make the pronouncements it wants.

—David Dayen on the SCOTUS loan forgiveness decision

EXECUTIVE EDITOR David Dayen FOUNDING CO-EDITORS Robert Kuttner,

Paul Starr

CO-FOUNDER Robert B. Reich EDITOR AT LARGE Harold Meyerson SENIOR EDITOR Gabrielle Gurley MANAGING EDITOR Ryan Cooper ART DIRECTOR Jandos Rothstein ASSOCIATE EDITOR Susanna Beiser STAFF WRITER Lee Harris JOHN LEWIS WRITING FELLOW Ramenda Cyrus WRITING FELLOWS Jarod Facundo, Luke Goldstein INTERNS Thomas Keegan, Elizabeth Meisenzahl, Emma Murphy, Elizabeth Rosenberg CONTRIBUTING EDITORS Austin Ahlman, Marcia Angell, Gabriel Arana, David Bacon, Jamelle Bouie, Jonathan Cohn, Ann Crittenden, Garrett Epps, Jeff Faux, Francesca Fiorentini, Michelle Goldberg, Gershom Gorenberg, E.J. Graff, Bob Herbert, Arlie Hochschild, Christopher Jencks, John B. Judis, Randall Kennedy, Bob Moser, Karen Paget, Sarah Posner, Jedediah Purdy, Robert D. Putnam, Richard Rothstein, Adele M. Stan, Deborah A. Stone, Maureen Tkacik, Michael Tomasky, Paul Waldman, Sam Wang, William Julius Wilson, Matthew Yglesias, Julian Zelizer PUBLISHER Ellen J. Meany PUBLIC RELATIONS SPECIALIST Tisya Mavuram ADMINISTRATIVE COORDINATOR Lauren Pfeil BOARD OF DIRECTORS Daaiyah Bilal-Threats, David Dayen, Rebecca Dixon, Shanti Fry, Stanley B. Greenberg, Jacob S. Hacker, Amy Hanauer, Jonathan Hart, Derrick Jackson, Randall Kennedy, Robert Kuttner, Ellen J. Meany, Javier Morillo, Miles Rapoport, Janet Shenk, Adele Simmons, Ganesh Sitaraman, Paul Starr, Michael Stern, Valerie Wilson PRINT SUBSCRIPTION RATES $60 (U.S. ONLY) $72 (CANADA AND OTHER INTERNATIONAL) CUSTOMER SERVICE 202-776-0730, ext 4000 OR info@prospect.org MEMBERSHIPS prospect.org/membership REPRINTS prospect.org/permissions

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1225 Eye Street NW, Suite 600, Washington, D.C. 20005 info@prospect.org | 1-202-776-0730 ext 4000 AUGUST 2023 THE AMERICAN PROSPECT 3

S T C E P S PRO MAUREEN TKACIK AND DAVID DAYEN

A Sick System The Old Post Office featuring artisan tequila and full-sized Belbuilding in Washington, with its observation tower that looms over the Federal Triangle, once housed Donald Trump’s hotel, but it was converted into a Waldorf Astoria last summer. The ornate sensibility remains in its grand ballroom, where in early June, the ratio of humans to massive crystal chandeliers was unsettlingly low.

Just about every corporate representative with the slightest relationship to health care had assembled to hear from Biden administration officials, members of Congress, and industry CEOs at POLITICO’s Health Care Summit. It was fittingly co-sponsored by a pharma company whose sole organically developed drug is a blend of ibuprofen and famotidine (Pepcid AC) that retails for $2,500 a bottle, and the lead trade group for the private equity industry, whose longtime leader Drew Maloney opened the summit with a panel on “private equity’s role in improving digital and virtual health.”

Following Maloney’s lead, nearly every panelist spent some time touting the transformative potential of technology and artificial intelligence in healing patients and, not incidentally, saving money. North Carolina urologist-turned-Republican congressman Greg Murphy, beaming in from a House Ways and Means markup seven blocks east, was lavishing praise on the miraculous ability of telemedicine to provide quality Hospital at Home™ treatment to his constituents in the Outer Banks (where two of its three actual hospitals have closed over the past decade), when his Zoom stream froze for 20 seconds. Somehow, nobody laughed.

Later, after multiple panelists explained how “food is medicine”—an unwitting reference to the 2020 CMS rule enabling Medicare Advantage insurers to entice seniors with debit cards they can use to buy groceries—guests were treated to an open bar 4 PROSPECT.ORG AUGUST 2023

gian waffles with fudge sauce and sprinkles.

In other words, the gathering exemplified much of the current American health care predicament: empty buzzwords, hysterically misplaced confidence, chronic bad habits, and wads of corporate cash.

A week later and seemingly on the other side of the universe, another health care conference transpired in decidedly less gilded fashion. The “Take Medicine Back” summit was entirely virtual and attended almost exclusively by doctors, who heard presentations about the creeping financialization of health care and the moral injury medical professionals feel from serving an investment portfolio rather than their oath to provide care.

Mitch Li, a politically progressive emergency physician based in Black Mountain, North Carolina, founded Take Medicine Back to expose the abuses of private equity buyouts of medical practices. His most reliable political ally and one of the few policymakers who spoke at the conference, North Carolina state Treasurer Dale Folwell, is a central-casting cultural conservative. The two met through Mountain Maladies, a grassroots campaign to unwind for-profit hospital behemoth HCA’s 2019 purchase of Asheville’s Mission Health, the monopoly network of western North Carolina. Both men have come to regard HCA as the apotheosis of a broader “profits over patients” mindset that has infected every corner of the health care system.

HCA doctors seem to concur. An astonishing 27 of them from 16 hospitals corroborated a sinister story about administrators employing a “vulnerability index” algorithm to identify patients who are closest to death, and charging staff with persuading their loved ones to abandon life support in favor of hospice care, often without consulting the patient’s attending physician. A tear-

ful mother described how HCA clinicians barged into her 42-year-old daughter’s Austin, Texas, room to pressure her into pulling the plug on her ventilator, lest she spend the rest of her life caring for a “vegetable.” The mother refused, and her daughter, who had a virulent case of pneumonia, ultimately made a full recovery.

Since acquiring its own hospice provider two years ago, HCA’s discharge rate has jumped to roughly twice the national average, according to new research from the Service Employees International Union.

Unlike hospitals, which are paid a flat fee based on a given diagnosis, hospices charge Medicare by the day regardless of whether they administer any services, so conglomerates like HCA are incentivized to convert acute patients with alacrity. And even if a patient dies immediately upon discharge, HCA frees up the hospital bed for another patient, and gets the death “off their books,” lowering the mortality metrics of the discharging hospital. Those metrics are part of the calculation for HCA executive bonuses.

While American life expectancies are in free fall, our agencies and institutions and algorithms are all nurturing an industry that has perversely taken to the promotion of death rather than treatment—which would be infuriating even if health care weren’t consuming a fifth of the GDP. We live in an age of real innovations in medicine. During the coronavirus crisis, the mobilization of treatments and vaccines accelerated at record speed; associated technologies with mRNA could legitimately put a dent into cancer mortality; and Ozempic may have accidentally cured addiction.

By the boasts of many in the field, we are on the precipice of extending lives and eliminating the worst infirmities.

The problem is, because the country essentially lacks any institutions designed to broadly improve public health, our medical advances are funneled through a veritable gauntlet of gatekeepers, distributors, middlemen, subcontractors, loopholeexploiters, conglomerates, and monopolies, all under the watchful eye of Wall Street investors. Managing a hospital or clinic today requires hiring an ever-mushrooming cadre of lobbyists, consultants, and contractors to navigate this confusing new world.

The science of health care points to a bright future; the business of health care points directly backwards.

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In this Prospect special report, we look at the business of health care, the inner work-

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ings of the monopolies and cartels extracting ever-greater sums for ever-lousier outcomes, and the policies and protocols pushing doctors and nurses to the brink— and increasingly into labor unions.

One of the most maddening trends, as HCA’s conf lict-ridden foray into the hospice business shows, is vertical integration. The HMO empire UnitedHealthcare, now the nation’s largest insurer and the largest employer of physicians, is perhaps the most vivid embodiment of a company whose structure dangerously incentivizes the neglect of patients and denial of care.

We’ll explore the continued shifting of veterans into private medical care, re-examine the misunderstood saga of “Pharma Bro” Martin Shkreli, whose own practice of charging a half-million dollars a year for rare-disease drugs is fast becoming the dominant method of Big Pharma, and examine the retail-ification of health care through the unlikely pivot of Dollar General, whose rural locations are patronized by some of the sickest people in America.

We will document the growing influence of private equity in health care, epitomized by a supremely knowledgeable health policy veteran who has spent the H E last 20 years using •private T Ecapital E of a H A to exploit pieces system he R was instrumental in creating. And we’ll meet a young, Southern family doctor (and abortion provider) at one of that private equity firm’s clinics, who recently quit her day job to join the ideologically heterodox ranks of the direct primary care movement, which aims to emancipate patients and medical professionals from the cesspool of corporate medicine in favor of a Substack-style subscription model.

Together, we hope these stories capture a reality that gets missed by a mainstream media too hopped up on trendy buzzwords and misinformed by the experts and influencers who spend more time rubbing elbows at happy hours than they do talking to frontline workers. It’s not a pretty picture. But it is an industry where we discovered an inspiring sense of solidarity among doctors and nurses, and a disarming sense of clarity about the fundamental conflict between caring for patients and delivering value to shareholders. That, if nothing else, could light a path forward to a more caring future. n

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The AMA stranglehold over medicine loosened considerably in the 1970s. A series of court rulings and an FTC investigation overturned certain antitrust exemptions. Then the 1973 HMO Act created a class of enterprise that was explicitly exempt from corporate medicine bans, which remain on the books in 33 states. By 1980, the cost of American health care had begun to decouple itself entirely from other developed-world systems. In hindsight, the difference between an industry dominated by small-business greed and corporate greed was profound.

Corporate medicine exists in symbiosis with the public sector. The government funds half of all American health care expenditures today, up from less than a third during the 1990s. But to call these programs “public” would be unnecessarily generous. Nearly 84 percent of Medicaid beneficiaries are enrolled in some form of private managed care—the updated numbers may be as high as 90 percent— and more than half of all new enrollees in the Medicare program are opting for privately provided Medicare Advantage plans, which have proven such a reliable profit generator for insurers that virtually the entire retail industry, from Amazon to Walgreens, seems A R Eto be shifting to O F a MedicareC Advantage • play. The H Affairs health system, Veterans the closest thing this country has to socialized medicine, is being rapidly privatized. And when Congress was f inally roused to do something about the shame of tens of millions of uninsured Americans in 2010, it offered premium support on exchanges to purchase private health insurance. The top seven insurance company CEOs made $335 million last year.

Progressives dream of vanquishing private insurance, and establishing a single-payer system. But even if they could, it’s hard to imagine “Medicare for All” in today’s America as anything other than a corporate gravy train. And the most radical opponents of that gravy train, ironically, are the same AMA members who once were predisposed to attack national health care.

Those inside the system have reconciled to the fact that something is deeply wrong with the way we practice medicine.

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Whereas at the Waldorf, a seemingly bottomless reserve of uniformed skilled humans managed the check-in lines, replaced the coffee urns, and whisked away every dirty plate and lipsticked glass within seconds, facilities caring for our fellow citizens are chronically understaffed, as slashing labor costs raises profits. Shortages of doctors and nurses, and medical deserts that send patients scrambling to find care, have now extended to routine shortages of cheap cancer drugs and penicillin and even IVs composed of salt and water in a bag.

Where is the money for the most expensive health care system in the world going? The cut of gross national health care expenditures commanded by administrative overhead and waste has ballooned to an estimated 30 percent; the portion that pays doctors and nurses has fallen. Experts estimate that fraud comprises at least $10 of every $100 the U.S. government spends each year on health care.

And how much does the government spend policing that fraud? In 2021, that figure was two cents, according to the HHS inspector general. Wealth extraction has become so normalized in American health care, it can barely be considered illegal.

For much of the 20th century, doctors were this for-profit I N Ethe foremost enablers TofH CA U Sconstruct, S because doctors (theoretically L R at B least) operated the cartelAthat controlled how medical care was financed. For decades considered the most powerful lobby in Washington, the American Medical Association and its 2,000 affiliated state and county medical societies worked tirelessly to preserve its preferred mode of financing medicine, whereby doctors set the fees for medical services and patients paid them, without “intrusion” from government or any other third party.

The AMA and its allies worked to sabotage every gesture that might get people comfortable with public options in health care, even things as obviously worthwhile as mass polio vaccination drives or rural prenatal care clinics. The principle that supposedly reconciled this reactionary opposition with the AMA’s idealistic origin fighting the “patent medicine trust” in the late 19th century was its steadfast opposition to the “Corporate Practice of Medicine.” Critics archly pointed out that the medical societies never seemed to sanction doctors who milked the system by investing in hospitals to which they also referred patients. But the cartel’s interventions did sustain medicine as an industry of small and smaller businesses.

AUGUST 2023 THE AMERICAN PROSPECT 5

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6 PROSPECT.ORG AUGUST 2023

NOTEBOOK

Discount Health Dollar General is part of a trend of major retailers trying to move

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You can tell the story of America’s economic and political divide through a spray chart of Dollar General store locations.

One segment of America lives near a Whole Foods or another high-end grocery. In the other America, composed mostly of poor inner-city and rural areas, dollar stores are often the only game in town, with lowpaid employment and little or no access to fresh foods.

Dollar General, the most dominant of the ultra-discount retailers, has explicitly built its business model around this chasm. The chain store’s growth strat-

egy follows a pattern: It hunts for cheap chain stores than all the McDonald’s, land in depressed areas with average Walmarts, Targets, and Starbucks comincomes less than $40,000 a year, and bined. Dollar General alone has 19,294 then crushes any remaining competitors store locations as of the end of March, more than double what they had by supplying low-priced products U U S Istore N E invato cash-strapped populations.

E B S I N in 2010. The Bdollar H sion went largely unnoticed for The pat chwork of dollar stores that has metasyears by the media and polititasized across the country cal class precisely because its has increasingly become a locations, just like the poverty inf licted upon these areas, predictor for the country’s were invisible to elites. voting patterns. To put it Fittingly, the company that crudely, dollar stores are red has profited most from the splinterAmerica, and Whole Foods are ing of the country is now setting its sights blue America. Dollar General and its main competitor Dollar Tree own more on expanding into another market that’s

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into medical care. Cut-rate treatment is the last thing needed in the vulnerable populations dollar stores serve.

NOTEBOOK starkly bifurcated between the haves and have-nots: health care.

Earlier this year, Dollar General announced plans for an expansion of DG Wellbeing, a long-term play to attach health clinics to select stores. Executives at the corporation are making a bet that, in the same way the stores blanketed food deserts across the country, it can also take hold in rural “health care deserts,” where populations are underserved by traditional medical networks.

Dollar General is just the latest retailer to take a stab at the 800-pound gorilla of the health care sector. Widespread dissatisfaction among Americans with rising health costs has prompted a surge of new players to enter the market. Big-box stores like Walmart, Target, CVS, and Walgreens have already begun rolling up the pharmacy business and are now moving into primary care, leveraging foot traffic at their hypermarkets to draw customers to new health centers. Amazon’s recent acquisition of the subscription medical service One Medical and CVS’s purchase of Oak Street Health expand their reach into primary and virtual care too. Best Buy has a “hospital at home” service now.

While public-health reformers see the millions of Americans without insurance as a market failure, large retailers see it as a market opportunity. Their future customer base either may not live close to a hospital or cannot access adequate insurance coverage at work. As with the rest of the market, most new health care enterprises like Dollar General’s are hoping to tap a share of trillions of dollars in public-health programs like Medicare and Medicaid, and entice customers by making receiving a diagnosis as easy as buying a six-pack of tube socks.

Whether that’s advisable is open to question. “The retail-ization of health care is only going to drive more problems in the future … [it] leaves the core of our decrepit health care system intact,” said Stacy Mitchell, coexecutive director of the Institute for Local Self-Reliance, which has chronicled the development of dollar stores and its effect on local communities.

Dollar General may be filling a void, but its retail model and extreme cost-cutting practices pose severe concerns for the quality of the medical treatment that patients will receive. The company has a hard enough time keeping its own employees safe and healthy, let alone its customers.

When Dollar General announced the DG Wellbeing expansion earlier this year, it specifically focused on growth opportunities for mobile health clinics, which it sees as an untapped niche in the market.

In practice, what that currently looks like is roving vans in select locations across Tennessee, a state ranking at the bottom both for public health and rates of insurance coverage among the population. Though vans may have been adequate for rapid tests or vaccines during the pandemic, it’s hardly a substitute for the urgent-care treatment the company promises to deliver. Cheap and dodgy, DG’s health clinic on wheels is the perfect emblem for the company’s strippeddown business strategy in retail, applied to primary medical care.

In hindsight, the rollout of DG’s health care pilot this year came at an inopportune time for the company. When the move was first announced in January, Dollar General was still outperforming other retailers in sales, as it had been throughout the pandemic. The company was inoculated from the pandemic collapse of retail because of its locations in remote areas that initially had fewer COVID-19 cases. During inflation, many shoppers turned to dollar stores to

TOM WILLIAMS / AP PHOTO

Sen. Patty Murray (D-WA) has called out Dollar General’s 986:1 CEO-toworker pay ratio.

8 PROSPECT.ORG AUGUST 2023

Dollar General is just the latest retailer to take a stab at the 800pound gorilla of the health care sector. stretch their purchases, which boosted Dollar General’s sales numbers despite increased costs for supplies.

In the first quarter of 2023, however, the economic slowdown finally caught up with the company, which saw its first decline in sales in years and a drop in stock valuation.

“We’re skeptical about the overall pitch for retail health care at this time and frankly have more serious questions about the fundamentals of the company for the moment,” said Brian Yarbrough, senior equity research analyst at Edward Jones, who has provided analyst coverage on Dollar General.

But rather than pumping the brakes, Dollar General responded to the market slump by doubling down on new growth opportunities to please investors. At the company’s annual shareholder meeting at the end of May, executives emphasized the DG Wellbeing expansion. According to a recent Bain & Company analysis, 30 percent of the market in primary care could be captured by nontraditional players over the next decade, and Dollar General wants as much of that upside as possible.

Outside the walls of the shareholder meeting though, a worker protest put in stark relief how ill-equipped the business’s low-cost model is to deliver quality health care, especially for the low-income customers that its stores mostly serve.

Dozens of workers from stores across the country marched to demand improved working conditions after OSHA recently designated Dollar General a “severe violator” of worker safety.

Armed robberies targeting the stores have frequently resulted in worker deaths.

One incident cited by protesters was the shooting of a St. Louis Dollar General employee by robbers. The employee, Robert Woods, had already been subjected to multiple robberies at the store and requested additional security from his manager. Since the shooting in 2018, the police have been called to the same store over 120 times.

According to workers, robberies have

become routine in part because of a lack of security protections for employees provided by the company.

In response to months of pressure from labor advocates, the company’s shareholders passed a resolution to conduct an independent audit into safety and health policies.

Workers saw it as a small step in the right direction, though far from adequate.

Robberies are only one issue workers face.

Since 2013, 49 workers have died and 172 have been injured, most from non-criminalrelated accidents. OSHA filed penalties totaling $21 million against the company in that time, and found blocked emergency exits and other safety hazards on the sites that went unaddressed by the company despite employee complaints.

David Williams is a stock clerk at a Dollar General store in New Orleans and helped to organize the protests through the organization Step Up Louisiana. He described to the Prospect the conditions at the store that motivated him to speak out.

As one example, the company refused to invest in a new rolltainer, used for transporting products into the store’s warehouse, despite Williams’s repeatedly notifying his manager about its dangers. The rolltainer had a rusty pole sticking out that posed a hazard for the workers unloading goods. On one occasion, the rolltainer slipped and the pole nearly impaled Williams.

“Workers were not getting the respect they deserved … and reporting [these incidents to the company] was like talking to a brick wall,” said Williams, in reference to the rolltainer and other similar incidents at the store.

In addition to cutting corners on safety, the company pays its workers so poorly that it’s brought national attention from lawmakers. The median Dollar General worker makes $14,571 per year, far lower even than other big-box retailers. By understaffing and mostly hiring part-time workers, the stores also employ far fewer workers onsite than the independent retailers that typically get pushed out of the communities by cut-rate Dollar General competition.

Sen. Patty Murray (D-WA) blasted the company in a letter sent to management in 2022, pointing to the company’s 986:1 CEOto-worker pay ratio, which is three times greater than the average for other large publicly traded corporations.

“As the company’s business grows, particularly in low-income communities, more

and more Dollar General workers will face low wages, insufficient benefits, and unsafe working conditions,” wrote Sen. Murray.

The health care industry is already plagued by understaffing and an underpaid workforce, which has been shown to threaten patient safety. Dollar General would have to mimic those practices in order to keep its care prices low enough to get a foothold in the market. Quality care usually costs more than a dollar.

DocGo—Dollar General’s health care partner for the joint venture, which will operate the mobile clinics—has shown a willingness to shortchange medical staff.

In public statements, the company’s former CEO Stan Vashovsky openly admits their employment recruiters seek out a precarious workforce with little professional experience because they’ll accept lower wages to escape working at large hospitals, plagued by burnout and bad working conditions.

“We ‘uptrain’ people of lower skill but who are medically certified to do that work … we can do it at a fraction of the cost. So far, we’re having phenomenal success with it,” he told Fierce Healthcare.

Dollar General often targets poor areas and heavily Black neighborhoods outside the network of big-box retailers. Once the stores open up, Dollar General uses predatory pricing to drop its price tag for goods to kneecap independent competition. It’s only a matter of time before the local stores go out of business.

Dollar General’s chokehold over neighborhoods has resulted in food deserts because until recently, the company didn’t offer fresh produce. To counteract negative press attention, Dollar General has begun to offer a wider array of produce, but only at certain locations.

By only selling low-quality foods, Dollar General has been linked to worse health outcomes in the communities it serves. For that reason, there’s a perverse irony to the company now also trying to take over health services in the same areas whose access to fresh foods are strangled by the stores.

“Dollar General wants to make money on both creating chronic conditions and apparently now in treating those conditions,” Mitchell said.

As the health care giants show signs of weakness, the retail sector is jumping at the chance to make inroads into the market. It ultimately may say more about the depleted state of health care than it does about the prospects of the business ventures. n AUGUST 2023 THE AMERICAN PROSPECT 9

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A System Worth Saving The VA’s undersecretary for health, Dr. Shereef Elnahal, recently urged nine million VHA patients to stick with their primary health care system, because “study after study shows that Helping “Our Heroes”? quality and patient safety is at least as good Under the guise of expanding “veteran if not better than our private-sector counter- choice,” the HEALTH Act would, according parts.” The American Legion expressed the to its co-sponsors, “codify and expand the same sentiment when they called the VHA “a current criteria … for determining when a system worth saving,” because of its unique veteran is eligible to receive [non-VA] care.”

Where did those “criteria” come from? The expertise and vet-centric culture.

That professional advice will not be fol- Trump administration. lowed if Congress passes any part of S.1315, Robert Wilkie, Trump’s second VA secretary, used federal rulemaking to the Veterans’ Health EmpowerUSI NES ment, Access, and B U S I N E implement the E B Leadership, S IMISSIONSAct with N H U Transparency for Our Heroes a set of “access standards” that steered patients outside the VHA (HEALTH) Act, co-sponsored by based on their “drive times” to Sens. Kyrsten Sinema (I-AZ) and “wait times” for appointand Jerry Moran (R-KS). A ments. As reported previously companion bill in the House in the Prospect, current VA Secis sponsored by Rep. Mariannette Miller-Meeks (R-IA). Sen. retary Denis McDonough has had the opportunity to undo the instiJon Tester (D-MT), who chairs the tutional damage done by his predecessor Senate Veterans’ Affairs Committee, “has a yet-to-be-numbered bill called the Making since early 2021. A relatively easy first step Community Care Work for Veterans Act that, would be to reverse Wilkie’s decision not to reports indicate, would similarly enrich 1.2 count telehealth, when delivered by the VHA, million federal contractors, while not doing as a form of “access to care.” This has led to much to improve their own service deliv- annual expenditures of up to $1 billion or ery as unnecessary competitors with almost even more on appointments outside the VHA, where telehealth is deemed to be “access.”

1,300 VHA facilities around the country.

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Funding for the Department of Veterans Affairs (VA) was one of many federal budget items that suddenly became uncertain during the debt ceiling showdown this spring.

Despite their oft-professed love for veterans, House Republicans voted for the Limit, Save, Grow Act in late April, which would have cut VA spending by 22 percent.

This threat to essential services—and the appearance that former soldiers had become political pawns—drew an angry response from veterans organizations, putting House Republicans on the defensive. In a May 11 opinion piece in Military Times entitled “Our Budget-Cutting Plan Doesn’t Harm Veterans,” Veterans Affairs Committee Chair Rep. Mike Bost (R-IL) reassured former service members that their “earned benefits will never be scrutinized” and “their healthcare will never be compromised.”

The eventual debt ceiling deal preserved the VA budget, thanks in part to public outcry. In a Wall Street Journal article after the dispute was settled, House Speaker Kevin McCarthy boasted that Republicans were not only “meeting our obligations to veterans,” but fully funding their programs.

On Capitol Hill, veterans’ entitlements went, in a matter of weeks, from being a political football to a sacred cow once again—to the relief of many. But now, congressional leaders are signaling that any temporary cease-fire over veterans’ health care and how to fund it is over.

The Senate Committee on Veterans’ Affairs will soon be considering new bills that would force the VA-run Veterans Health Administration (VHA) to divert an even bigger share of its $128 billion annual budget from direct care to Medicare-style reimbursement of private-sector doctors and hospitals enrolled in a Veterans Community Care Program (VCCP), which was

created by the Trump administration’s MISSION Act five years ago.

Bipartisan fans of that privatization scheme are now trying to amend the MISSION Act of 2018, which opened the floodgates for outsourcing, in ways that would ensure they will never be closed. Leading the charge are right-wing Republicans, an embattled Democrat seeking re-election from Montana, and a recently rebranded “independent” from Arizona who has reeled in millions of dollars from Big Pharma and other health care industry donors.

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By Suzanne Gordon and Steve Early

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Veterans just dodged a GOP bullet to their health system, but now they face bipartisan fire once again.

TOM WILLIAMS / AP PHOTO

Gunning for More VA Privatization

Sinema, Moran, and to some extent Tester all cater to the popular fantasy that VHA patients—unlike any other health care consumers in America—should be able to selfrefer to doctors, hospitals, or clinics outside their own federally funded “network,” the in-house care delivered by the VHA, which has been constructed to serve very particular military-related health care needs.

Supporters have constantly assured former service members that the resulting bills for a newly created private care program (in 2023, over $40 billion) will be paid by the VA. At the same time, they promise, the VHA will have the money to adequately staff and maintain its own system, so it can continue to provide all eligible veterans the highquality care they originally signed up for.

Paying simultaneously for in- and outof-system care is not a business model any reputable health care economist would ever endorse, not to mention any multistate health care system seeking to avoid bankruptcy. At Kaiser Permanente, for example, bean counters would quickly point out that steering Kaiser’s slightly larger patient population—with no threat of financial penalties—to competitors in eight states and the District of Columbia would soon lead to in-house service cuts, staff layoffs, and widespread facility closings.

McDonough has yet to initiate his own broad administrative rulemaking process, or even a narrower rewrite that would eliminate the telehealth double standard. If adopted, the HEALTH Act would make that impossible, by turning Wilkie’s drive and wait time standards into federal law, amendable in the future only by Congress. The legislation also specifically prohibits VHA telehealth services from counting as access to care.

The most pernicious provision in the Moran-Sinema bill adds “veteran preference” as a reason to seek private-sector care.

According to this provision, even if the VA can provide high-quality care in-house, in a timely fashion and at lower cost, veterans can choose to get out of the system because, well, they just want to. The bill would also

set up a pilot program allowing veterans to receive outpatient mental health or substance abuse treatment in five test locations, without any prior authorization or oversight by their VHA clinicians. As an analysis of the bill by the Veterans Healthcare Policy Institute (VHPI) points out, the VA secretary could be empowered to quickly expand the program nationwide.

Paying VA Vendors More While the proposed HEALTH Act does not impose much-needed wait time standards, quality measures, or training requirements on private-sector providers, it would allow the VHA’s third-party administrators—TriWest and Optum, a UnitedHealth subsidiary—to pay more money to private doctors and hospi-

tals that join the VCCP. According to multiple sources, some providers have been reluctant to enter the VCCP because they would be reimbursed based on Medicare rates, which some consider too low, particularly given the complex nature of VHA patients.

One enthusiastic backer of the HEALTH Act is Concerned Veterans for America (CVA), an astroturf group with Koch brothers funding and close ties to Donald Trump.

CVA just launched a website to help veterans access private-sector care—but that requires first establishing eligibility for the VHA itself, which CVA has long wanted to dismantle and replace with a voucher system.

Sadly, the American Legion and the Veterans of Foreign Wars have both signed on as HEALTH Act endorsers, even though—

Sens. Jon Tester (D-MT) and Kyrsten Sinema (I-AZ) have separate bills that would enrich private contractors to compete with the Veterans Health Administration.

AUGUST 2023 THE AMERICAN PROSPECT 11

NOTEBOOK It will be impossible to ensure veterans access to a well-maintained health care system if the VHA is cannibalized by outsourcing. in their official statements—neither favors privatization, and the VFW is on the record objecting to the very access standards the bill codifies into law.

Value-Based Care?

The HEALTH Act’s embrace of for-profit health care is also reflected in its announced goal to “transition the current VA health care system to a value-based care model, which has been shown to … improve patient outcomes.” In their various private-sector iterations, value-based care and payment models were similarly touted as a way to rein in ballooning costs, improve quality and patient outcomes, and increase physician and patient satisfaction.

According to a recent analysis by the Medicare Payment Advisory Commission (MedPAC), these schemes have not cut costs or enhanced the quality of patient care.

But they do end up penalizing hospitals and providers that care for poorer and more complex patients, as well as patients of color (a good description of many VHA patients). One article in The New England Journal of Medicine found that these models “hampered the pursuit of health equity” and “perpetuated structural racism.” They also encouraged “gaming” reimbursement systems through upcoding and other fraudulent billing practices, and led private health systems to squander even more resources on “external consultants.”

It’s unclear what “value” the SinemaMoran plan will add to a public system that already outperforms its private-sector competition in almost every way.

In a House Committee on Veterans’ Affairs hearing on the Miller-Meeks bill, VA assistant undersecretary for health for clinical services Erica Scavella voiced the VA’s strong opposition to a number of the bill’s provisions, including the codification of access standards. This opposition is based on oft-expressed worries about the potential 12 PROSPECT.ORG AUGUST 2023

consequences of unrestrained growth of the VCCP. Scavella, however, stated that the VA supports the value-based care provisions.

VA leaders provided similar testimony in a July 12 Senate hearing.

argues, VHA staff are “not exempt from data collection requirements, burdensome as they may be,” so similar “accountability and transparency should be mandatory for those who participate in VCCP and are paid to do so.”

Contractor Training and Accountability?

Tester, who faces a tough re-election fight back home in Montana, has drafted an equally dubious bill. The Democratic chair has a long history of complicity with VHA privatization, followed by occasional second thoughts about how it’s going, followed by waffling on even small steps to ensure greater accountability by non-VHA health care providers.

In June 2018, Tester proudly co-sponsored the VA MISSION Act, which President Trump regarded as one of his biggest legislative triumphs. Seven months later, Tester led 28 Senate colleagues in a public expression of concern that the projected cost of patient referrals to non-VHA providers was not being “adequately assessed” or properly funded by the Trump administration.

Their letter warned that the MISSION Act, as implemented by Wilkie and Trump appointees from CVA, would expand privatization “at the expense of VA’s direct system of care … something we cannot support.”

Tester’s new bill, like Sinema and Moran’s, would give Wilkie’s outsourcing rules statutory authority, tying McDonough’s already reluctant hands. At the same time, it fails to give VHA officials the tools they need to make sure that VCCP participants are well prepared to handle veterans’ health care needs, and subject to effective monitoring of their performance. Tester’s draft legislation offers financial incentives to doctors who do a better job, but sets no minimum standards or mandatory training requirements.

Five years after passage of the MISSION Act, the VHA’s outside contractors are still not getting the same training that is required for VHA providers on service-related health conditions, like PTSD, military sexual trauma, or toxic exposures.

Tester seems so solicitous of the VHA’s 1.2 million private contractors that language in his bill designed to promote better medical record-sharing is undercut by an exemption, if that “constitutes too heavy of a burden on the provider’s time and resources.” The VHPI critique of this glaring loophole notes: “By its very nature, the collection of data is burdensome.” But it’s absolutely essential for improved coordination between VHA caregivers and outside contractors. As VHPI

The Real Choice Facing Vets The bottom line for veterans is pretty clear, if regularly obscured by deceptively labeled bills that promise to better serve them.

When it comes to taxpayer-funded health care, former service members can’t have their cake and eat it too. It will be impossible to ensure millions of veterans access to a properly staffed and well-maintained health care system, devoted to their special needs, if the VHA’s patient population is cannibalized by outsourcing.

VA-run medical centers across the country are already under severe financial strain. In San Francisco, the Prospect was told that the VHA now has a $51 million budget deficit, in large part because of 37 percent growth in the number of its patients who have been redirected to the private sector; that facility will pause new recruitments. As a VHA administrator in the Southwest told the Prospect, “We are, by law, forced to prioritize paying for escalating amounts of community care, which means the money has to come from somewhere, which is our operating budget.”

Even Secretary McDonough has warned that, if outsourcing costs continue to rise, “VA medical facilities, particularly those in rural areas, may not be able to sustain sufficient workload to operate in their current capacity.”

At the end of June, a headline in The Philadelphia Inquirer announced that Undersecretary for Health Elnahal made an agreement to replace VA centers in Philadelphia and Coatesville, and work more closely with the University of Pennsylvania Health System to care for VA patients. To VA employees, the move sounded like a rerun of McDonough’s plans to shutter those facilities.

The big decision facing veterans today is whether they want to chase the chimera of choice or stop the dismantling of their own 158-year-old hospital network. In short, it’s “use it or lose it” time at the VA. n Suzanne Gordon and Steve Early are coauthors, with Jasper Craven, of Our Veterans: Winners, Losers, Friends, and Enemies on the New Terrain of Veterans Affairs (Duke University Press, 2022). Gordon is a senior policy analyst and co-founder of the Veterans Healthcare Policy Institute.

Beachfront Roulette

After Hurricane Ian, Southwest Florida takes its chances on the climate crisis and builds back right up to the water’s edge.

By Gabrielle Gurley Last September, Hurricane Ian turned Southwest Florida inside out. Clocking wind speeds of 150 miles an hour, Ian’s walls of water pummeled Fort Myers Beach, Sanibel Island, Naples, and other Gulf Coast communities, and scrubbed homes off their beachfront foundations. Storm surge combined with driving rains swelled the rivers that destroyed inland properties. Ian is now the costliest storm ever to hit Florida, totaling $114 billion in insured and uninsured losses, and the third-most expensive hurricane in American history, behind Katrina and Harvey.

Florida’s climate perils are well documented. Southwest Florida is on target for one foot of sea level rise by 2050, within the lifetime of a 30-year home mortgage.

Hurricanes are stronger and intensifying

faster, and extreme heat complicates everything. But the money sloshing around in the housing sector means the ecosystem is alive and well. Real estate developers prioritize home construction and sales, lenders profit on interest and closing costs, and investors cash in on mortgage-backed securities. Cities and towns need that system to run, surviving on the associated fees and taxes that are even more of a priority to recoup after large taxable property losses. For 2023, Fort Myers Beach saw a 40 percent decrease in taxable property values and Sanibel had a 33 percent drop, equivalent to $2 billion in losses in each municipality.

As long as the federal government provides disaster assistance, flood insurance, and new fortifications to protect property that survived the last storm, there is little incentive to break these cycles. Long-term options, such

as inland alternatives to living on coastal fringes, are set aside. Those elements, combined with a White House–seeking Republican governor who rambles on about “the politicization of the weather,” have virtually guaranteed that there’s no post-Ian discussion in Florida about strategic relocation.

For the fastest-growing state in the country, there’s no crisis in their climate. Some snowbirds dazzled by c’mon-down-thewater’s-fine pitches from Florida realtors still shell out their savings for dream homes on Gulf of Mexico barrier islands that nature intends to finish chewing up and spitting out. “Even after this hurricane demonstrated that places like that can be inundated,” says John Capece, president of the Democratic Environmental Caucus of Florida, “they still want to build there.” Cape Coral, just southwest of Fort Myers, is the third-most popular Florida destination after Miami and Tampa for Redfin users looking to relocate, even though the town saw between 9 and 12 feet of storm surge during Ian, and nearly all its homes are at risk for severe flooding.

“From the standpoint of government those are very attractive homes—apartments and condos— because they have the least demand for services, yet they’re paying the same amount of taxes,” says Craig

REBECCA BLACKWELL / AP PHOTO

New construction sits behind structures damaged from Hurricane Ian in Fort Myers Beach, Florida, in May.

AUGUST 2023 THE AMERICAN PROSPECT 13

At the end of 2022, the Dublin Real Estate Investment Group LLC spent $7 million on the damaged 27-room beachfront Carousel Inn, in Fort Myers Beach, which once appealed to “budget travelers looking for a sunny getaway,” according to the hotel website Oyster.com. The developer plans a luxury residential condo development, with 12 4,000-square-foot units that start at $3.9 million. Real estate developers gravitate toward winter season rentals for visitors, or second homes and condos for mostly part-time residents; those people are likely to be elsewhere and their properties likely to be vacant during the height of A month after the Category 4 storm, tarped roofs in Fort Myers show the extent of the destruction. the summer hurricane season.

Some of the confidence in this paradise One beachfront home built in 2020 in percent year over year, to $3,125,000 from on the edge stems from stringent post–Hur- Fort Myers Beach in Lee County is a testa- $2,600,000, according to the Naples Area ricane Andrew building code reform, which ment to building code reforms in South- Board of Realtors. Overall, the May 2023 turned Florida’s weak building codes into west Florida. After Ian, the home remained median home closing price decreased a litthe strongest regulations in the country. standing, surrounded by more than a dozen tle more than 1 percent to $600,000, from “Hurricane proofing,” or at least something empty lots that once contained homes built $607,500 in May 2022.

Cindy Banyai, a former Democratic approaching it, is now a well-developed between 1930 and 1991. All of the older conbusiness model. Post-Andrew new home struction was swept away by a nearly 15-foot candidate in Florida’s 19th Congressional construction codes require windows to storm surge. This destruction made a lot District, sees investors offering to buy out resist water penetration, as well as impacts of lots available. In early July, Zillow had people waiting on roof repairs for their from wind-borne flying debris and high- 94 properties on sale in Fort Myers Beach, homes. “Some people are taking that,” Banlevel wind loads (a measure of sustained ranging from a vacant lot for $99,500 on yai, a small-business owner, says. “There’s wind pressure or force against the exterior the market for more than 130 days to a $3.9 no real concern or care about where people of a structure rather than wind speeds). In million beachfront vacant lot (after a $1.3 are going, what’s happening to neighbor2018, the owners of the Sand Palace, a Mex- million price cut), part of a former condo hoods, or how it’s affecting the prices around ico Beach home in the Florida Panhandle, complex, that has been on the market since it because basically, most of the municipal built their residence to withstand 250 mile- the end of May. jurisdictions as well as the county, their idea per-hour winds, which exceeded the top end Despite high interest rates and construc- is to want everything to be luxury.” of the county regulations by 100 mph. It tion anxiety due to the exodus of undocuThe downside of the obsession with luxstood up to Hurricane Michael. Unlike older mented construction workers and ongoing ury is gentrification. Ian-fatigued survivors homes, newer construction fortified with supply chain shortages, the high-end beach- are moving inland and upland, or out of concrete and steel features strong connec- front market perseveres. In Collier County state, particularly if they cannot afford to tions between walls and roofs, using “hur- (excluding Marco Island), the May 2023 rebuild to the resilience standards required ricane straps” that literally fasten the roof median closing price of single-family for new construction or pay higher flood to the rest of the house. homes near beach locations increased 20 insurance premiums. Wealthy newcom14 PROSPECT.ORG AUGUST 2023

ALEX MENENDEZ / AP PHOTO

Fugate, a former FEMA administrator and Florida Division of Emergency Management director. “If I’m a developer and I’m looking at these areas that got hit, this is some prime real estate that was probably underdeveloped. So, I can go in there and buy those lots at distressed value, and I’m going to demo it and I’m going to go with a higher density.”

An April AAA survey put the number of Florida homeowners who did not have flood insurance at 70 percent. ers drive out middle-class residents, who in turn move to areas where they displace low-income households, often sending both groups further away from coastal jobs. Florida lawmakers have passed the more than $700 million Live Local Act, aimed at building homes for teachers, nurses, and other middle-income homebuyers. The law, however, prohibits stabilization mechanisms such as rent control and preempts certain local zoning controls.

While some people rebuild and cash out, others get their homes back in shape as best they can, and give it one more storm before they decide what’s next. Worse off are those Florida homeowners who did not have flood insurance; an April AAA survey put that number at nearly 70 percent. Many of these people put their life savings into their homes, and are now economically strapped.

The most common reasons cited for not having flood insurance were “not living in a flood zone” (nearly 60 percent) and “never having flooding problems before” (about 35 percent). Some wealthy homeowners live without flood insurance, but many others can’t afford it. By 2027, homeowners insured through Citizens, the state’s insurer of last resort, will have to have flood insurance, regardless of location.

The lack of take-up complicates one goal of flood insurance: using higher premiums to spur people to move out of dangerous seaside communities, through a perverse kind of market-driven managed retreat. If many more homeowners go without insurance instead of relocating, while real estate developers continue to cater to homeowners who can afford risks, states and localities may delay taking the necessary steps in time to protect lives and property and reduce taxpayers’ exposure to recovery costs.

The federal government has a different set of priorities when it comes to cities and towns, slowly shifting from exclusively a disaster-focused posture to one seeking

to mitigate the impacts of storms through community resilience projects. Coastal residents’ calculations about staying or leaving their homes are tied to their perceptions about how local infrastructure will hold up and how public officials respond. Homeowners ask themselves, “How often am I going to be hit and how is the infrastructure going to be able to cope with that?” says Juan Palacios, director of the Climate and Real Estate Initiative at MIT’s Center for Real Estate. “If I have high confidence in a levee system and that the government is going to put me back in that house, then my response is very different than if I think that nobody’s going to come to rescue me and I have to rebuild the house.”

The 2017 hurricane season focused the minds of area residents on severe storm risks. Hurricane Harvey soaked Houston and Maria crushed Puerto Rico, while Irma, the first major hurricane to hit Florida since 2005, turned into the most expensive storm in the state’s history at that time.

In 2018, the Army Corps of Engineers began to study a storm protection plan that involved hardening the shoreline in the Naples area of Collier County with a mix of floodwalls, storm surge barriers, concrete reinforced dunes, and other structures and natural features. Although the Army Corps had undertaken similar projects in other parts of the country, Southwest Florida had no experience with these kinds of measures.

Environmental agencies and groups concerned about impacts to marine wildlife and erosion pushed back, and the Army Corps shelved the proposal.

This spring, the Army Corps jump-started a new $3 million study of potential solutions and alternatives for an area that saw up to nine feet of storm surge during Ian, and four to five feet during Irma. Corps officials are mindful of incorporating natural solutions, like the region’s dense mangrove patches, as natural fortifications in the first line of defense. “The flooding still pushed through the mangroves and damage still occurred,” says Abbegail Preddy, an Army Corps project manager. “Looking at what exists, we want to formulate measures that would reduce that risk.”

The Army Corps also would consider elements like pump stations to handle water levels around hard structures like floodwalls.

That poses questions for inland communities like River Park, a historic African American Naples neighborhood that suffered severe

flooding and damage to its 1960s-era homes during Ian. Residents are concerned that features of the project could pose unexpected flooding issues. Some people were able to restore their homes, but others are living in less than habitable conditions or have left the neighborhood. They also fear gentrification and have been dismayed by the city’s lack of attention to their well-being before, during, and after the storm.

The Corps project could also potentially incorporate recommendations for acquiring certain parcels of land that could be designated open space in perpetuity, to provide a measure of protection. (State or local authorities would have to secure those areas by eminent domain.) “It’s difficult to justify acquisition except for maybe in those cases where it is an area that’s low, very low and will continue to flood repeatedly in the future, especially with sea level rise,” says Michelle Hamor, chief of the planning and policy branch in the Army Corps of Engineers’ Norfolk District.

One way for cities and towns and developers to share resilience or recovery costs, especially for new construction in threatened sites, would be to levy impact fees. The Seaport, a multibillion-dollar neighborhood in Boston that sprang to life in the early 2000s, benefits from a climate resilience fund that requires developers to contribute to protective measures.

Protecting shoreline places requires new fiscal strategies. “If it is truly economically beneficial for those developers to develop there and it’s good for the town, the developers should be bearing the cost of keeping those homes safe for the next 30 years, not the local government,” says A.R. Siders of the University of Delaware’s Disaster Research Center. “Make them pay for the strain it’s going to put on your adaptation and resilience system, your emergency services system.”

Given Florida’s peculiar strain of climate denial, deep conservatism, and powerful real estate interests, such proposals would likely need some strong signals before they could even begin to creep forward. Yet if Floridians fail to step up to hurricane threats, it may take focusing events—like back-toback, cataclysmic storms—to impress upon developers, lenders, public officials, and community members that it is sheer madness to threaten lives and churn through taxpayer dollars by propping up beachfront lifestyles in high-risk coastal zones. n AUGUST 2023 THE AMERICAN PROSPECT 15

Patient Zero

Tom Scully is as responsible as anyone for the way health care in America works today.

BUSIN E JANDOS ROTHSTEIN

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It was late 2002, and Tom Scully, adminis- joke,” he said, explaining that his regulatrator of the Centers for Medicare & Med- tors were outgunned and slow to react. The icaid Services (CMS), was at a U.S. News hospitals falsified patient costs and that was and World Report forum, relating a tale unethical, he conceded, but they were just of hospital skullduggery. Under CMS rules, responding to incentives. “People follow the Medicare reserved 5.1 percent of its bud- money,” Scully said, “and they’ll find the get to compensate hospitals that treated little niches in the program and they’ll game “outlier” high-cost patients. Scully, a youth- it, and that’s what happened here.” ful-looking man with a pile of slightly grayOne reading of the history of health care ing hair who talked a mile a minute, over the past half-century, as the profit • Tintroduced I N and several NESS U STenet motive was gradually explainedBthat I HE E S RE into insurance and delivery sysother hospital systems, without U tems, is that little niches have the regulators knowing, had sprung up, and people with for years randomly jacked up capital have taken advantage. prices on individual patients That would include Tom Scully. to access the set-aside. This At the Office of Managedeprived other hospitals that ment and Budget (OMB) in the actually had sick patients from first Bush administration and CMS getting a higher share of the funds; under Bush II, Scully played a major role the dishonest actors were costing the in many of the defining features of health honest ones money.

Scully didn’t blame hospital deception, care today, from Medicare Advantage and but the policy framework he was hired the privatized Part D prescription drug bento manage. “I love Medicare, it’s a great efit to risk adjustment and the physician program, but as an insurance model, it’s a payment schedule. He wasn’t responsible

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AUGUST 2023 THE AMERICAN PROSPECT 17

for Obamacare, but the program closely follows his desire to solve problems through the private sector.

When Scully left CMS in late 2003, he joined Welsh, Carson, Anderson & Stowe, perhaps the leading health care–focused private equity firm, where he used his knowledge and contacts to invest in companies that were poised to capitalize on the incentives the government offered. Welsh Carson helped pave the way for what is now an investor gold rush into the medical system.

I’ve watched and listened to virtually every scrap of tape of Scully over the last 35 years, and I conducted a long interview with him in June. I think his beliefs are sincere. He thinks government price-setting doesn’t work, and that empowering private insurers that put their own money at risk leads to better and more efficient care. He believes poor people should be covered generously, but all other patients exposed to cost to reduce overutilization. And he wants the best hospitals and nursing homes and clinics to be paid more than the worst, to force advances in quality.

In practice, this set of philosophies has created the monster that is America’s health care system, where most of the money is public, but most of the entities dishing out and getting that money are private. Commercialization has crowded out what was a thriving nonprofit impulse; intensifying mergers and acquisitions have concentrated every aspect of the system; and a plague of middlemen each take their cut. Scully’s fear of big-government price-fixers has led to the triumph of big private profit-takers, at the cost of doctors, nurses, and patient care.

More than anything, the system has become maddeningly complex, with armies of functionaries working every angle, straddling every ethical line, to unlock a big safe full of money. Scully is America’s safecrackerin-chief. He designed so many aspects of this system, with its intricate nooks and crannies, that he’s practically the only person who understands it. That makes him an extremely valuable commodity. It’s almost as if he invented his career outside of government when he was transforming it on the inside.

Scully, 65, was born in Philadelphia. After graduating from the University of Virginia, he came to Washington, getting hired in 1981 as a staffer for Sen. Slade Gorton (R-WA) while earning his law degree at night from Catholic 18 PROSPECT.ORG AUGUST 2023

University. He eventually moved on to BigLaw giant Akin Gump, working as a telecom lawyer. But he was friends with one of George Herbert Walker Bush’s sons, and that pulled him into the 1988 presidential campaign, where he ran the press operation (he worked briefly on Bush’s 1980 campaign as well).

“I didn’t know the difference between Medicare and Medicaid, even after the campaign,” Scully told me, in typical self-effacing style. But a position running legislative affairs at OMB came open, and Scully’s first two big projects there were health care– related: trying to save the Medicare Catastrophic Coverage Act of 1988, and devising a better method for Medicare to pay physicians, which had seen 14 percent annual inflation the previous year.

Both ended in failure. The catastrophic coverage law, which provided a limited prescription drug benefit, capped out-of-pocket costs, and allowed longer clinical stays, sparked outrage because it forced wealthier Medicare beneficiaries to pay higher premiums for other people’s benefits. After House Ways and Means Committee chair Dan Rostenkowski (D-IL) had his car surrounded by angry constituents after a town hall, Congress repealed the law. The Medicare physician payment reform, called the resource-based relative value scale (RBRVS), uses a complex process to pay doctors for each procedure. It failed to alter the cost trends.

Scully soon became associate director of OMB for health, education, and welfare, simul-

taneously taking a health care policy role in the White House. Within a few years, Scully was writing the long-forgotten 1992 Bush health care proposal. “We think a marketdriven delivery mechanism is the best,” he said when presenting the plan at the conservative American Enterprise Institute (AEI).

A decade earlier, Arizona, the last state to adopt Medicaid, was the first to create a statewide Medicaid managed care system.

Building on successes from Southern California’s Kaiser Permanente, whose insurance limited patients to Kaiser doctors and hospitals, Arizona paid private insurers a per capita rate approximating annual health expenditures, and the insurers used narrow networks and strong case management to keep within that budget. Health inflation in Arizona was lower than the national average. Scully drew the lesson that private insurers can eliminate waste, because it’s their money at stake. “If you say here’s $16,000 a year, call me next year, they’re going to work like crazy to put a 10 percent margin on that,” Scully told me.

The Bush health plan adopted the Arizona managed-care model for Medicare and Medicaid, and added a tax credit for uninsured Americans outside those programs to help purchase basic private health insurance. Rules were put in place so nobody could be denied for a pre-existing condition and everyone in a region would pay the same rate. A risk-adjustment mechanism would give companies with sicker patients in its

The 1992 Bush health plan at least

rhymes with what passed 18 years

later as Obamacare.

Scully ran the Medicare program as part of CMS from 2001 to 2003.

risk pool payments from healthier pools, to guard against cherry-picking.

Being a Republican plan, there was malpractice reform in it. But in form, the 1992 Bush health plan at least rhymes with what passed 18 years later as Obamacare: premium support for basic coverage, and insurance market reforms to prevent adverse selection. The reliance on competition and case management to “bend the cost curve” was a selling point of the Affordable Care Act. While Scully ended up mildly opposing the ACA because he thought the subsidies were too high, he said at a 2018 policy forum that it resembled the Federal Employees Health Benefits Program, a private insurance exchange that has been his model reform for 30 years. “Exchanges are the right thing, what Obama did was the right thing,” Scully told me.

The Bush health care plan would not get adopted, as he lost the 1992 election. Scully decamped first to law/lobby shop Patton

Boggs—Sen. Jay Rockefeller (D-WV) teased him at a 1994 panel that “he is now very close to poverty … but was able to afford cab fare for this”—and then to run the Federation of American Hospitals, which represented around 1,700 private providers. He had now been an inside player in every major part of the health care system, public and private.

A dutiful partisan, Scully opposed the Clinton health care plan as packed with unfunded liabilities and fuzzy math. But as he was documenting the evils of out-ofcontrol health spending, he was representing hospitals, the biggest cost drivers in Medicare and Medicaid, and it’s doubtful he was lobbying for less money for them.

In our call, Scully told me about his frustrations with match rates in Medicaid, and how states can use other pockets of funds to eliminate their share. “The Massachusetts miracle that Mitt Romney did? There wasn’t one penny of Massachusetts money in there, it was all a provider tax scam,” he said. “I actually coached the Massachusetts

Hospital Association a little bit on how to do it as a lawyer.” He quickly followed up with, “That doesn’t mean it’s right!”

When George W. Bush took office in 2001, Scully was recruited to run what was then called the Health Care Financing Administration; he and Health and Human Services (HHS) Secretary Tommy Thompson changed the name to the Centers for Medicare & Medicaid Services to emphasize a “new culture of responsiveness,” Thompson said. Rebranding was part of the agenda: Scully spent big to market a 1-800-Medicare customer service line, with silly commercials featuring Leslie Nielsen and even a blimp that flew over college football games.

When you hear that the government is nothing more than an insurance company with an army, CMS is that insurance company.

(Well, sort of; since its inception, the government has contracted Medicare billing to private insurers, mostly Blue Cross plans, in exchange for a 1.4 percent fee.)

Today, CMS enforces the rules and manages approximately $1.4 trillion in payments for Medicare and Medicaid; in Scully’s day, it was around $560 billion. Even the Pentagon is smaller.

Scully didn’t love the system. He lamented how fee-for-service Medicare paid doctors the same whether the procedure was successful or not. He hated supplemental Medigap insurance policies, which wrapped around traditional Medicare to cover copayments, giving seniors first-dollar coverage and making them insensitive to price.

He once claimed that seniors in Florida went to the doctor too much because they were bored, but usually he was more careful in saying that public insurance made it impossible to manage utilization.

At CMS, Scully started publishing objective quality information on nursing homes and home health agencies, and instituted a small pilot for paying select hospitals more based on their success rates. But Scully said repeatedly that he re-entered government to get a Medicare prescription drug benefit done, to avenge the ghosts of the catastrophic coverage defeat. His talking AUGUST 2023 THE AMERICAN PROSPECT 19

point was that seniors paid the highest prices in the drugstore, because without a prescription plan, they couldn’t negotiate group 28.4 rates for medications.

26.2 Legislation dragged on 24.0 for years. Supporters envi22.0 sioned a separate drug 19.0 17.6 benefit run entirely by pri16.8 vate insurers, not CMS. The 14.4 15.7 13.1 poorest seniors would have 11.1 11.9 no premium and small co9.7 10.5 8.4 pays, but above 135 percent 6.9 6.8 6.8 of the poverty line—roughly 5.6 two-thirds of seniors at the 6.2 5.6 5.3 5.3 5.3 time—costs went up, with a $420 annual premium, a $250 initial deductible, and more if beneficiaries hit the ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 ’20 ’21 ’22 “doughnut hole” at higher drug spending levels.

After changes Scully championed in 2003 creating Medicare Advantage, enrollment D e s pi t e t he rhe t o has skyrocketed. ric about bulk purchasSOURCE: KFF ANALYSIS OF CMS ENROLLMENT DATA ing, critics said the bill failed to take advantage of it. “They wrote into the law itself that gressional passage, he touted the drug ben- and Medigap. They had become popular Medicare couldn’t pay a better price for efit. But he gave just as much attention to in the private market, and Scully wanted drugs,” recalled former Rep. Henry Wax- another program authorized in the law. It to give Americans over 65 what Americans man (D-CA), a senior member of the House was “going to revolutionize the Medicare 64 and under were moving toward. Many of Energy and Commerce Committee at the program, and I also think it’s going to revo- the lobbyists on the bill that Public Citizen time. Scully countered this by saying that lutionize the health care system,” he told revealed were managed-care insurers. private pharmacy benefit managers (PBMs) AEI. It was called Medicare Advantage.

“Those Blue Cross plans and Unitedwould negotiate Medicare’s prices. But that Health plans and all the other plans are fragmented the system, since each plan Like Medicaid managed care, private health going to have leverage to go into hospitals maintenance organizations (HMOs) could and say what are your outcomes, how are would bargain separately.

The Medicare Modernization Act, receive capitated per-enrollee payments you performing,” Scully said at AEI. “We’re which included the drug benefit, finally from Medicare and cover seniors within shifting back to a little bit of a consumerpassed Congress in November 2003, after sharply limited provider networks. (In the driven health care system where people are two marathon House sessions where the 1990s, Scully was on the board of Oxford more responsive.”

Critics saw it as a bid to destroy Medicare, Republican leadership strong-armed Health Plans, which ran the largest Medimembers to support the bill, including care HMO in New York City.) The pro- recalling then-House Speaker Newt Ginwith alleged offers of bribery. According gram, then called Medicare+Choice, rose grich (R-GA) saying in 1995 that if Medicare to Public Citizen, over 1,000 lobbyists for to become 14 percent of Medicare by 1997. were exposed to competition from private drug companies and other firms worked for But a budget deal that year changed the insurance, it would “wither on the vine.” the MMA’s passage. A year later, Rep. Billy payment formula, so funding no longer kept Appearing on C-SPAN in 2001, Scully took Tauzin (R-LA), who chaired the Energy and up with health inflation. HMOs started drop- a call from a woman who “advise[d] all Commerce Committee and was responsible ping out, and Scully spent much of his time seniors to read an article in The American for the provision barring Medicare from at CMS begging them to return.

Prospect” about how proposed Medicare The MMA changed that formula, changed Advantage plans “will not give seniors the direct price negotiations, left to lead the top trade association for the pharmaceu- the name to Medicare Advantage (MA), health care they have now.” Scully chuckled tical industry for a reported $2 million and allowed in more lenient preferred pro- before replying. “I would say don’t let people per year. The private insurance industry vider organizations (PPOs), which didn’t ban spook you, because that article is not accuhad succeeded in appropriating the trusted out-of-network care but just made it more rate and not true.”

Medicare brand to market an entirely pri- expensive. PPOs could offer basic insurance, The vine for traditional fee-for-service vate plan for drug coverage, complete with a Part D drug benefit, and catastrophic cov- Medicare is indeed withering. Because MA the label: Medicare Part D. erage all in one, rather than three sepa- plans are paid by the government up front, When Scully visited AEI days after con- rate premiums with traditional Medicare premiums are low or even nonexistent, and

Enrollment in Private Medicare Plans, 1999–2022 (in millions)

20 PROSPECT.ORG AUGUST 2023

money is poured into additional benefits and heavy advertising. Medicare Advantage is now the choice of 48 percent of the Medicare-eligible population. To Scully and his ideological confreres, this should have led to significant cost savings, as private insurers outperform the government. But payments to MA plans are higher per enrollee than if they were covered by traditional Medicare.

Overpayments are as high as $75 billion per year, according to a University of Southern California Schaeffer Center analysis. “People refer to it as an arbitrage game,” said Paul Ginsburg, a professor of health policy at USC, who co-authored the study.

Medicare Advantage plans maximize profits in a few ways. First, there’s risk selection. Patients with chronic illnesses worry about limitations on doctors, and can’t use the gym memberships that MA plans offer.

Because Medicare prescription drug plans are bundled with MA, insurers can make available drugs that healthy seniors take, like statins or blood pressure medication.

And they can be strict on cutting-edge cancer treatments, weeding out high-cost patients. MA patients typically cost $1,253 less than someone in traditional Medicare, according to the Kaiser Family Foundation. But because the plans are paid based on the average cost of a senior throughout Medicare, cherry-picking healthy enrollees becomes pure profit.

Risk adjustment, which Scully instituted at CMS in the 2000s, is supposed to balance insurance pools. But private insurers

learned how to game it. Physicians who submit claims on patients enter codes with the diagnosis, which determines the pay rate. But MA plans began to encourage doctors in their networks to upcode, adding diagnoses that make their customers look sicker and shift more money to them in risk adjustment. The government has alleged in an ongoing lawsuit that Kaiser Permanente’s MA plans systematically “add diagnoses that either [1] did not exist or [2] were unrelated to the patient’s visit with the Kaiser physician.” The Biden administration tried to fix upcoding this year, but attack ads from large insurance companies delayed the reform.

When all that fails, insurers simply deny care, according to published reports, congressional hearings, and the HHS inspector general. The IG’s findings of “inappropriate denials of services and payment” translated into around 85,000 rejected requests for care that should have been covered. In this sense, Medicare Advantage is fine until you have to use it. “Insurers have two powerful incentives,” said health care activist and ALS sufferer Ady Barkan. “They want their customers to look as sick as possible, to juice their revenues. And they want to approve as little health care as possible, to keep costs down.”

The linchpin for all of this, experts claim, is precisely what Scully thought would revolutionize health care: the advance per capita payment to insurers. “The money is in the bank, and they don’t want to take money

Overpayments in Medicare Advantage are

as high as $75 billion per year, according

to a USC Schaeffer Center analysis.

out of the bank,” said Rick Gilfillan, former CEO of nonprofit hospital Trinity Health and director of the Center for Medicare and Medicaid Innovation under President Obama. “It creates a whole new mindset about how to manage costs.”

When I talked to Scully, who sits on the board of a small MA plan out of the University of Massachusetts, he was pretty candid about the program’s failings, including the gaming of risk adjustment, which was “completely out of control.” He still feels like private plans are more efficient. “But if you give them a long leash and let them make unlimited margins then they’re going to do it, because that’s what their shareholders are going to want to do,” he said. “So my attitude, you gotta set good rules.”

Scully left government after the Medicare bill passed, immediately joining the law and lobbying practice at Alston & Bird. A few months later, Richard Foster, Medicare’s chief actuary, alleged in an interview that Scully had threatened to fire him in 2003 if he revealed his cost estimates for the Medicare Modernization Act to Congress.

While the Bush administration insisted throughout the debate that the bill would only cost $400 billion over a decade, Foster’s calculations showed a range between $500 and $600 billion. Indeed, the White House admitted, after the MMA was signed into law, that the total would be $534.1 billion.

Scully denied to the press that he had threatened Foster, but admitted that he had asked him to withhold the estimates. The HHS inspector general corroborated Foster’s claims, and a Government Accountability Office report later recommended that seven months of Scully’s 2003 salary be given back, because the federal budget prohibited paying any official who blocked a subordinate from communicating with Congress. Scully responded that he wouldn’t be returning the money, saying, “I never did anything wrong.”

It was contemporaneously revealed that Scully was negotiating with lobbying firms while still in office, receiving a waiver from HHS to do so. The legislation he was helping to finalize had implications for clients of the employers he was hitting up for a job. Scully even charged the government for travel expenses incurred during the job search. He said that he mixed official business with personal meetings, and was therefore entitled to submit receipts.

AUGUST 2023 THE AMERICAN PROSPECT 21

The Justice Department investigated and then settled the matter in 2006, with Scully returning $9,782 in expenses. Sen. Chuck Grassley (R-IA), who ran the Senate Finance Committee at the time, called the settlement “an insult to civil servants and taxpayers for a high-level official to look for a job on government time, seek false reimbursement for job search expenses, and to misrepresent what he was doing and why he was doing it.”

In our interview, Scully chalked up the controversies to political silly season: “George W. [Bush] was running for reelection as a scoundrel.” The intense spotlight might have derailed other bureaucrats’ exit into private life, but it seemed to just make Scully stronger. At Alston & Bird, he landed $3 million in business within a few months, signing clients like the trade groups for nursing homes and home health care, along with Abbott Laboratories, Aventis Pharmaceuticals, and Caremark Rx, businesses with a deep interest in the Medicare drug benefit. The ethics requirements of the time only prohibited Scully from lobbying HHS for a year after leaving government; he could lobby Congress and provide “strategic advice” to companies right away.

Maybe Scully weathered the storm because he was that special breed of “Washington guy,” the gregarious types who use their charm and ability to f lourish in a relationship-driven town. Everyone Scully mentioned in our conversation, from senators to CEOs, was an old friend and a spectacular human being. Nobody I talked to who had interactions with Scully over the years had much bad to say about him, praising his knowledge and straight-shooting demeanor. “I knew him well and kind of liked him,” said Ginsburg. “Even though he was a political appointee, he really was strong on the substance.”

K Street couldn’t satisfy Scully, however.

He had met Russ Carson when he ran the Federation of American Hospitals. Carson’s private equity firm—Welsh, Carson, Anderson & Stowe—was dabbling in hospital chains at the time, including Select Medical. Scully didn’t know much about investing, but Welsh Carson offered him a general partnership, and he became a lobbyist with a well-paid side hustle. One of the first things Scully did was join the board of Select Medical, where he still sits today.

Private equity’s recent charge through the medical system has taken many forms, 22 PROSPECT.ORG AUGUST 2023

from hospitals and physician groups to hospice, home health, and autism services. Critics say that the business model’s penchant for cash extraction, while lucrative, endangers patient care and access. “They run it like a financial machine,” said Rosemary Batt, a private equity expert and professor at Cornell University. “CEOs who do not go along with the playbook get fired.”

Welsh Carson has attempted to set itself apart from the industry’s bottom-feeders.

Founded by two Citicorp venture capitalists and an executive from Automatic Data Processing in 1979, the firm historically focused solely on technology and health care. It has funded 100 health care investments, unlocking parts of the industry that rivals initially shied away from. It bought a behavioral health company called Springstone before a flood of investment into that business line; it scooped up U.S. Anesthesia Partners and United Surgical Partners International before the market saw potential in clinician groups.

“Other firms see them and their choices as safe bets,” said Eileen O’Grady with the Private Equity Stakeholder Project. “The way Welsh Carson would say it is that they understand the business of health care.”

One way to do that is through recruiting people with deep expertise and connections. Current employees include the former CEOs and presidents of Baylor Scott & White Health, Presbyterian Healthcare Services, Yale Medicine, and Providence Health provider networks, along with top executives

from insurers Centene and UnitedHealth.

Operating Partner Adaeze Enekwechi had Scully’s old job as OMB’s head of health programs under President Obama; Dan Mendelson, another operating partner, had it under Clinton.

“The Welsh Carson thing was kind of like a flier,” Scully told me. “I had a bunch of ideas that were kind of unorthodox, that were not standard, and they let me do a whole bunch of them and they worked out … to be honest with you it’s more fun than being a health care lawyer.”

Scully’s first Welsh Carson investment was MemberHealth, which would combine two big policies of the Medicare Modernization Act. As Medicare Part D kicked off in 2006, MemberHealth was one of ten national stand-alone prescription drug plan (PDP) sponsors, a designation that required CMS approval. Through a partnership with the National Community Pharmacists Association, MemberHealth became the preferred sponsor for 25,000 small pharmacies, setting it up to compete with regional and local plans. By fall 2007, 1.1 million beneficiaries had enrolled.

And then, that September, MemberHealth was suddenly sold to Universal American Financial Corporation for $650 million. At the time, MemberHealth was the fourth-largest PDP. Welsh Carson praised it as “one of the Firm’s most successful investments in terms of investment multiples and internal rate of return.”

Welsh Carson has funded 100 health care

investments, unlocking parts of the industry

rivals initially shied away from.

JEFF ROBERSON / AP PHOTO

Centene, number 25 on the Fortune 500, earns nearly all its revenue managing government-funded private health insurance plans.

The deal was explicitly a cross-selling play. Universal American hoped it could convince MemberHealth customers to bolt to its Medicare Advantage PPO. Within a few years, Universal American sold off the PDP to CVS Caremark, one of the Big Three pharmacy benefit managers. Universal American was then purchased in 2017 by WellCare, a bigger Medicare Advantage rival, which itself was purchased by Centene in 2020, in a $17.3 billion deal that created one of the biggest private insurers in the country. Centene, which is number 25 on the Fortune 500, earns nearly all its revenue from the government, managing Medicare, Medicaid, Tricare, and Affordable Care Act exchange plans.

One promise of private involvement in health care was that competition would drive down costs and improve system quality. But deal making and domination became more of the norm. In 2007, there were over 1,800 Part D plans; by this year,

that number is down to 800. As of 2019, the largest five plans, which had over 36 million sign-ups, roughly 75 percent of the total, were UnitedHealth, CVS (which has merged with Aetna), Humana, Cigna, and WellCare, which is now Centene. In other words, the five biggest insurers took over the vast majority of prescription drug plans.

That’s true of Medicare Advantage as well; of its seven largest providers, five of them are the same insurance companies mentioned above, controlling about 63.5 percent of all plans; Blue Cross plans make up another 14 percent.

This is an inevitable outgrowth of health care’s growing financialization. Private equity habitually either rolls up a fragmented industry into one controlling giant, or makes a quick turnaround to a willing buyer. And those buyers are invariably the biggest names in health care. Among Welsh Carson investments, US Oncology was sold to massive supply distributor McKesson;

United Surgical Partners International merged with hospital network Tenet; Accredo is now part of Express Scripts; AGA Medical went to Abbott Labs; CenterWell Primary Care was sold off to Humana.

One of Scully’s more recent successes followed this trajectory. While negotiating the 1990 budget deal for OMB, he had helped create Medicaid rebates for prescription drugs.

In what Scully calls an “accidental by-product,” drug manufacturers in Medicaid had to participate in the 340B program, which gives safety-net providers that treat high volumes of low-income patients large discounts on prescription drugs. Scully saw it as a transfer payment from drug companies to inner-city teaching hospitals and other clinics, and from his contacts in Congress, he knew it was too important to ever be repealed.

Teaching hospitals weren’t good at retaining prescription drug customers, squandering the 340B benefit. Patients would get their first prescription from the hospital, and then their drug plan would call them and get them to switch over to mail order or a specialty pharmacy. The teaching hospitals didn’t do the outreach to keep the patient in-house.

Enter a former Notre Dame middle linebacker named Jack Shields, who started a company to contract with hospitals to keep patients in their drugstores. “I would say Shields doubled, tripled the net output of most of these hospitals once they get in there,” Scully said.

Scully knew Shields from law school and considered him “one of the greatest guys ever.” The company, Shields Health Solutions, was built in Jack’s relentlessly jovial image; workers loved the atmosphere and turnover was low. Scully and Welsh Carson partnered with Walgreens to make an equity investment in 2019, allowing Shields to expand the business. Within a few years, Walgreens bought the whole company for $1.37 billion.

This was a nimble company that essenAUGUST 2023 THE AMERICAN PROSPECT 23

tially served as a health care Robin Hood, bolstering providers serving the poorest patients in America. And it got sucked up into one of the nation’s Big Three pharmacy chains. Jack Shields is still chairman but no longer president, and stories of startups with great culture getting overrun by a corporate behemoth are legion. “The vicious cycle is that profit-driven behaviors concentrate wealth,” said Don Berwick, a CMS administrator under President Obama who lectures at Harvard Medical School. “Concentrated wealth plays out in lobbying influence and a lack of will on the part of Congress to bring health care under control.”

Scully usually brushes aside consolidation concerns, saying that health care is a local business and that national market share doesn’t much matter. But when you devolve health care into a series of private transactions, you motivate the entities on every side of that transaction, from hospitals to insurers, pharmaceutical firms to PBMs to pharmacies, and everything in between, to get bigger. And when they bulk up and can’t make their margins from each other, doctors and patients take the loss.

Obamacare reinforced that trend. Ten years ago, a New York Times article quoted Scully reassuring worried investment managers about the moneymaking potential of the new law. “It’s not a government takeover of medicine … It’s the privatization of health care,” he told one gathering.

Beyond the insurance reforms and expansions that would flood money into the system, Obamacare was filled with experiments and strategies to improve care and tighten costs. Private firms and consultants could pitch the government to carry out these tests. Scully had his eye on one area in particular, with the unwieldy name of “post-acute care bundling.”

When a senior leaves a hospital after surgery or illness, Medicare will pay for her to stay in a nursing home or rehab facility for 20 days. (Every senior gets better on the 21st day, Scully has joked.) Even if they need physical therapy or supervision, patients often recuperate better in comfortable surroundings among friends. But the providers get paid to hang onto the patients, and they establish relationships with the hospitals to funnel them their way. Scully told me about his late mother, who spent 20 days after a back infection at a church-run rehab that 24 PROSPECT.ORG AUGUST 2023

Scully had his eye on post-acute care

bundling, which offered a lump sum

to providers rather than paying

separately for each service. was one story above her residence. “She literally just said, ‘I want to go downstairs and stay in my apartment,’” he explained. “They kept saying no, no, no.”

CMS under Obama was testing post-acute care bundled payments, which offered a lump sum to providers rather than paying separately for each service. Scully’s innovation was, essentially, an app, where patients would answer questions about their health and an algorithm filled with hundreds of thousands of patient outcomes would recommend the right type of care, the right setting, and the right length of time. Then it would monitor the aftermath, to minimize time spent away from home and prevent hospital readmission.

Scully thought he found the right company in Healthways, on whose behalf he was lobbying CMS in 2010 over a failed disease management pilot. Healthways’ CEO wasn’t interested in post-acute care bundling, but told him about another company down the street in Nashville called SeniorMetrix, which had an algorithm and was working with Kaiser on exactly what Scully envisioned. He went to SeniorMetrix the next day, bought the company for $6 million, and convinced Healthways’ general counsel Clay Richards to quit and run the new firm, which they called NaviHealth.

Scully raised $50 million in an initial funding round, half from Welsh Carson and half from his contacts (including Select Medical, the former Welsh Carson investment; Scully still sat on their board). NaviHealth’s pitch to hospitals and Medicare

Advantage plans, as he explained on a 2020 episode of the podcast A Healthy Dose, was this: “The day a patient comes out of the hospital, give us your patient for 60 to 90 days, we’ll take all the risk, we’ll manage all the care, give you a 2 percent return and give you a 50 percent gain share.”

Within a few years of NaviHealth’s launch, it was serving two million MA plan members. In 2015, Cardinal Health, an enormous drug distributor, bought it for $410 million. By 2018, Clayton, Dubilier & Rice, another private equity firm, took it private at a valuation of over twice that. And then in 2020, it sold again to Optum, a division of the medical leviathan UnitedHealth for more than twice that, with a valuation of $2.5 billion. “I wish I didn’t sell it as early as I did,” Scully quipped.

But then the problems began. The NaviHealth algorithm recommended a set number of care days. If that day came and the patient was still in pain or not ready to go home, she could be cut off from coverage.

Stat News reported on patients having to spend down their life savings to get Medicaid to pick up nursing home costs when Medicare stopped covering. Families filed legal appeals that took months to resolve, sometimes outliving the patients. Appeals spiked between 2020 and 2022, right when UnitedHealth bought the company.

While the NaviHealth tool was supposed to merely suggest a course of care, MA plans made it more rigid; the consequences of “efficiency” were devastating for infirm seniors. Congress held hearings this spring,

and Medicare wrote new rules to prevent AI determinations on post-acute care that don’t account for “the circumstances of the specific individual.”

Scully had nothing to do with NaviHealth by the time these problems emerged. But I asked him whether this really sprung from a profit-driven system that rewards restrictions on care, with the algorithm a convenient scapegoat. He said the business still helped diminish overutilization, and he didn’t believe his friends there would intentionally hurt patients. Ultimately, he said, government had to step in to set boundaries on misconduct: “If you had no limits on regulation, GM would be building V-8 engines that get six miles a gallon still. As I said, I’m a fan of appropriate regulations.”

Maureen Hewitt met Scully in 2013 at JPMorgan Chase; not a bank branch, but the corporate headquarters. She was run-

ning a small company out of Denver called InnovAge, a local provider for the Program of All-Inclusive Care for the Elderly, or PACE. That program combined two of Scully’s favorite ideas, capitation and bundling.

PACE is a version of what Kendall Roy pitched in the last season of Succession as Living+. It provides comprehensive, 24/7 health and social services, mostly for dual eligibles in Medicare and Medicaid—poor and typically frail seniors, about two-thirds women, with an average age of 77—as a way to keep them at home and active in their communities. PACE providers offer personal home care, physical therapy, medical appointments, prescription drug delivery, transportation services, and a day center with a primary care clinic, meals, and activities.

Medicare and Medicaid pay a per-member, per-month (PMPM) rate to PACE providers of about $7,500 on average, which

CHARLES DHAR APAK / AP PHOTO

Scully said about Obamacare: “It’s not a government takeover of medicine …

It’s the privatization of health care.”

comes out to $90,000 per year. A nursing home costs substantially more, and the PACE provider assumes that risk, so they make their money on keeping patients from being admitted as long as possible. That both cut costs to the system and improved the remaining years of seniors’ lives. But with a population of frail elderly who would otherwise be in nursing homes, at some point there comes a conflict between profit maximization and necessary care.

Scully immediately took a shine to Hewitt. He had loved PACE since first seeing a demonstration in 1990. Hewitt wanted to expand InnovAge beyond Colorado, but there was a problem: PACE operators were required to be nonprofit, by state laws and federal regulations. That barred Welsh Carson from making any equity investments. So Scully set about to change the law.

He called Patrick Conway, a top deputy at CMS, and Marilyn Tavenner, the administrator at the time. There was a regulatory proposal sitting dormant to open PACE up beyond the nonprofit sector. In May 2015, a for-profit PACE pilot showed minimal differences in quality of care, and later the rule was finalized.

Simultaneously, Scully stalked the corridors of power in Denver, lobbying state lawmakers to amend Colorado’s nonprofit requirement.

InnovAge was technically a state asset, so Scully negotiated with attorney general Cynthia Coffman to sell it to a foundation he created called NextFifty for $216 million, on the condition that the law would change. Once it did in 2016, Welsh Carson bought InnovAge as the first for-profit PACE organization, and Scully joined the board of directors. He installed Tavenner as a director right away.

A nonprofit CEO without contacts at CMS or resources to buy out the state of Colorado probably couldn’t have achieved the same result. I asked Scully whether it was reasonable to say he used his inf luence to pry open favorable terms. “If somebody followed me around with a camera every day in that three years, I would have zero problem because I know everything I did was totally legit,” he replied.

“To me, PACE was like a community AUGUST 2023 THE AMERICAN PROSPECT 25

Scully on C-SPAN in 2013. He’s a fairly regular guest on the network. co-op grocery store that I was trying to turn into Whole Foods … It’s no different than a hospital conversion.”

InnovAge immediately started rolling up PACE operators in Virginia and Pennsylvania, and opened programs in California and New Mexico. By 2018, it was the largest PACE provider in the country. Enrollment and revenue more than doubled. But InnovAge’s mission-driven origins sat uncomfortably with an unbending reality as it transitioned into a for-profit company: The more it drove spending under $90,000 PMPM, the more money it got to keep.

Former regional chief operating officerturned-whistleblower Karen Lapcewich alleged in a lawsuit that InnovAge was “denying [patients] access to thousands of medically necessary services,” including failing to schedule doctor appointments or deliver medications. One patient suffering from “heavy bleeding” wound up in the emergency room after InnovAge never got her to a specialist, the lawsuit states.

According to one audit, 87 percent of care orders at one InnovAge center in San Bernardino were outstanding for 30 days or more. Because PACE is all-inclusive, patients 26 PROSPECT.ORG AUGUST 2023

who don’t get care can’t go anywhere else but the ER, explained Emma Curchin, a research assistant with the Center for Economic and Policy Research, who has studied InnovAge. “You can’t go in for a regular checkup,” she said. “It limits people who can’t get appointments.”

Lapcewich was told that InnovAge’s provider networks were simply inadequate to cover the patients, that the problems had been going on for years, and that when seniors complained, those grievances were not tracked. She also discovered that InnovAge cherry-picked healthy patients and disenrolled those who were sent to nursing homes, a sanctionable violation of the program. After Lapcewich reported this all to Hewitt, she claimed that she was told to hide the information from CMS. Within a month, Lapcewich alleged she was told to accept termination for “job abandonment” or to resign; she opted for the latter.

The False Claims Act case was dropped because the government didn’t intervene, but contemporaneous media reports detailed the same problems: drives for enrollment (sales employees were given bonuses for exceeding quotas and even

signed up homeless individuals with hotel addresses) and declining quality of care (one woman was found in her home suffering from dehydration and a failed bowel; she died in hospice two weeks later). The states of California and Colorado, along with CMS, investigated and sanctioned InnovAge facilities, suspending new enrollment in much of Colorado and Sacramento, California, in 2021, and several other states in 2022.

Hewitt was eventually forced to resign, which Scully called a traumatic experience.

But Welsh Carson did fine; InnovAge went public in early 2021, and the IPO raised $350 million, well beyond the initial investment.

A dividend recapitalization in 2019 netted $66 million.

Media profiles, legal complaints, federal investigations, settlements, and civil penalties on Welsh Carson portfolio companies over the years documented situations similar to InnovAge: overbilling and underdelivery. The profit motive was working its will, just as Scully thought it would. But whether it benefited the system, or patients, was a bigger question. “When you privatize social goods like health care, you end up getting the worst of both worlds,” said Gilfillan.

“Because it’s seen as a public good, you can’t let the marketplace operate as it normally would … you get captured regulatory processes that end up facilitating the extraction of wealth by the private sector.”

Scully conceded that, like a lot of startups, InnovAge grew too fast. He blamed sloppy documentation and, most of all, COVID-19. “When you basically say all of those people will be taken care of at home, and they’re not going to come in on buses and they’re not going to come to the centers and the centers are shut down, the whole model changes,” he said. But the Lapcewich lawsuit details conduct from 2017, which she claims was happening for years.

CMS released InnovAge from sanctions over the last year; the company has a new CEO and is back to adding enrollees. Scully remains bullish. “The last couple years were extremely unpleasant,” he admitted. “But it’s still a great program, and InnovAge is still a great company … there should be way more of them.”

Tom Scully is not the only former health policy official to later work for businesses he was regulating; in fact, it’s become more of the norm. Tavenner left CMS to become the head of America’s Health Insurance Plans, the lead insurer lobby. Patrick Conway, Scully’s other ally in changing the PACE program to for-profit, is now a CEO of care solutions at UnitedHealth subsidiary Optum.

The last four people who had Rick Gilfillan’s job at the Center for Medicare and Medicaid Innovation were Conway; Adam

Boehler, who later started a health care venture firm involved with risk coding in Medicare Advantage; former Anthem Blue Cross executive Brad Smith, who’s running a venture fund for rural health; and the current head, Liz Fowler, who went from Anthem (then WellPoint) to a chief Senate counsel job to Johnson & Johnson before CMMI. Andy Slavitt jumped from Goldman Sachs and Optum to CMS and then to a venture fund that has invested in one of the main challengers to InnovAge. “It’s become an honored pathway,” Gilfillan said.

But Scully did lay a path for his successors. He helped turn widely held and even bipartisan ideas about market incentives and private-sector efficiencies into the blueprint for today’s health care system.

It may have seemed reasonable at the time to institute some constraints on fee-forservice medicine. But it built a giant opportunity factory for private businesses and people who knew ways around and through the system. Scully said this himself on the Healthy Dose podcast: “People in New York undervalue policy … I am always surprised when people are doing big investments in health care, and they don’t have someone who used to work at OMB.” Today, Scully says the market for private equity deals is slowing; he estimates that 99 percent of the meetings at Welsh Carson are about AI. “I think it has huge potential, I also think it’s not going to change things overnight,” he said. There’s still room for his quirky ideas. Last year, he bought a

Tom Scully is not the only former health

policy official to later work for businesses he

was regulating; in fact, it’s become

more of the norm.

majority stake in LIBERTY Dental—which administers dental benefits for Medicaid, MA, and private insurers. That prefigured another private equity gold rush into the dental care sector. Scully joined the LIBERTY board, one of many directorships over the years. Our conversation overlapped with the end of a board meeting.

Under Biden, there has been some pushback on the trajectory of health care privatization. Medicare will begin to directly negotiate with drug companies, and there’s even been some new price-fixing on certain drugs, along with a coming out-of-pocket spending cap for medications. But by and large we have a private delivery system, and a mostly private insurance system, even as half of the $4 trillion in health spending comes from the government.

Scully said that most of the people he encounters in health care are in it for the right reasons. Living in his head for the last couple of months, I think he is too.

He’s compulsively likable, whip-smart, and brutally frank, and he has a guiding star for his views on health care. The problem is that the injection of the profit imperative can make good people do things that produce harm, especially if they think it’s for the sake of aid and comfort.

As we closed our conversation, he conceded that the system isn’t anything close to perfection. But if it’s well regulated—“and that’s a big if”—private delivery will outdo government price-fixing, he reiterated. The problem with this is that he was a regulator, and at the time he routinely complained about how private businesses would find ways around that regulation. “The regulated are smarter than the regulators about practices,” said Don Berwick, who ran CMS in the 2010s. “They have full-time lawyers and staff, they know more than the regulators …

They control knowledge, not just money.”

Wasn’t that true, I asked Scully? Didn’t the system he helped construct build in a need for people like him, who know the ins and outs? Maybe, he said, and then pivoted to talk about how change happens incrementally. He didn’t want to talk about his role in either making that change, or capitalizing on it.

Scully turned 65 last October. I asked him whether he’d entertain going on traditional Medicare. He said that he’s still in the private market. While he left Alston & Bird in 2017, he picked up another gig at a little law firm.

“They pay my premiums,” he said. n AUGUST 2023 THE AMERICAN PROSPECT 27

How decades of policy failures led to the everpowerful UnitedHealth Group

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“Do I enjoy being king? Yes, that’s fun,” said to PHP audits. The doctors countersued, Richard Burke in 1987. He had spent over accusing PHP of financial impropriety. It ten years running a health care nonprofit in culminated with a state-appointed mediaMinneapolis called Physicians Health Plan tor and settlement in 1987.

(PHP), and also UnitedHealth, the for-profit The controversy was enough to dislodge company that was managing it. In 1986, the Burke from both PHP and United. Yet docnonprofit paid him $267,823; the for-profit, tors still had the feeling that “Burke will be $418,342, not including stock options. The behind the curtains, pulling the levers.” And average income for the highest-earning doc- in many ways, they were right. Because up tors at the time (orthopedic surgeons) was until last year, Burke chaired the board of just 16 percent of that. But Burke’s salaries directors of UnitedHealth Group, the largweren’t what caused doctors at PHP to rebel. est and most powerful health care company In 1984, UnitedHealth used PHP to pay in our country’s history. $600,000 toward United’s terminaToday, United is the fifth-largest H O N EU.S., bigtion costs inSa delayed stock offerpublic company S T E F • U inI the S B S H PHP had B ing. At Ethe same time, ger than JPMorgan Chase. Its E quietly agreed to pay United 15 insurance products serve 50 to 17 percent of its revenue for million members, more than the next 25 years in exchange the population of Spain, and for future United stock. Docits $186 billion health services tors at PHP immediately prodivision, Optum, has 103 miltested, pointing at the conflicts lion patients, more than Vietnam’s population. Earnings came introduced by interlocking boards to $28.4 billion last year, putting it in the that were both under Burke’s thumb.

United went public with a shorter PHP man- top 30 of companies worldwide. agement contract, but doctors had to pull We think of United as an insurance comthe SEC documents to learn that, despite pany, but it has never really been exactly that. being salaried workers, there would be a 20 It began as a health management company, percent pay cut to cover PHP “bills.” The war and it is now also the largest employer of waged on, with United filing suit against physicians in the country, with 70,000 docthe outspoken doctors for defamation, and tors across 2,200 locations. Underneath its trying unsuccessfully to block their access corporate umbrella are pharmacies, primary

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care clinics, surgical centers, urgent care centers, home health agencies, hospice agencies, mental health agencies, a pharmacy benefit manager, an IT division, and plenty more.

United has so many subsidiaries that 25 percent of its total revenues come from itself.

United even has a bank. Optum Bank is a way for consumers to manage health savings accounts, but the company’s latest financial service is a payday loan system called Optum Pay Advance for independent physician practices. While they wait for reimbursement from United for their claims but have to make payroll, doctors can

get money from United to tide them over … with 35 percent interest. The other option is to succumb to the pressure and sell out to United, giving it an even greater margin.

PR-tested slogans insist United’s reach across the industry allows it to support patients along the “full continuum of care.”

But instead, United seems committed to maintaining a level of control to extract profits off the backs of patients, independent providers, and the government. This evolution into a health care supermarket with interlocking conflicts of interest happened slowly but deliberately, bolting on businesses

to its core like a Transformer, each one slipping by the antitrust authorities. United is the master of the rollup, with at least 28 purchases of physician groups and providers since 2010; annual revenue in the past decade has grown by more than $100 billion.

Other health care giants are imitating United’s vertical integration strategy. But it took time and practice for the company to perfect it, a function of policy adaptation, creativity, and ruthlessness. To understand UnitedHealth, and the business model that has eaten the health care system, you have to understand people like Richard Burke.

AUGUST 2023 THE AMERICAN PROSPECT 29

“As the price of medical care mounts, health insurance has become a necessity; but insurance premiums are becoming more expensive too, while benefits dwindle as rapidly as the costs of medical treatment increase.

Money aside, the consumer’s major problem is finding his way about an increasingly impersonal, fragmented, irrationally arranged set of health services.”

While this could be a quote from today, it was written in The New York Review of Books in 1970, just a few years after Lyndon B. Johnson introduced federal health care insurance for the elderly and the poor.

Medicare and Medicaid were necessary, but the new multibillion-dollar programs had few guardrails; doctors and hospitals saw them as guaranteed subsidies.

Combining the traditional fee-for-service model, where more tests and procedures equal more money for health care providers, with generous public insurance created unchecked financial opportunity. Between 1964 and 1969, doctor’s fees rose by 33 percent and hospital charges by 77 percent, spurring a debate about how to reorganize and fund the health care system.

The HMO Act in 1973 offered loans to encourage the development of health maintenance organizations. These were pitched to President Nixon as an alternative to feefor-service, where members paid a subscription fee to access necessary care without additional costs. The HMO employed doctors directly—members could only visit those doctors—and covered the cost of care. In this setup, the costlier the treatments, the less money available for doctor salaries. In theory, the interests of insurers, looking to pay less for care, and doctors, hoping for higher income, would be aligned.

And here UnitedHealth was born. Founded by Richard Burke in 1974 and originally named Charter Med, it was set up to provide management services to HMOs. It was his way around state HMO laws, which said they must be run as nonprofit organizations advised by physicians. Burke did found nonprofit HMOs, like PHP and MedCenter in St. Louis Park. But he used Charter Med to handle overhead and doctor salaries.

Burke was essentially handed the opportunity by the “father of HMOs,” Paul Ellwood, who hired Burke as an insurance expert at InterStudy, the think tank that developed the concept. Ellwood blamed the nonprofit requirement in Minnesota’s HMO law for 30 PROSPECT.ORG AUGUST 2023

delaying necessary “management expertise.” Only decades later would Ellwood acknowledge how this shift, “where insurers instead of physicians managed care,” radically changed the medical system. “We didn’t recognize it as the birth of ‘managed care,’” he said in an oral history.

From the beginning, HMOs attracted a certain profiteering element. In 1974, newspapers in Florida warned that the new law was a “boon to con men,” who set up “fake clinics.” There was also a power struggle between providers of health care and management middlemen like Burke. The American Medical Association (AMA) initially discouraged physicians from entering into certain contracts with non-physicians, which would hamper the spread of the new model. These principles were certainly selfserving, but they were also an attempt to ban the “corporate practice of medicine” and ensure that trained physicians, rather than business executives, were the ultimate deciders of patient care.

However, in 1979 the Federal Trade Commission, eyeing the potential cost-saving benefits of HMOs, ordered the association to change its guidelines, helping solidify HMOs

and managed-care concepts in the heart of our health care system.

As the Minneapolis Star Tribune reported in the mid-1980s, Burke epitomized “the shift in the HMO movement away from its modest origins as a fledgling alternative to conventional insurance, and into an era of big-budget marketing, Wall Street financing and hefty rewards for professional managers in a field once dominated by doctors.”

In 1980, Burke dropped 1,600 customers when canceling their plan with Control Data Corp. Burke was still the head of the nonprofit PHP at this time, and he said that the HMO lost roughly $600,000 in 1980 from the Control Data contract alone. He partially blamed the fact that Control Data’s pregnancy rate was double PHP’s other members, effectively saying that pregnancy was an unnecessary expense.

Burke also capitalized on the growing market in prescription drugs. In 1982, United introduced a drug formulary in its Twin Cities market to dictate which drugs its beneficiaries could use. Two years later, it did something no other insurer had done before: tie formulary coverage of brandname drugs to rebates from manufactur-

ers. This essentially invented an entirely new industry, known as pharmacy benefit managers (PBMs). Since Burke established his PBM, called Diversified Pharmaceutical Services, as its own business line, other HMOs started to hire United to do the same for them.

Giving a drug company a rebate in exchange for access to patients would normally be seen as a kickback. But in the 1990s, the government gave PBMs exemptions to anti-kickback laws. Since bigger list prices lead to bigger rebates, and bigger profits for PBMs, the result of this regime has been higher prices for patients and the preferencing of expensive brand-name drugs over more affordable generics.

Burke’s PHP scandal ended his reign at the top of UnitedHealth. But it didn’t end the business model of seeking growth at all costs, even when it created unavoidable conflicts of interest.

In the 1980s, as states started to relax their nonprofit restrictions, UnitedHealth swallowed a number of HMOs, while divesting from plans that hurt its margins. Investors were undecided on investment opportunities from the budding sector, but United was rarely questioned. It had bulked up the non-HMO side of the business; annual revenue grew from $13 million in 1984, its first year as a publicly traded company, to $605.5 million in 1990.

A New York Times Marketplace reporter, Phillip Wiggins, identified three midsize HMOs in 1985 that he liked because of their “enormous growth potential.” United ended up buying all three.

In 1991, United named William McGuire,

a former physician who had previously been brought in to run the company’s merger and acquisition team, as CEO. He quickly became the top-paid executive in Minnesota. McGuire’s first big move was to sell Diversified, United’s groundbreaking PBM, to SmithKline Beecham for $2.3 billion. He used those proceeds to buy up Metrahealth, a traditional fee-for-service insurer with over ten million customers that gave United a presence in the Northeast, Southwest, West Coast, and rural America. Metrahealth was itself the product of a merger of the health insurance businesses of MetLife and Travelers, consummated just a year earlier and executed by Kenneth Simmons, the man who took over for Burke as CEO of United in 1987 before handing the reins to his colleague McGuire.

Metrahealth managed insurance for 40 of the Fortune 100, including Chevron and General Motors. This was new territory for United. While it served 3.8 million customers comprehensive care, and more limited benefits to 27 million, most were from small- and medium-sized employers. The $1.65 billion deal solidified United as the nation’s largest provider of health care plans. The only person at United who made out badly as a result was VP Michael Mooney, who landed in prison seven years later for insider trading before the deal was made public.

McGuire stated explicitly that the company would be able to apply the managed-care techniques it developed through its HMOs to control costs, even on the fee-for-service side of the business. More importantly, the Metrahealth purchase gave United market power to demand lower prices from doctors

UnitedHealth was Richard Burke’s way around many state HMO laws, which said they must be run as nonprofit organizations.

and hospitals and undercut rival insurers, driving out competition that may have prioritized quality. As United wrote in a 1995 SEC filing, the acquisition would give the company “critical mass”—a “coded way of saying that the combined HMOs would be so dominant that employers and doctors would have no choice but to do business with them,” according to Pulitzer Prize– winning journalist George Anders in his 1996 book Health Against Wealth.

The HMO model, and its impact on patient care, stirred a backlash. One year after the Metrahealth merger, 400 bills regulating managed-care practices were introduced in state legislatures, all addressing horror stories of health plans denying treatment or incentivizing doctors to limit services. In 1995, Maryland prohibited HMOs from holding back a portion of doctors’ salaries until the end of the year, a practice which sent doctors the message that if costs were not to the HMOs’ liking, pay would be docked.

Helen Hunt exemplified the national mood well when she yelled, “Fucking HMO bastard pieces of shit” in her Academy Award– winning performance in 1997’s As Good as It Gets, after her plan refused to cover a standard scratch test for her son. HMOs had wrapped their straitjackets so tightly around doctors and patients that they were now properly seen as a public enemy.

But as outrage mounted, the other trend of the 1990s was HMO consolidation. There was just $1 million in HMO transactions in 1989. By 1996, that grew to $13 billion.

United’s plan to acquire its way to dominance was catching on. McGuire insisted that with bigger size came more resources to invest in IT, and the ability to create a kind of “Zagat’s guide” on doctors and hospitals.

United was briefly derailed by losses in the Medicare HMO side of the business.

While HMOs have been a perennial option in Medicare, starting in 1982, the government began to offer a per capita rate for each enrollee, meaning HMOs could make more money by authorizing less care. United was one of many to jump into this business, winning a $4 billion-per-year contract in 1997 to provide supplemental benefits to the 5.7 million members of the American Association of Retired Persons who were on Medicare.

That deal gave United a massive platform to market its HMO plans to seniors—a “big piece of business,” as McGuire described it.

But Congress’s 1997 budget agreement sharply curtailed payments to Medicare AUGUST 2023 THE AMERICAN PROSPECT 31

In 2003, Congress established what today is known as Medicare Advantage, reversing the lower payments from 1997 and creating a strong foothold for managed-care plans in Medicare. Today, UnitedHealth is the largest supplier of Medicare Advantage plans in the country, with 26 percent market share as of 2020, when the government spent $317 billion on the program.

In the same law, McGuire saw another opportunity. Congress green-lit tax-advantaged “health savings accounts” (HSAs), so patients could use pre-tax money to pay medical expenses in high-deductible health plans. United created an internal bank to offer HSAs. The idea was that patients would be incentivized to shop around for the cheapest care, if not avoid doctors altogether. But United and other insurers also used managed-care techniques like limited physician networks in these plans to keep their own costs down once deductibles were hit. Today, United’s bank is the second-biggest provider of health savings accounts, 32 PROSPECT.ORG AUGUST 2023

with $20 billion under management and millions of users.

Wall Street couldn’t get enough of this experimentation. “Attending a UnitedHealth Group investor day is nothing like listening to any other company in the health insurance space,” Prudential analyst David Shove wrote about the company in 2004.

“The management has BIG aspirations …

This stuff is way beyond health insurance.”

The glory days were short-lived. A law firm hired to review the timing of employee stock options discovered that executives were routinely and illegally backdating securities to maximize returns. The number one abuser was William McGuire, who backdated “most or all” of the 44 million split-adjusted stock options he received over a decade. McGuire also received $5 million in cash bonuses that were only granted due to “errors in stockbased compensation accounting,” per a later Securities and Exchange Commission settlement agreement.

William McGuire, UnitedHealth CEO from 1991 to 2006, resigned while under investigation for securities fraud.

McGuire resigned in October 2006. He gave $600 million back to the company and was fined a record $7 million for his “illgotten gains” by the SEC, though he never admitted wrongdoing and retained $800 million from the scheme. It was the largest monetary penalty ever assessed against an individual executive in a backdating case; McGuire was also barred from being director or officer of any public company for ten years.

Stephen Hemsley, United’s president since 1999, took McGuire’s post as CEO. His promotion brightened the mood of financial analysts, who wanted the continuation of the 500 percent growth in UHG’s stock price since Hemsley joined. It was overlooked that Hemsley sprang from the same corporate culture. A 2008 shareholder lawsuit, led by the California Public Employees’ Retirement System, alleged that Hemsley had “personally offered backdated options to new hires.” United

ERIC MILLER / AP PHOTO

HMO plans. When United reported to Wall Street in August 1998 that some of its Medicare plans were losing money and that it would withdraw from a number of markets, investors dashed for the exits. Its stock dropped 28 percent in a single day, bringing plenty of other insurers down with it.

United regrouped, offsetting the lost revenue by raising premiums and buying companies like AmeriChoice, an insurer for people with Medicaid—the government-funded program for the poor—which had also opened up its program to managed care. The 2002 acquisition brought United’s total Medicaid beneficiaries to more than one million.

In 2002, 700,000 physicians brought a class action suit against United and nine other managed-care companies for fraud and racketeering. They argued that the insurers “systemically deny and delay payments due physicians and profit from the moneys wrongfully retained.” Litigation went on for years, and most insurers chose to settle, but United pressed on, with federal district court judge Federico Moreno, a George H.W. Bush appointee, later deciding to dismiss the charges in 2006. In his ruling, Judge Moreno wrote: “Those desiring changes in the way health care is provided in America must either look for remedies before Congress or allow the free market to dictate the results.”

UnitedHealth is the largest supplier of Medicare Advantage plans in the country, with 26 percent market share as of 2020. denied Hemsley’s role; the company settled the case for $895 million.

Once the McGuire news faded, Hemsley faced further inquiries from New York attorney general Andrew Cuomo about a United subsidiary called Ingenix, America’s largest provider of health care billing information. Ingenix ran a database that determined the industry benchmark rates that providers charge for a service, and in turn, what percent of that rate insurers would cover in “out of network” medical costs.

It seems impossible to have a health care system where an insurance company with a direct incentive to understate “reasonable” rates controlled the industry-standard benchmarking. But United eliminated any other options by acquiring essentially every billing company, while regulators sat and watched.

Cuomo alleged that Ingenix had been manipulating one of its nationwide databases for years; as a result, “real people get stuck with excessive bills and are less likely to seek the care they need,” he said after opening an investigation in 2008. In the investigation, regulators found that United knew that most doctor visits cost $200, but the Ingenix database reported that the typical rate was only $77. Insurers applied the contractual reimbursement rate of 80 percent, but covered only $62 for a $200 bill, leaving the patient with a $138 balance.

“This is like pulling back the curtain on the wizard of Oz,” said Cuomo. Ingenix shut down the database, but paid a meager settlement of $50 million to set up a nonprofit alternative. Renamed OptumInsight, the division generated nearly $15 billion in revenue last year, and served 80 percent of U.S. health plans. It boasts one of the larg-

est claims data assets in the country, with information on 285 million people.

Democrats successfully ran the entire 2008 election on finally delivering universal health care. United prepared for the moment in 2007 by purchasing The Lewin Group, a think tank it could deploy with “unbiased” research on health policy. While Democrats considered including a public option in what would become the Patient Protection and Affordable Care Act (ACA), The Lewin Group helped kill it by publishing studies claiming that a public option could eliminate the private insurance market.

After passage, United positioned itself to grab much of the $27 billion in subsidies Congress authorized in the Health Information Technology for Economic and Clinical Health (HITECH) Act for medical providers to start using electronic health records systems, designed to cut waste by streamlining testing and procedures. Despite continual failures in its technology, United’s software was first in line for the benefits.

In 2012, United purchased QSSI, just months after the company won a contract to build the government’s ACA website. Two congressmen wrote to the companies saying, “This raises serious questions about the conflicts of interest that may exist.” Not only could United position itself advantageously on the website, but there were questions around how the contract was given; Steve Larsen, a top regulator at the Centers for Medicare & Medicaid Services, which administers the government programs, was hired by United just after it had acquired QSSI. United and its rivals also got Democrats to walk back plans to slash Medicare Advan-

tage. The ACA had ordered cuts of $200 billion in payments to the private Medicare option over the next decade to help pay for the bill. But after a seven-figure lobbying blitz from the insurance industry, CMS announced it would increase Medicare Advantage rates.

A few years later, a 2011 whistleblower lawsuit was unsealed. In it, former United finance director Benjamin Poehling detailed how the company gamed the “risk adjustment” rules the government used to provide Medicare Advantage plans that had sicker patient populations with compensation. This was intended to prevent companies from cherry-picking patients, but it became a huge revenue opportunity for insurance companies.

United, Poehling alleged, would use data mining tools to identify patient diagnoses, and modify records to justify larger payments from the government. A senior with diabetes and kidney failure, for example, could justify thousands in extra dollars if United claimed the diabetes caused the kidney failure. An email from the CFO of Poehling’s division urged him and his colleagues “to really go after the potential risk scoring you have consistently indicated is out there … with huge $ opportunities. Let’s turn on the gas!”

Democrats tried to use other methods in the ACA to rein in insurers. They talked up a provision called the medical loss ratio (MLR) that forced companies to spend 80 to 85 percent of their premium revenue on patient care, so executives wouldn’t be able to pad their wallets as much. The provision might have been meaningful had the government been dealing with a traditional insurer with no other business lines, but it ignored that insurance companies had diversified well beyond insurance, encompassing physician practices, pharmacy benefit management, claims processing, and information technology.

At United, these ancillary businesses, which United combined under the rebranded Optum name, were growing at a much faster rate than its health plans. In 2011, Optum brought in $29 billion, just over 30 percent of what the insurance unit generated. By 2016, Optum posted $84 billion in revenue, more than 56 percent of the insurer’s haul.

The MLR also incentivized United to get bigger, because more premium revenue translated to more profit. As ProPublica explained so well: “It’s like if a mom told her son he could have 3 percent of a bowl of ice cream. A clever child would say, ‘Make it a bigger bowl.’”

But the biggest loophole in the MLR was this: It capped profits when it came to AUGUST 2023 THE AMERICAN PROSPECT 33

claims reimbursement at the point of service, but if a physician is a salaried employee of an insurer, their treatment doesn’t count against the MLR—meaning the insurer gets away with spending much less than 80 to 85 percent on patient care because it goes directly back to its own accounts. That created a powerful incentive for United to sign up doctors to work for them, and yet another reason to extend their tentacles further across health care.

Hemsley oversaw much of this growth by using the same M&A strategy as his predecessor, Bill McGuire, who by then was busy donating his $41 million collection of rare moths to the University of Florida. Before the ACA, Hemsley brought United into the market of its biggest adversaries through its 2007 acquisition of Sierra Health Services. While regulators focused on United’s growing market power in Nevada’s insurance market, they ignored that it also gained control of Sierra’s subsidiary Southwest Medical Associates, Nevada’s largest multispecialty physician group.

Joining United may have seemed shocking to most physicians then, but Sierra’s founder, an entrepreneurial cardiologist named Anthony Marlon, felt that centralization was most efficient. Physicians “did not initiate the changes, they were brought along into the 21st century kicking and screaming,” he said in 2009, when he was working as a consultant for United.

By the time Obamacare passed, a wave of mergers proliferated among providers. They were trying to get leverage over negotiations with insurers, using the new rules to maximize billing for services. But United’s simultaneous motivation to game the MLR by scooping up physician practices was facilitated by this provider consolidation, giving the company easy targets to choose from.

In 2011 and 2012, United made eight physician group acquisitions, one of which had over 15,000 doctor’s offices that would now be under United’s control. They capitalized on a rollup strategy: Buying small physician groups one at a time kept them under the Hart-Scott-Rodino Act threshold that would force them to inform government regulators. It made the deals difficult to detect until United achieved a dominant position.

There were other motivations to directly employ physicians. For years, physician practices have filed suit against United’s 34 PROSPECT.ORG AUGUST 2023

The medical loss ratio incentivized United to get bigger, because more premium revenue translated into more profit. “downcoding,” which refers to when an insurer records that doctors provide less expensive care than they claim to avoid paying the doctor fairly. By owning the physician practices, United can more easily force individual physicians into unprofitable fee schedules and redefine what reasonable pay looks like. Without competition, United can set reimbursement rates to whatever they’d like, this time with no database for regulators to discover. Perhaps most important, United could steer beneficiaries to its internal physicians and block payments to others.

OptumHealth, which includes its physician groups, generated more than $71 billion in revenue last year. “It’s wearing people down,” one New York doctor said this year after United acquired his group, previously known as CareMount. “I love what I do, and I have no regrets that I became a physician and chose my specialty … But what we see is the administration running the group poorly, and patients continue to complain.”

“Now you want to leave, but you’re trapped.”

Doctors may find kinship with independent pharmacists, who are being forced out of business thanks to the practices of United and other insurers that have copied it. PBMs like United’s OptumRx consistently under-reimburse stand-alone drugstores and dictate which medications their patients can take.

Decades after helping invent PBMs, United led the charge to reconsolidate the industry under insurers when it took over Prescription Care Solutions as part of the acquisition of PacifiCare Health Systems in 2005. United rebranded it OptumRx,

which, in 2015, bought the fourth-largest PBM, Catamaran, for $12.8 billion. Optum CEO Larry Renfro boasted that United Healthcare’s data mining capabilities “can all be combined with the pharmacy side,” setting it apart from its rivals.

Today, every one of the Big Three PBMs is under the ownership of a large insurer: United has OptumRx, CVS/Aetna has Caremark, and Cigna has Express Scripts. All of them can steer patients to their preferred pharmacies, like United does with OptumRx’s mail-order service, the fourth-largest pharmacy in America. Last year, OptumRx made just under $100 billion in revenue.

Republicans, traditionally more sympathetic to Big Pharma, have elevated PBMs as the culprit behind escalating drug prices. In 2020, Donald Trump’s Health and Human Services Department tried to ban many of the kickbacks that drugmakers give these middlemen, but in three successive laws in 2021 and 2022, the rule was delayed, as part of an elaborate legislative maneuver to help “pay for” roads and bridges, gun safety implementation, and green-energy investments. That prescription drug users would ultimately pay the price was left undiscussed.

In 2021, United announced one of its most critical mergers, again through the OptumInsight arm. Change Healthcare was a claims integrity processor, which meant it served as the “mediator” between insurers and providers, allowing insurers to process claims from each patient visit and address any mistakes or disputes. Optum ran the same service as a competitor to Change, but it was important to have claims integrity processing remain independent from

providers and insurers due to the clear conflict of interest if captured by one side—not to mention by one company that can then self-preference.

Jonathan Kanter, President Biden’s antitrust enforcer at the Department of Justice, saw the potential for harm and filed a lawsuit, but after Optum voluntarily divested a small asset, the case became harder to argue and the DOJ lost in court.

As the Prospect warned back in 2021, the defeat and subsequent merger brings United “one step closer to creating their private single-payer system.”

United’s brawls with whistleblowers and disgruntled physicians have also not let up. In one notable case from 2020, Maxwell Ollivant, a United nurse practitioner for a skilled nursing home, revealed that the company’s Medicare Advantage plans “withheld or unduly delayed necessary services such as hospitalization,” refusing to transfer patients out of Optum facilities.

This, Ollivant stated, enabled Optum to keep receiving payments for their care, while also saving United on hospital bills that the insurer would have to pay. In one case, according to the lawsuit, a nurse reported that a patient was “vomiting what she described … as appearing like ‘fecal material,’” yet Ollivant’s supervisor refused to send the patient to the hospital.

Ollivant also said in the suit that nurse practitioners’ compensation was tied to lowering hospitalization rates, and that the facilities would get dividends for keeping hospitalizations down. NPs were also required to push nursing home residents to agree to “do not resuscitate” rules that limited care if the patient stopped breathing. All of this aligned the wishes of providers with insurers, but at the expense of patients. Despite this evidence, the government declined to intervene in the case.

Today, many providers with enough financial backing to bring lawsuits are owned by the private equity industry. That gives United a convenient line of defense in the public, as private equity investors are known as profit-hunters themselves.

Still, the arguments put forth by groups like TeamHealth resemble the complaints from the 700,000 doctors who took on the managed-care industry more than 20 years ago.

In July 2022, for example, TeamHealth filed a lawsuit accusing United of downcoding. In another case, judges in Florida decided that United was paying TeamHealth provid-

ers just 30 percent of what they deserved. As of December, United had forked over about $500 million to settle the allegations.

In a similar case, United removed multiple anesthesia practices throughout the country from its networks, a strategy that could “permanently reduce the alternatives for anesthesiology services in favor of UHG’s own employed anesthesiologists” and make the independent practices “more willing to be acquired,” said the American Society of Anesthesiologists.

When the COVID-19 pandemic put great financial pressure on health care providers, who had to focus all their resources on treating patients, the Health and Human Services Department enlisted Optum Bank to distribute $150 billion to hospitals and doctors to help cover expenses.

This massive role in delivering money to providers likely helped pave the way for Optum Pay Advance, the company’s payday loan “service” for doctors. The initial offer came with a 35 percent interest rate attached. “You have to have steel balls to actually propose that publicly. I mean, you have to not have any moral compass at all,” said Dr. Alex Shteynshlyuger on the podcast An Arm and a Leg. Payday lenders are viewed as immoral because of the high interest and fees they take from vulnerable customers. In United’s case, they’re not only doing that, but they’re generating the need among physician practices in the first place. According to data compiled by the Kaiser Family Foundation, United denies almost a quarter of all claims, making it very difficult for independent doctors to meet payroll.

United also has acquired one of the largest home health companies, LHC Group, and has offered to acquire another, Amedisys.

This brings their consolidation full circle.

Both LHC and Amedisys provide hospice care, giving United its own end-of-life outlet to send patients they cared for with their doctors, supplied with prescriptions, and insured throughout their lives. Hospitals have been accused of pushing costly patients to hospice care to save money; a vertically integrated health giant like United would have plenty of incentives to follow suit.

“Fundamental improvements in health care can be achieved only through a head on confrontation with our political and economic system,” that New York Review of Books article concluded in 1970. “In

short, the health system should be re-created as a democratic enterprise, in which patients are participants (not customers or objects) and health workers, from physicians to aides, are all colleagues in a common undertaking.”

An examination of United’s reach and breadth makes those words even truer today. The company has pushed the envelope of what an insurer can be, treating the U.S. health care system as its personal well and striving to wring out every last dollar from every spigot it attaches.

Avoiding this profiteering is the reason why advocates have demanded bans on the “corporate practice of medicine.” By opening the floodgates to for-profit managedcare pioneers like United, the government has abandoned this principle. Now, United and its peers are embedded in the fiber of the health care system.

And along the way, United has internalized a critical fact about health care: If you sit on every side of the transaction, from doctors to insurers, drug payers to drug prescribers, lifesavers to end-of-life carers, you not only grow as the system grows, but you have the ability to steer the entire system inside your gaping maw. Conflict of interest is really the business model.

But the fact that United is essentially running a private single-payer system, with more customers than most nations have citizens, could also be the answer to the problems United creates. If you treat the entire network like a utility, you could plug those spigots so that there is no financial gain from gouging patients, pharmacists, physicians, and the government.

Under public utility regulation, premiums could be capped. The government could oversee United’s offerings so closely that it effectively serves as a public option. And conflicts of interest could be eliminated: separating the claims integrity process from the insurers and doctors, separating drug rebates from pharmacy benefit manager profits, and separating insurer financiers from owning health providers altogether.

This could be the only way to prevent the same problems that led doctors to rise up against Burke in the 1980s, which patients are paying for, both financially and with their health. n Krista Brown is a senior policy analyst at the American Economic Liberties Project.

Sara Sirota is a policy analyst at the American Economic Liberties Project.

AUGUST 2023 THE AMERICAN PROSPECT 35

The Olive About a decade ago, a hedge fund manager (who asked to remain nameless) got a call from a young short seller about a pharma company whose stock price they were both betting would fall. The company, Questcor, had been a 50-cent stock just a few years earlier, but a new CEO had raised the price of its flagship product by 1,300 percent, and now the stock was approaching 50 dollars.

The flagship drug, HP Acthar, positively reeked. The Food and Drug Administration had initially approved it in 1952, before trials were required to prove a drug’s efficacy, for numerous inflammatory diseases. It was most commonly used for treating epilepsy in infants. Yet Medicare, not known as a major insurer of infants, was spending billions of dollars on Acthar. It was being marketed to neurologists as a remedy for multiple scle36 PROSPECT.ORG AUGUST 2023

rosis patients; 80 percent of the physicians who filed Medicare claims received “speaker fees” or “other perks.” Questcor’s new owners, the brothers Claudio and Paolo Cavazza, the former of whom was arrested and placed on probation for bribing the Italian health minister to put drugs he and his associates controlled on the national formulary, failed repeatedly to prove Acthar worked any better than far cheaper alternatives. For that reason, a major insurance company had dropped the drug from its formulary. And yet prescriptions for the $28,000 vials kept rolling in, the stock kept going up, and all the bearish bets were now bleeding red ink.

But the kid had a plan. He’d recently founded a biotech company of his own, which was in the final stage of negotiations to acquire the domestic distribution rights

to a European drug that was almost a precise synthetic equivalent to Acthar, minus a few amino acids—so it wouldn’t be covered by any exclusivity deal. EU data suggested the drug, Synacthen, would work exactly the same as Acthar, but its owner had never applied for FDA approval. The neurological disorder was rare enough that clinical trials would be fast and cheap, thanks to federal policies that strongly privilege so-called “orphan drugs” and make them exponentially cheaper to bring to market than drugs affecting a wider population.

To ease the process of raising cash to finance the trials, the kid had also recently merged his biotech startup into a shell company incorporated by an Atlantic City casino manager, and now it was worth close to a half-billion dollars on paper. He just

How orphan drugs became big business for Big Pharma

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By Maureen Tkacik

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AUGUST 2023 THE AMERICAN PROSPECT 37

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almost like they had spies in the shortosphere. What made the kid so sure they weren’t fixing to foil his brilliant plan?

A few months later, the day before the kid was scheduled to wire over his $16 million and assume the distribution rights to Synacthen, Questcor swooped in and bid H E Sa handful of potential U S I Nplus $135 million, LT B A than bonuses the kid figured would more double the sticker price.

The kid was fucked.

While his biotech company was superficially thriving thanks to a lucrative gallstone drug franchise it had picked up, his short position in Questcor, coupled with a host of other shorts in suspect drug companies that refused to shrivel promptly, was likely killing him. And that was a problem, because what the hedge fund manager did

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Now that the kid had merged with the penny stock shell company, everything that came out of his mouth arguably constituted “insider information.” Depending on how the kid timed his trades, they could both be subpoenaed for the conversation they were “You’re running a public comO F having.

THE B H pany now,”E he• gently reminded the kid. Maybe too gently.

The hedge fund manager also suspected the kid was underestimating Questcor.

When he hired a private investigator to contact a rheumatologist who’d abruptly stopped prescribing Acthar, the hedge fund had found itself served with a threatening letter from the company’s high-powered attorneys with shocking alacrity. It was

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needed to figure out the sweet spot, pricewise. Acthar was so crazily priced, he could undercut it by a factor of ten and still profit handsomely. But he’d do more damage to Questcor—and make more money on the short—if he gave it away for free.

It sounded like a pharma version of • T S The Big Short, of getR E only Hinstead E ES ting rich speaking truth about a tidal wave of foreclosures that was about to wipe out the global banking system, they’d get rich saving babies’ lives while immiserating a bunch of sketchy corporate executives. It was a perfect plan, with one little flaw: There were these things called securities laws. “STOP TALKING NOW,” the hedge fund manager interrupted. “You can’t be telling me any of this!”

not know then was that the kid seemed to have launched the biotech company solely to pull himself out of a deep rabbit hole he’d dug with some of his shorts.

The kid was maybe too young to grasp, the hedge manager thought, that the cliché references “snake oil” for a reason.

Selling dubious cure-all potions was the nation’s second-oldest profession; you had to choose your battles wisely. The kid’s public criticism of pharma companies had made him more enemies than he could probably comprehend; it was almost like his emotional intelligence was inversely proportional to his intellectual intelligence.

Within a year, the boy genius’s enemies had him excommunicated from the company he had founded. At which point, even the kid realized his “If you can’t beat ’em, join ’em” moment had arrived.

About 18 months after Questcor beat him, the kid lined up $55 million to buy a drug. He didn’t have enough time for even abbreviated clinical trials or a bare-bones sales team, so he homed in on the kind of medication pharma doesn’t make anymore, because it actually cures people of the need to buy more of it. Insurance companies likely wouldn’t mind paying for it, given that it was only generating about 10,000 prescriptions per year. The kid approached the owner, offering to pay a premium for the marketing rights in exchange for an agreement to withdraw the drug from its normal distribution channels and work exclusively through a specialty pharmacy (Walgreens), making it more of a challenge for generic drugmakers to source enough of the stuff to work on their own version.

The kid was Martin Shkreli, the vampiric Albanian janitors’ son with the smirk that launched a thousand cease and desist letters. And the day after he bought the rights to Daraprim, he raised the price from $13.50 a pill to $750.

The New York Times story a month later was almost scrupulously fair to Shkreli, quot38 PROSPECT.ORG AUGUST 2023

Nine of the ten biggest post-COVID pharma deals have involved orphan drugmakers Deal

Date

Price

Orphan Play

AstraZenecaAlexion

12/2020

$39 billion

Alexion’s rare disease drugs Soliris and Ultomiris cost about $500,000 per year.

Amgen-Horizon

12/2022

$28 billion

Horizon’s six orphan drugs are all priced at more than $300,000 per year.

Gilead-Immunomedics

9/2020

$21 billion

Immunomedics’ flagship drug Trodelvy is an $18,000-per-cycle orphan treatment for rare forms of cancer.

BMS-MyoKardia

10/2020

$13.1 billion

MyoKardia’s newest drug Camzyos, which costs $140,000 per year, has an orphan designation for a rare heart condition.

CSL-Vifor Pharma

12/2021

$11.7 billion

Vifor specializes in treatments for rare forms of kidney failure.

Pfizer-Biohaven

5/2022

$11.6 billion

Biohaven had been testing one of its drugs for ALS in pursuit of an orphan designation. The trial failed, however.

Merck-Acceleron

11/2021

$11.5 billion

Acceleron’s most promising drug at the time of acquisition was orphan-designated heart drug Sotatercept.

Jazz-GW Pharma

2/2021

$7.2 billion

GW’s orphan-designation CBD-based drug Epidiolex debuted in 2018 with a list price of $32,000 per year.

J&J-Momenta

8/2020

$6.5 billion

Momenta’s focus is rare blood disorders and autoimmune diseases; its most promising drug has also shown promise treating a rare fetal disease.

Pfizer-Global Blood Therapeutics

8/2022

$5.4 billion

GBT’s focus is drugs for sickle cell disease, one of the more common rare diseases, which afflicts 100,000 Americans.

Analysis from Maureen Tkacik via public merger announcements.

ing a hospital medical director commending his efforts to ensure rapid supply of the medication and containing the vital sentence: “Turing’s price increase is not an isolated example.” As Andrew Pollack, a veteran biotech reporter who would unfortunately accept the newspaper’s early-retirement offer the following year, explained it, the young “Pharma Bro” was merely the latest in an industry epidemic of astronomical price hikes on off-patent drugs: Rodelis Therapeutics, Marathon Pharmaceuticals, and of course Valeant Pharmaceuticals, a particular bête noire among Shkreli’s old short-seller buddies for having pulled his move on more than 100 relatively ancient medications.

It is easy to forget now that, during the

Autumn of the Pharma Bro, it seemed as though the government might do something about not just Shkreli but pharma profiteering, full stop. While Donald Trump, then on the campaign trail, pilloried the “young guy” who “looks like a spoiled brat to me … a spoiled brat,” House Democrats convinced the majority Republicans to expand an inquiry into Daraprim to focus on bigger fish like Valeant. The Department of Justice indicted an Allergan executive and imprisoned a Valeant executive, and successfully convicted the CEO of a company that specialized in extortionately priced fentanyl spray and four of his executives on racketeering and conspiracy charges. DOJ exhumed old cases against Purdue Pharma and Jazz Pharmaceuticals.

Of course, they also threw the book at Martin Shkreli and sentenced him to seven years in a low-security prison—though that particular case had nothing to do with drug prices. Then in 2022, a federal judge banned him forever from the pharmaceutical industry. But by that time, it was clear that Shkreli was being used as a punching bag. The Pharmaceutical Research and Manufacturers of America (PhRMA) exploited his distinctly repellent personality to advance the narrative that he represented some sort of anathema— “More Lab Coat, Less Hoodie” was the working title of this branding campaign. But at the same time, the pharmaceutical industry was literally remaking itself in Shkreli’s image.

Shkreli’s scheme—find a drug that only an unlucky few cannot live without, and balloon the price—was already a booming growth business before he got his hands on Daraprim. But afterward, it became something more like the prevailing business model, as endemic to the drug industry as outrageous add-on fees are to airlines and ticket brokers. By the time the Pharma Bro was released from prison in 2022, the $60,000 price tag of a typical course of Shkreli’s Daraprim was about the same list price as the best-selling drug in America, AbbVie’s 20-year-old Humira.

It’s not exactly news that prescription drugs cost a fortune in America. But the pace at which drug prices inflated during Shkreli’s prison sentence is so staggering that when I read some of the figures in a recent issue of The Journal of the American Medical Asso-

ciation, I thought they were a misprint. In 2015, the year Shkreli jacked up the price of Daraprim, the median launch price of a new or reformulated pharmaceutical was roughly $10,000 a year. The median launch price of a drug launched in 2021 was $180,000 a year; by the time I went back to fact-check that figure, it had jumped again in 2022, to $222,000. Not long ago, six-figure drugs were real outliers; since 2020, roughly half of newly launched drugs in the U.S. cost $150,000 per year or more.

The biggest drivers of this hyperinflation are so-called “orphan” drugs, obscure treatments for rare diseases believed to afflict fewer than 200,000 Americans, the very niche in which Shkreli specialized. Orphan drugs are privileged under the law via a special para-patent system housed at FDA that guarantees drugmakers seven years of marketing exclusivity of their chemical formulation, even if the drug’s patent is long expired.

But they also benefit from plenty of privileges even after all the legal protections expire.

At some point, industry norms determined that orphan drugs should cost much, much more than their mass-market contemporaries. Their launch prices from 2008 to 2018 have been roughly seven times their general-population counterparts. They are also, paradoxically, much cheaper to bring to market. The clinical trials are subsidized by the government. The affected recipient populations are so small they often require as few as 30 recipients, compared with thousands in the average clinical trial. The patients are often well organized by non-

Not long ago, six-figure drugs were real outliers; since 2020, roughly half of newly launched drugs cost $150,000 per year or more.

profit advocacy groups, which are simultaneously vital resources staffed by activists of utmost sincerity and cynical astroturf ventures that exploit the desperation of patients to extract free lobbying and public relations out of them and silence populist outrage about drug prices. And in marketing, there are fewer doctors to court, fewer sales representatives to pay, far less negative press to endure if the drugs injure or kill someone, and less negativity in general, thanks largely to the hope miracle cures can arouse.

This has all served to deflect mainstream attention from the extent to which rare-disease medications have swallowed the pharmaceutical industry. Orphan drugs now comprise between 35 percent and 45 percent of the new drug approvals in any given year, and are projected to be at least one-third of the overall drug development pipeline, and close to one-fifth of drug sales, period, an amazing amount for medications that by definition serve a limited patient population. That number does not include pseudo-orphans like Daraprim and HP Acthar, whose legal protections are long expired, but which by various mysterious machinations regularly wind up on the top 10 most expensive lists.

A more accurate barometer of the magnitude of the rare-disease drug bonanza is the ballooning portion of the annual American drug spend consumed by so-called “specialty” drugs, which are generally injectables, though anything above $600 a bottle is generally sold through specialty channels. In 2010, specialty drugs comprised 24 percent of pharmaceutical spend; by 2021, it was 50 percent. Amgen’s recent proposed $27.8 billion acquisition of Horizon Therapeutics, a company whose origins make Shkreli’s Turing Pharmaceuticals look like the National Institutes of Health, demonstrates that this normalization is continuing, full speed ahead.

Mick Kolassa, a Memphis blues musician and former industry consultant who wrote a book, The Strategic Pricing of Pharmaceuticals, advising executives on how to stop worrying and hike drug prices, says the magnitude of the greed that consumed the business post-Shkreli finally drove him out six years ago. “I got this call from a major drug company and they said, ‘Listen, we’ve got this drug for a very rare kind of asthma about 3,000 patients have.’ And I said, ‘OK, with 3,000 patients you have the potential for a very high price because it’s an orphan.’ And they said, ‘Well it works on regular asthma, too.’ And I told them, ‘Well then you have to AUGUST 2023 THE AMERICAN PROSPECT 39

sell it to the biggest market.’ And they said, ‘Oh, we already are! We just wanted to know if we can charge more for patients with the rarer form of it.’ I said, ‘Because they were unlucky enough to get an unpopular disease?’ and then politely declined to take the job. It just wasn’t the industry I entered anymore.”

Where Kolassa once advised companies to push the limits on pricing, he now believes the government should establish an American version of the United Kingdom’s National Institute for Health and Care Excellence, which decides which drugs the National Health Service will provide patients and how much it is willing to pay for them.

Sean Tu, a doctorate pharmacologist turned law professor at West Virginia University who is an expert on patent abuse and other drug industry machinations, sees pharmaceutical research as a standard example of the so-called “trolley problem,” a moral dilemma defined by the philosopher Philippa Foot as the decision that faces the operator of a derailed trolley racing down a hill. “If you go down the hill, you probably kill four people; if you pull the lever and swerve into an alley, you’ll kill the one man walking down the alley.

If that’s the choice before you, you have to swerve into the alley,” said Tu. “If I’m trying to maximize social welfare, shouldn’t I spend my money on diseases that kill more people?”

More than ten million people die of infectious diseases each year, but an intervention designed to correct a simple market failure has begotten an even more obvious moral failure.

Congress passed the Orphan Drug Act in 1983, following a curious grassroots lobbying campaign orchestrated almost entirely for a television show. Abbey Meyers, a mother of three children with Tourette syndrome, had found a “wonder drug” called Orap that minimized their tics, but a friend had gotten the medication confiscated by Border Patrol agents when they attempted to bring it home from Canada. Her letters to Congress inspired an entire hearing on the subject.

Maurice Klugman, producer of Quincy, M.E., a popular television show about a medical examiner played by his brother Jack, was struck by the issue, because he himself had a rare bone cancer. He decided to dramatize the predicament with a series of “true story” episodes about the struggles of patients with diseases too obscure to plant dollar signs in the heads of pharma execs. For the final episode, the producers 40 PROSPECT.ORG AUGUST 2023

decided to stage a fake “March on Washington” for rare-disease sufferers, and charged Meyers with rounding up some 500 extras with real-life rare diseases to star in it.

The year the law passed, Meyers formally incorporated one of its most critical legacies, the National Organization for Rare Disorders. The group launched an early CompuServe database with a grant from the Generic Pharmaceutical Industry Association. Today, NORD serves as a vital umbrella of rare-disease foundations, which in turn serve as conduits between patients, doctors, and pharmaceutical companies. The annual budget of NORD alone is $50 million.

The rare-disease dilemma exemplified a simple paradox: Because the U.S. health care system was a creature of the pursuit of profit, the big drug companies focused all their marketing and development efforts on afflictions they deemed prolific moneymakers, like cancer and heart disease, while other patients suffered hopelessly, even when perfectly effective drugs were available. No big drug company would bother ponying up the funds to submit a drug to the rigors of the FDA approval process that would only ever have a few thousand customers. Tourette sufferers suspected that companies were sitting on scores of drugs like Orap, which was produced by a Johnson & Johnson subsidiary but never marketed in America.

The Orphan Drug Act subsidized drug companies that conducted clinical trials for treatments of rare disease, and extended seven years of marketing exclusivity to any un-patentable drugs that passed the trials.

The industry felt the ODA was too imprecisely worded and not generous enough. So a 1984 amendment defined “rare” as “believed

to afflict fewer than 200,000 Americans,” so it could be used for promising new treatments for narcolepsy and multiple sclerosis, and a 1985 amendment extended the seven years’ exclusivity to patentable drugs.

The first documented episode of a drug company exploiting the new law to engage in what doctors deemed “needless and shameless price gouging” occurred not long thereafter.

LyphoMed was a small Chicago drug manufacturer backed by the pharma giant Abbott Labs and led by an enterprising chemist named John Kapoor, who claimed to have been asked by the Centers for Disease Control and Prevention to apply for an orphandrug designation for an antimicrobial drug it produced called pentamidine. Originally developed in the 1940s as a remedy for African sleeping sickness, pentamidine was also a first-line treatment for a rare form of pneumonia called pneumocystis, which happened to be the leading cause of death in individuals infected by the AIDS virus, which was surging through American cities at the time.

Following its award of market exclusivity, LyphoMed quadrupled the price of pentamidine; by 1987, an average three-week course cost hospitals $2,000. Kapoor endured a cycle of bad press, but the same activist community who shamed him brought him a new business opportunity: a spray form of the drug administered via a nebulizer, which AIDS sufferers smuggled into the country from France and used as a preventative treatment to avoid hospitalization. Preventative treatments are generally much more profitable than hospital drugs, and LyphoMed’s aerosolized pentamidine soon fetched as much as $200 a vial, eight times its price in France. By the end

The Orphan Drug Act subsidized companies that conducted clinical trials for treatments of rare disease.

CHARLES KRUPA / AP PHOTO

John Kapoor, who led the first company to exploit the Orphan Drug Act by jacking up the price of a drug

of the Reagan administration, LyphoMed’s future looked bright enough that Kapoor was able to sell the company to a Japanese firm for nearly a billion dollars; he walked away with $130 million, though the Japanese company ultimately clawed back some of that money after suing him for racketeering and fraud.

It’s worth pointing out that Daraprim (pyrimethamine), a very similar drug to pentamidine that treated the second big infection associated with AIDS, toxoplasmosis, sold for as little as 18 cents a pill in 1989. Its owner, Burroughs Wellcome, was already the target of consumer boycotts over the cost of its new orphan AIDS treatment AZT. That year, the Bush administration reportedly contemplated revoking its AZT patents, using a 1910 law that had not been invoked in 30 years. While they never followed through, the AZT scandal drew attention to other pharmaceutical companies using “orphan” status as an excuse to set astronomical prices for drugs. The newly

formed company Amgen’s $8,000-a-year EPO and Eli Lilly’s $10,000 growth hormone were frequent targets of criticism.

By 1990, the ODA’s co-sponsor Henry Waxman was distancing himself from the monster he had created, proposing amendments that would severely curtail the bonanza, following a fight with Amgen over its inaugural drug Epogen, which treated anemia in dialysis patients and cost $8,000 a year. But those amendments failed to pass. “I always thought one of the biggest problems with health care is that it became a business,” Waxman told the Prospect recently. “It’s no longer a noble activity.”

In 1991, the buzzy biotech firm Genzyme released the world’s most expensive drug, an enzyme replacement therapy for the genetic disorder Gaucher’s disease called Ceredase (which the company produced from human placentas) that commanded as much as $400,000 a year. Gaucher’s is suffered by somewhere between 2,500 and 6,000 Ameri-

cans, many of whom complained about being constantly harassed by pushy salespersons.

Ceredase was a gravy train for more than just Genzyme: Its primary distribution partner was a Memphis company called Accredo Health Group, a spinoff of the Methodist Le Bonheur health system that specialized in delivering high-priced injectable drugs to patients, teaching them how to administer them, and haggling with their insurance companies. Accredo boasted in its 1998 prospectus that it grossed “within the range of $150,000 to $200,000 per patient” from this relationship, or close to $100 million a year during the late 1990s off Gaucher’s patients, showcasing the deal for decades to come in internal strategy documents.

Genzyme CEO Henri Termeer initially suggested Ceredase’s price would come down once manufacturing costs fell, but he kept the price basically unchanged when the company introduced Ceredase’s synthetic analogue, Cerezyme, which was far cheaper to produce.

“What’s the difference between charging $200,000 or charging $175,000 to a patient? No one can afford it without insurance,” he reasoned in 2005, voicing a nihilism that would become far more common in the industry over the decade ahead.

Martin Shkreli likely first learned about Genzyme as a 17-year-old intern at Jim Cramer’s eponymous hedge fund, where he worked during the early 2000s. He gravitated toward pharma stocks, for reasons an old friend from the era interviewed by the journalist Christie Smythe couldn’t recall. “Why would you pick that industry? I have no idea.

It doesn’t capture the hearts and minds like the internet companies do.” (Shkreli would not comment for this story, emailing, “I dont support journalists or ‘antitrust’ ‘law’ enforcement, sorry,” in response to an email I sent identifying myself as a journalist and fellow with an antitrust think tank.)

And yet when Shkreli nabbed an invitation to a pharma analyst’s party, “he was like a little kid at Disneyland,” the friend said.

AUGUST 2023 THE AMERICAN PROSPECT 41

42 PROSPECT.ORG AUGUST 2023

Martin Shkreli began his career short-selling biotech firms, developing a reputation as one of Wall Street’s most sophisticated readers of a clinical study.

of many of them. CREW’s attack turned out to have been funded by the family who founded the University of Phoenix.

Far more perilous than the CREW crew, though, was the market’s penchant for remaining irrational. Such was the case with Questcor, the company that jacked up the price of Acthar from $40 a bottle to $40,000, and stymied Shkreli’s attempt to acquire a potential competitor. In the months after the company outbid Shkreli for (and predictably shut down) Synacthen, an allied short seller, Andrew Left, decided to solve a big mystery about Acthar: what even was in the stuff.

Questcor’s CEO—whose last company ran municipal airports and Pentagon facilities— was strangely cagey about this, claiming that it was harvested from the pituitary glands of pigs, but cryptically adding in investor presentations that it may contain active ingredients other than the main one listed, a hormone called corticotrophin.

Left actually retained a laboratory to

examine a sample of Acthar. Astonishingly, the lab found that the drug contained no corticotrophin whatsoever, only the degraded refuse of the hormone. With the help of a former senior FDA attorney, Left compiled the findings into a 300-page report and sent it to the agency in December 2013; the agency never formally responded. (The Federal Trade Commission, for its part, did investigate and ultimately sue over Shkreli’s formal complaint about Questcor’s Synacthen acquisition, though the Pharma Bro was out on bail and awaiting trial on securities fraud charges by that point.) In 2014, the world’s largest manufacturer of pharmaceutical opioids bid $5.6 billion for Questcor, a 27 percent premium to its already inflated stock price and an utter fiasco for shorts.

Perhaps Shkreli’s most disastrous bear call was Horizon Pharma, then a Deerfield, Illinois, drugmaker he pronounced “an attractive short” in 2012 after reading the fine

SUSAN WALSH / AP PHOTO

Perhaps inspired by the famous successes of the short sellers of the era, profiting off the demise of everything from Enron to mezzanine collateralized debt obligations, Shkreli gravitated toward the bearish side of the business.

His first recorded success was a biotech company called Regeneron, which had spent its first seven years bringing to market a lackluster ALS drug that ended up adding three months to the life of the average patient; the company was testing out its efficacy as a weight loss drug, which didn’t work. Shkreli advised his bosses to short the stock, and they made a killing when the FDA ultimately rejected it.

While he had no formal medical training, Shkreli quickly developed a reputation within the short-seller community as one of Wall Street’s most sophisticated readers of a clinical study. Some of his early picks are still up at the investment website Seeking Alpha, where he posted takedowns of longforgotten stocks like Neoprobe, Nektar, and MannKind.

Though nearly all his takes were substantively correct, Shkreli’s timing often wasn’t.

He lost $7 million on a single trade shorting a company hyping another weight loss drug he doubted. That company ultimately filed for bankruptcy protection—seven years later, when Shkreli was living in a New York federal prison.

The fundamental challenge of shorting biotech firms is that their stock prices are as much a function of the strength of their lobbyists as the efficacy of their drugs. Shkreli often accompanied his trades with letters to the FDA, encouraging the agency to reject the applications of what he suspected to be poor drugs. In 2012, the watchdog group Citizens for Responsibility and Ethics in Washington wrote the SEC demanding an investigation into Shkreli’s correspondence.

It’s not clear what triggered CREW’s indignation, but Shkreli was at the time close with Steve Eisman, a famous short seller CREW similarly denounced in 2010 for testifying about the predatory practices of forprofit universities while shorting the stocks

print of an amendment to its latest SEC filing detailing the terms of a $60 million secured loan it had just taken out. The debt covenants explicitly required the company to post minimum revenue of $20 million for the quarter to avoid default; Shkreli thought Horizon was unlikely to eke out much more than $15 million. Even if it did, the threshold for the following quarter was $30 million.

Horizon had spent much of the past five years securing FDA approval for a drug called Duexis, a combination of ibuprofen and famotidine, the active ingredient in Pepcid AC. Its “inventor” had patented the drug in 2005 with the apparent idea of capitalizing on the controversy surrounding COX-2 inhibitors, a class of blockbuster anti-inflammatories that had been recently discovered to involve heightened risk of cardiac arrest. But the fact remained that the drug was a combination of two widely available drugstore pills, which together cost $10 a month at maximum.

Sales had been tepid, and various generic manufacturers had already challenged the company’s patents in advance of launching their own versions. Somehow, Horizon had amassed $60 million in debt bringing Duexis to market. A more obvious short has perhaps never existed: At one point in March 2012, so many traders were shorting Horizon’s stock that the short positions outnumbered outstanding shares of the stock nearly 5 to 1.

Improbably though, the company crawled out of the hole. Management simply raised the price of Duexis, first to $500 a bottle and later to $2,500, then used the proceeds to spend $35 million buying its primary competitor, Vimovo—which com-

bined naproxen with esomeprazole, better known as Aleve and Nexium—from its developer AstraZeneca. It hiked Vimovo’s price even higher, to $3,000 a bottle.

Critical to this business model was a Long Island mail-order pharmacy called Linden Care, recently purchased by a small private equity firm called BelHealth Investment Partners, where famous “voodoo economist” Arthur Laffer is an adviser. Linden Care employed a special team of 50 representatives solely to move Vimovo and Duexis; one lawsuit against Horizon estimated a similar “captive” mail-order pharmacy booked a $100 fee for each Horizon prescription it fulfilled.

Because CVS and Walgreens were unlikely to stock Duexis or Vimovo, Horizon sales reps encouraged doctors to direct patients to Linden Care, offering to cover their co-pays as an inducement. Linden Care then filed directly with patients’ insurance companies.

Linden was skilled at fast-tracking the authorization process in part because its only other consequential client was Insys Therapeutics, an Arizona company founded by the inimitable John Kapoor, the original Martin Shkreli of the 1980s, who had followed up his sale of LyphoMed by becoming the purveyor of the world’s most expensive opioid medication. Insys Therapeutics charged between $6,000 and $40,000 for a 30-day supply of the Subsys fentanyl spray, and while the only approved indication for the drug was the so-called “breakthrough” pain of terminally ill cancer patients who are severely opioid-tolerant, it sold $330 million in 2015 to patients who overwhelmingly did not have cancer.

Horizon’s first major drug, Duexis, was a combination of two widely available drugstore pills that together cost $10 a month.

But Linden made a rookie mistake with its bounty from Horizon and Insys: It failed to share enough wealth with the pharmacy benefit managers (PBMs), in particular Express Scripts, which in October 2015 very publicly severed its ties with Linden Care and Philidor, a mail-order pharmacy with a dizzying maze of sham subsidiaries that was secretly controlled by Valeant, a Canadian rollup that had run the Shkreli playbook on hundreds of drugs.

All throughout that Autumn of the Pharma Bro, Express Scripts had taken on an unusually public role. Pharmacy benefit managers typically operate outside public view, in part because their business models are inextricable from the rise of drug prices.

Ostensibly, they negotiate drug discounts on behalf of large groups of payers. In reality, the “rebates” PBMs extract, which they then skim from for their profits, are higher when a drug’s list price is higher.

Express Scripts relished any opportunity to cast itself as the solution to runaway drug prices, however, and Shkreli gave them an unprecedented opportunity. In November 2015, the company’s medical director Steve Miller gave an exclusive interview to the venerable Times reporter Pollack, sharing its plan to produce a cut-rate version of Daraprim in conjunction with a compounding pharmacy. A few days later, Miller publicly confronted Shkreli at the Forbes Healthcare Summit, provoking a fascinating series of retorts from Shkreli, who claimed that Express Scripts was happily complicit in his activities and had further been “begging for my business” just months before when he was pinning down a “closed distribution” partner. (He’d gone instead with Walgreens, whose specialty pharmacy division, incidentally, largely consisted of John Kapoor’s old company Option Care, Inc.) While Business Insider posted a dispatch on the exchange, almost no one comprehended its significance.

A Philadelphia attorney named Don Haviland was the exception. He was working on behalf of a handful of small selfinsured health plans that had somehow been induced to spend millions of dollars on HP Acthar, the $40,000-a-vial pig pituitary potion. In the process, he had unearthed, inter alia, a May 2015 Express Scripts internal email that described pitching Shkreli’s Turing on an exclusive distribution deal with Express Scripts for Daraprim. The further AUGUST 2023 THE AMERICAN PROSPECT 43

he dug, it seemed that Express Scripts had played the pivotal role in enabling Questcor to sell billions of dollars’ worth of Acthar.

Like all PBMs, Express Scripts was preposterously conflicted when it came to its putative purpose of cost containment. A recent study calculated that PBMs extract an astonishing 53 percent of the sales of insulin, and that’s a situation where it’s sharing the wealth with three pharma giants. The lawsuit Express filed against Horizon over Linden’s Duexis sales alleged that the company had failed to pay $166 million in rebates, even though Horizon had only posted total sales of about $400 million up to that point.

Horizon “only” ended up paying $65 million to settle the lawsuit. From there on, it pivoted hard toward something that looked a lot like the Shkreli model.

Horizon acquired a 25-year-old drug Genentech had developed in the 1980s, followed by a third-line gout medication whose clinical trials had bankrupted a New Jersey biotech, and a rare eye disease medication that Hoffman La Roche had off loaded to a private equity–owned shell company in 2011. The company paid nosebleed valuations with borrowed money for every drug, but quickly earned back the cash f low to make its interest payments.

The gout drug Krystexxa went up tenfold; a new time-release version of an old treatment for the childhood kidney disorder cystinosis it picked up from a University of California, San Diego–affiliated startup went from $250,000 a year—itself so high that the startup’s CEO protested—to as much as a million dollars a year, leading the Canadian drug price ministry to demand price cuts.

While the Justice Department continued to sniff around Horizon’s $3,000 Duexis business, it declined to intervene in a whistleblower lawsuit brought by a marketing executive who alleged that Horizon had disseminated fraudulent literature to give doctors the impression that Krystexxa’s terrifying 26 percent incidence of adverse events could be easily preempted with the use of simple blood tests. The complaint included a shocking statistic: As many as a quarter of Krystexxa prescriptions in 2019 had been written by just two doctors, both of whom Horizon had paid tens of thousands of dollars to deliver speeches on the drug’s benefits. Nevertheless, the company recently said it expected Krystexxa to 44 PROSPECT.ORG AUGUST 2023

A recent study calculated that PBMs extract an astonishing 53 percent of the sales of insulin.

reach annual sales of $1.5 billion—certified blockbuster status—over the next couple of years; at almost $400,000 per year for many patients, it doesn’t take too many of them.

Accredo, the company that made all that money off of Ceredase and Cerezyme in the 1990s, now dispenses all Horizon medications. Express Scripts purchased Accredo back in 2011. There’s been no pushback by Express Scripts on pricing from Horizon or any other orphan manufacturer. “To be very frank, we are a price acceptor when it comes to ultra-orphans,” Express Script’s Miller said in 2016, referencing the subset of orphan drugs that treat diseases affecting fewer than 50,000.

“There’s no competition. It’s pharma that’s putting these prices out there. There’s nothing we can do.”

But documents produced in a putative class action lawsuit against Express Scripts suggest the PBM has gone out of its way to accommodate companies that choose to adopt what Questcor termed an “orphan pricing model”—to Shkrelify their businesses, that is.

The case study of HP Acthar would cer tainly suggest as much. Back in 2007, when Questcor’s stock was hovering around 50 cents, Express agreed to serve as the exclusive distributor, pharmacy, and patient assistance hub of HP Acthar, in exchange for a cut of the drug’s revenues. The venture was called ASAP, or the “Acthar Support and Access Program.” Using four Express subsidiaries, ASAP fast-tracked prescriptions through prior-authorization regimes thanks to “our extensive relationships with payors,” facilitated a Questcor-subsidized payment assistance program for patients

who couldn’t afford co-pays, maintained a 1-800 hotline to answer questions from patients and doctors and, most damningly, coordinated the relentless series of price hikes that launched the drug’s price tag from $40 in 2001 to more than $40,000 a vial in 2014.

Internally, ASAP was considered a spectacular success story. An internal email from a senior Express Scripts executive in 2013 described the drug as “our most profitable product” and noted that each Acthar prescription brought about $3,000 in to the company. A source familiar with the Acthar program says Express specialty pharmacy execs often mentioned the drug in the same breath as the illustrious Genzyme program of the 1990s. But there’s a critical difference between Genzyme’s drug and Questcor’s: The former delivered patients decades of relief from debilitating symptoms, while the latter, outside the population of epileptic infants, did not do much of anything a $25 cortisone shot wouldn’t do. Despite this, the vast majority of its patients were adults. At Questcor, Acthar’s dubiousness was a point of pride. “Just step back for a moment and realize what it is we are doing,” Questcor exec Steve Cartt wrote colleagues in 2011.

“We are selling perhaps the most expensive drug in the industry at $5k a day in a non-orphan situation. This is very different, unheard of really before we did it.”

“Acthar is one of those vampire drugs that is just a poster child for everything wrong with the PBM industry,” says Robert Seidman, the former chief pharmacy officer for the health insurer WellPoint, who left a few years after it was swallowed by Anthem Blue Cross. “It should have been relegated to the dustbin of pharmaceutical history.” Instead,

WILFREDO LEE / AP PHOTO

Express Scripts, through its subsidiary Accredo, dispenses all Horizon medications, with no pushback on pricing.

“they sent the Kens and Barbies out to detail the doctors and it flew under the radar, and began consuming so many health care dollars.” Ultimately, he says, “PBMs realized at some point that there was far more room for abuse in the orphan drug space.”

This is the other major danger of orphan drugs. While rare-disease sufferers lobby aggressively, and often successfully, for the FDA to approve treatments even in the absence of legitimate efficacy data, the more nebulous a drug’s mechanisms and benefits, the higher potential a drug stands of turning a profit in the off-label market.

From the cataplexy drug (and onetime exclusive Accredo partner) Xyrem, which was offered for everything from depression to fibromyalgia, with deadly consequences, to the liver-damaging genetic disease medication Juxtapid, which was given for run-of-the-mill high cholesterol, there are litanies of orphan drugs that attempted to go Hollywood. Both of those drugs, by the

way, are exclusively distributed by Express Scripts. Horizon’s newest blockbuster Tepezza appears to be one of the latest: a secondline treatment for a severe form of Graves’ disease that causes hearing loss in about 10 percent of patients, it is currently being heavily marketed on television as a salve for what seem from the commercials like bad cases of bloodshot eyes.

It’s illegal, of course, for pharmaceutical companies to promote drugs for anything other than FDA-approved uses. It’s also very common, which is why regulators and insurers installed guardrails like “prior authorization” protocols in the first place.

But a whistleblower retaliation lawsuit filed by a former Mallinckrodt employee in 2018 claims the company prevented her from speaking forthrightly with insurance companies about the company’s efficacy data on off-label uses of the drug—and that a Blue Cross manager complained that representatives of Express Scripts’ Accredo were

harassing the insurer about its coverage of the drug. Even more perversely, while insurance plans automatically receive rebates totaling about a quarter of the cost of brand-name drugs, the average rebate on “specialty” drugs distributed through mailorder pharmacies like Accredo is much lower and small payers may receive no rebates whatsoever on those drugs—another reason Express may have been “begging” for Shkreli’s business.

“Since 2007, [Express Scripts] has built a multi-billion dollar specialty distribution business centered around pulling retail pharmacy drugs, like Acthar, off the pharmacy shelves and ‘relaunching’ them as so-called ‘specialty drugs’ by simply limiting distribution and raising the prices,” alleges Haviland’s putative class action lawsuit.

In an excellent price-fixing and conspiracy lawsuit filed earlier this year against an industry he derided as “modern gangsters,” Ohio Attorney General Dave Yost slammed Express and its major rivals as “the solution that becomes the problem.” However, the mechanisms by which they and the rest of the industry operate are so opaque that it’s still not entirely clear how they are making their money and what we should do to stop them. But after the FTC voted unanimously to commence a comprehensive study on the issue last year and asked the public to weigh in, patients flooded the system with complaints about Accredo. “I work for Cigna which owns Express Scripts and Accredo, and you would think I would get treated better than to have my cancer drug cut off due to my financial assistance running out of funds after i signed up,” wrote one patient, who added that they were forced to call Accredo four times and pay $4,500 to begin receiving their drugs again.

“It was easy for them to go after Shkreli for the same reason it was easy for everyone to go after him,” says Haviland. “He was a small player, and it was just one drug with one indication, and of course it was outrageous. But in this case he was actually a whistleblower.” n AUGUST 2023 THE AMERICAN PROSPECT 45

MY LIFE IN CORPORATE MEDICINE Meet a millennial family physician who is also a one-woman antidote to private equity and the forces that have destroyed compassionate treatment for patients.

By Stephanie Arnold, M.D.

REBECCA D’ANGELO

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I wanted to be an anthropologist. But one a chef, still has trouble comprehending what day in my junior year of college, I was in a thankless profession he’s married into.

When I was working full-time at an a bioarcheology class, and my professor pulled me aside and said, “Look, you are urgent care clinic at a strip mall in southern very good at this. But I want you to under- Virginia, someone came in for a laceration stand, you will get a Ph.D. and then you who turned out to be this guy I’d worked will be wait-listed to teach at community with at a sporting goods store in undergrad. college.” I come from a working-class fam- So we caught up a little and at the end he ily; my parents got pregnant at 19 and my was like, “So uh, are you going to get, like, a dad went back to school and finished col- real job at some point?” I said kind of sheeplege when I was 11. I was their firstborn ishly, “Yes, I just have a nine-month-old daughter, I was class president, OF • T H baby and neededSaSpaycheck.”

N E S S own aspithey hadSaIlot of their The goodEnews is I started RE H my E rationsU tied up in my future, own practice, part of a growing and becoming a community movement in medicine called college teacher, maybe, was direct primary care (DPC). not going to fly.

It’s growing faster than I can even sustain, and I’ll soon have So I thought, I guess I’ll go to medical school because that’s to quit all my day jobs. But to … kind of like being an anthrounderstand why someone with pologist? Here’s the thing with two very small children and $320,000 being a family doctor, though: All of your in student debt with a 6.8 percent interest job options are going to have some sort of rate would want at this point in her life to stigma attached. It’s not quite being an work 70-hour weeks, and take on even more adjunct professor, but my husband, who is debt, all to become a small-business owner,

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Stephanie Arnold, M.D., a family care doctor with her own practice in Richmond, Virginia AUGUST 2023 THE AMERICAN PROSPECT 47

you have to know a bit about the jobs that do exist for millennial family physicians, and what that says about the state of American medicine today.

Sadly, of the jobs I’ve had since completing my residency, the urgent care gig was the best. I’ve also done weekends at an independent abortion clinic where I’ve worked since undergrad. I’m obviously committed to abortion rights, but as a doctor it feels like an assembly line. I offer abortion services in my clinic now; there’s no six-hour wait and patients are welcome to bring their kids, who aren’t welcome at Planned Parenthood.

Until recently, I also worked full-time as a primary care physician for a company that specializes in something called the Program of All-Inclusive Care for the Elderly, or PACE. It’s a kind of Medicare Advantage plan for people who are dually eligible for Medicaid and Medicare. While all of the jobs felt kind of dead-end in their own ways, that one introduced new layers of dysfunction and cynicism I’d never imagined. Surprise: Private equity owned it.

I started medical school in 2011, full of idealism and optimism over the promise of Obamacare. But the health care system has gotten progressively worse every year that I’ve worked in it, probably because private equity firms keep acquiring new corners. The urgent care was an exception, it was part of a family business, founded by an emergency physician who actually cares about employees. When COVID came, they didn’t lay off a single full-timer even when volume fell off a cliff, probably in part because he was a big Trumper and was convinced the pandemic would “blow over” by the summer of 2020. Whatever the case, though, support staff and mid-levels stayed with the company for years, so they operated with a level of competence and efficiency you don’t see much these days.

Urgent care is an extension of emergency medicine, which was never my favorite.

But it was a very coveted specialty when I was in med school that has completely collapsed. There were more than 500 unfilled residency slots in emergency medicine this year, which is unheard of, because private equity has turned it into an epic race to the bottom. No one wants to keep patients waiting 12 hours so they can get hit with a $10,000 bill.

In urgent care, I got a lot of patients who should have been at the ER but they were 48 PROSPECT.ORG AUGUST 2023

terrified of getting crushed by surprise bills. One woman came in for a mysterious infection no one had located and wasn’t responding to antibiotics, so I tested her blood and her white blood cell count was through the roof. That’s cancer. So I got her to the ER right away, where they performed an emergency Whipple procedure; pancreatic. Miraculously, she came back again the next year and told me the clinic had saved her life.

I found patients with undiagnosed lung cancer, a pulmonary embolism, sepsis, and a rare pediatric heart condition

try to replace as many doctors as they can get away with with NPs. My first residency was run by a private equity firm, so I got an early window into what was in store for health care. The idea of family medicine training is that we practice medicine “cradle to grave.” By the time you’re finished with your residency, you can handle 85 percent of all medical concerns: prenatal care, labor and delivery, preventative medicine across all ages, pediatric visits, chronic disease management, acute concerns, reproductive health.

If you look at some of the modeling for well-

The health care system has gotten progressively worse every year that I’ve worked in it, probably because private equity firms keep acquiring new corners. called Kawasaki syndrome. That kind of care can be satisfying, but it is also so depressing because all of those conditions could have been caught far earlier, more cheaply, and with a substantially higher chance of survival if these patients had regular relationships with physicians who were not too bogged down in paperwork to see them. Many had been misdiagnosed, mostly by people who weren’t actually doctors.

In most clinical settings, patients of a certain class don’t see a doctor at all, but a physician assistant or a nurse practitioner. I adore nurses, my mom is a nurse, but there’s between five and ten years’ extra education a physician has over an NP. The quality of medical judgment you’re getting just is not comparable, and it’s kind of crazy that the people who run things have somehow convinced everyone that it is. When private equity buys a medical practice, the first thing they tend to do is

functioning health care systems, 50 percent of all their doctors are either family doctors or primary care physicians. Here, that number is less than one-third.

The way medicine is corporatized in this country makes it extremely difficult and thankless to practice family medicine as it was intended. In fact, it’s hard to even train a family physician, because community hospitals where physicians might do all those things under one roof or even in one neighborhood are bordering on extinction. There was a lot of media attention in the aftermath of Dobbs about abortion deserts, but in all those same areas you have maternity wards closing every few weeks, and now this vast effort to outlaw gender-affirming care. As a family doctor, it is difficult to separate the culture-war stuff from an ideological project to justify the deprivation of poor and working-class people of their right to health care, and the intimidation of doctors who advocate for them.

In 2014, when I was starting to look at residencies, there was a private equity–owned hospital chain that was pitching itself as some kind of savior of community family medicine. That was the pitch I got as a med student, that they’d found this formula for delivering better health care at lower cost by bringing it back to neighborhoods. They were launching a family medicine residency at one of the neglected community hospitals they owned in deep South Boston, as kind of a dry run. And I bought in!

The first month, they spent a lot of time training us on the need to mitigate racial disparities in health care. The hospital had a reputation for providing great care to Irish Catholics and not particularly good care to the Black and brown people who live in those communities now, and they painted the family medicine program as the cornerstone of an effort to rehabilitate this reputation. They said they were going to bring back inpatient pediatric care—they even had these big characters painted on the wall of what was supposed to be the peds unit—and they were going to have labor and delivery.

When I interviewed, they made it seem like

equity firm that owned the manufacturer of the AR-15, and they had no interest in restoring community hospitals. We were initially supposed to do obstetrics (OB) at this hospital down the street, but then the private equity firm just straight up closed that hospital. So we ended up having to go 40 minutes south of Dorchester for the OB rotation, and most of us didn’t have cars.

For pediatrics, we ended up having to go to a completely different hospital system up in Salem, fully an hour north of Dorchester.

It was just awful. And of course, it was a reflection of a broader system breakdown.

But it’s hard to convey how much of a crisis it felt like as a first-year resident. You have a ton of education after four years of medical school but you only have a little bit of experience, and yet as a doctor you know you have this overwhelming amount of responsibility. Theoretically, it could take 20 years of training to really gain proficiency. The residency process is a kind of sacred, almost monastic tradition that is designed to give you all the training that you need so you can competently manage any problem, even and especially when you have no

there was a lot of stuff that was still getting worked out because it was so new.

By the time I moved to Boston, it was just clear that none of it was happening at all.

The hospital was owned by the same private

experience. When you come out of it, there’s almost a covenant with the community that you can be trusted with their medical needs.

You’re painfully aware of everything you don’t know, and you’re really thirsty for this

incredibly intense, compressed training in how to apply your education. And to be in a situation where you realize you were just not going to get there, it’s hard to describe how morally upsetting it was. It’s like this deep fear that if this training doesn’t do what it’s supposed to, I could potentially be in a situation to cause harm one day, which is the opposite of why we all went into this profession.

So we ended up filing formal complaints with the Accreditation Council for Graduate Medical Education and the hospital pulled the plug on the program, and I ended up at the Columbia University Medical Center, which was great.

All of which is to say that I should have known what I was getting into when I quit the urgent care clinic for a private equity– owned health care provider. But like I said, no one goes into family medicine for the awesome job prospects. I ultimately quit the urgent care because the Trumper owner was not great on COVID precautions, and someone assured me that the new job would involve a lot of telemedicine, which was good because I was 12 weeks pregnant and really trying not to get sick.

The company was a managed-care organization that worked by signing up senior citizens who were below certain income thresholds, then taking over their benefits and managing their conditions, with the idea of keeping them out of nursing homes for as long as possible. I think we made about $90,000 per patient per year, and with that money we were expected to pay for specialists, hospitalizations, physical therapy, home care, and whatever else they needed.

When I got there, the hub of the operation, the day center, had been recently acquired from a nonprofit. It had a kitchen and we held social events. People loved it. Well, that had to be cut, because we were losing money. Always, we were losing money. I don’t know if we actually AUGUST 2023 THE AMERICAN PROSPECT 49

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motel rooms so it would look like they had “stable” housing.

On the weekends, I’d moonlight at a local abortion clinic. The biggest thing people don’t get about abortion clinics is that antichoice people get abortions all the time; some patients will refer to a five-week-old embryo as “the baby.” The shattering of that cognitive dissonance is precisely why you saw support for Roe surge after Dobbs.

But in the moment, the patients are not happy, and many of them will take out their rage and shame on the doctor performing the procedure. For that and many other reasons, the doctor spends very little time with the patient. Nurses and support staff-

ers get everything ready, do almost all the work, and you come in for six minutes. The rate for an aspiration abortion is $70, and I have heard it hasn’t changed since the 1970s, but on a busy Saturday the money is decent. It’s nothing I could imagine doing as a full-time job.

When I was pregnant, I would use the ultrasound to check in all the time. I selfdiagnosed my second miscarriage that way; that was a hard day. Having kids is so hard even in the best of circumstances, but the ratio of joy to stress is so different when it’s wanted or planned. I’ve only ever refused one abortion patient: a couple who did want

REBECCA D’ANGELO

were losing money, but if we were it was ing you think, “I did a good thing!” But because we were brutally understaffed. The they didn’t really care about utilization. site administrator went to the mat to get There was a center in another part of the the home care aide salaries raised to $12 an state that actually had two physicians, and hour. I had to manage 260 super-complex their charts were always green, and no patients, plus an extra 10 to 15 new ones get- one in the company took them seriously ting signed up each month, with the help of because it was so “overstaffed.” The orgatwo nurse practitioners. nization was completely focused on enrollThese patients’ care could be better man- ment: recruiting new bodies, getting new aged. I had one patient who’d been seeing a contracts, regardless of the health or lives cardiologist for ten years for hypertension, of anyone they signed up. and every three to six months the note was We were only supposed to enroll just copy-pasted from the last time. Most of patients with stable housing, no serious my patients were seeing specialists for prob- mental health or substance abuse issues, lems I could handle. That’s what happens in who did not present a harm to themselves primary care; everyone is so overwhelmed or others. But all the time, they’d bring you they just refer you to someone else because then that’s one less thing they have to do.

But neglect can get really expensive. It was critical to make sure home care actually showed up to check on patients and shower them. I’d constantly be on the phone with families trying to keep their loved ones from getting admitted to the hospital unnecessarily, which honestly, can itself present a major Stephanie health risk to a fragArnold’s ile patient if they are direct primary care clinic in not properly staffed.

Richmond There was a nursing home that we sometimes sent patients for “respite care”—if a family wanted to go to Disney World for a week, they could take grandma to a nursing patients who clearly did not qualify. The home. But this nursing home was so short- one time I successfully got a candidate staffed, at one point I visited and there were rejected, it was because he literally had two nurses caring for 160 patients. So I put a huge scar on his face from a burn he’d an unofficial moratorium on respite care. gotten smoking a cigarette while using We had all these metrics by which cor- supplemental oxygen, and they finally porate monitored the patients’ “utiliza- relented on that one, because burn care tion” of health care. When a lot of patients is outrageously expensive. But I often went to the ER, there would be all this wondered, where are they finding some red on the charts, and when it got down of these people? In Pennsylvania, the to manageable levels, the chart would be sales team had literally started enrolling full of green. I’d see the chart go red every unhoused folks they met hanging out at a time I went away for a few days and back motel, and there was some internal disto green whenever I returned, and that’s cussion as to whether they were going to pinging away on your reptile brain, mak- get into trouble for paying for these guys’

to get pregnant but the woman had a night of heavy drinking before she missed her period, and her husband was freaked out about fetal alcohol syndrome. I just said, you don’t realize it now but this level of anxiety you are feeling is the new normal, you are going to feel this way about everything for the rest of your life. Trust me, I am a parent. It’s very sad, but one of the most revolutionary things that happens at my clinic is the fact that we allow patients to bring their kids. Lots of patients have very young babies. Quite a few of my abortion patients have become primary care patients, which surprised me a little.

I first heard about DPC during my second residency. It was and still is dominated by sort of libertarian-leaning men, who call it “free-market health care” because we don’t take insurance or Medicare. But they’re all committed family physicians who are

supply of the necessary syringes and applicators. For whatever reason, hormone replacement patients are constantly plagued by problems where CVS or Walgreens will have the drug they need but not the right vessels with which to administer them.

Dobbs definitely gave my DPC practice a boost in visibility and relevance. Indirectly, so did the pandemic. A lot of people realized they had gender dysphoria during the pandemic; a line I’ve repeatedly heard from patients is that “I couldn’t lie to myself.” A lot of people also realized they had ADHD. Silicon Valley responded with a lot of telehealth startups: You have Folx for gender-affirming care, Hey Jane for medical abortion, Cerebral for mental health. Patients got used to paying a subscription for these very specific medical needs and this very impersonal kind of care. Then Cerebral’s Schedule II business got essentially shut down after it was

If you’re one of my patients, I can give you the time to say what you need to say and listen to what you’re telling me. just trying to do cradle-to-grave community care, as the founders of family medicine intended. The idea is that patients pay you a cash subscription fee of $75 or $100 a month, and in exchange you give them a full hour for your appointments, they have direct access to you, and when they need a drug or a blood test or an MRI, you find the cheapest wholesale price and provide it to your patients at cost, with a $2 fee for processing. So a complete blood count is $2.70, a metabolic panel is $2.70, a cholesterol check is $2.40. A chest X-ray is $47, and most ultrasounds are just over $100.

I am my own pharmacist, so other than Schedule II controlled substances, I can get their medications much more cheaply than they can even through GoodRx. More importantly for my patients, I keep a steady

revealed that only five of their 1,600 prescribers were physicians. And Folx, while they’re a lifesaver to trans patients in rural America, as soon as you introduce any kind of comorbid conditions, they don’t want to take you on. Even with abortion, if you get mifepristone in the mail and you’re one of the unlucky ones with complications, you’ve got to start all over, or heaven forbid, go to the ER. But if you’re one of my patients, you can feel safe knowing I’m monitoring the risks associated with your hormone therapy. If you experience complications with an abortion, I will do an aspiration for no charge. Most importantly, I can give you the time to say what you need to say and listen to what you’re telling me. And no one ever gets that with a primary care doctor because the whole medical profession is so weighted towards spe-

cialization that primary care physicians are forced into these practices where they’ll have 2,500 to 3,000 patients. The sweet spot for a DPC practice is 600. My practice has about half that, which is all we can handle until October because we’re only nine months old.

With 3,000 patients, you can’t actually know any of them. Your days are divided into five-minute installments during which you essentially operate as a gatekeeper to a rolodex of medical specialists until 5 p.m., after which you do three or four hours of paperwork documenting all the “care” you provided. It’s a job that could be replaced by algorithms, and algorithms are definitely determining how much you get paid, which is probably going to be between $30 and $60 for a primary care appointment. And if the practice gets $60, the doctor is not likely to see more than $30.

I could never take care of the patients I have in that kind of environment, because they often have some kind of trauma or chronic stress that is causing them physical pain, and you need time to work through that. I had a new patient I just saw a few days ago who has chronic fatigue. She came in very frustrated that no one was repeating her lab work. But these labs had been checked, and they were all normal. From her perspective, everyone had just said, “You’re normal, it’s fine. You just have kids, you’re tired.” But I was able to sit down and really talk through everything, and this person had recently experienced what they had sort of classified as insignificant trauma, but which was obviously taking a serious toll.

I took a deep breath and said, “Look, we can definitely check these labs again but I don’t want us to miss the forest for the trees here. You have something that is draining your battery all the time, and I suspect that that is the thing that is causing or exacerbating these symptoms.” And I was a bit nervous, because this is the moment where they’re either going to buy in, or they’re going to be upset that I didn’t think of another test we could order. And the patient said, “Wow, thank you, I didn’t really think of it that way but it really helps to hear you put it in those words.”

It was such a relief. Because this was precisely the kind of patient who used to just stress me out before, and now I feel like I can actually help them, no snake oil involved. n Stephanie Arnold, M.D., is a direct primary care doctor in Richmond, Virginia.

AUGUST 2023 THE AMERICAN PROSPECT 51

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While Marx and Engels’s prophecies about the proletarian revolution haven’t exactly panned out, their analyses of how capitalism would change the world still look pretty good. In some cases, they look newly good. It may have taken nearly 175 years for a clear majority of American physicians to become the “paid wage laborers” that Marx and Engels saw as their future, but as an article published last year in The Journal of the American Medical Association documented, that has now come to pass. Indeed, it’s really only in the

H CAR

The bourgeoisie has stripped of its halo every occupation hitherto honored and looked up to with reverent awe. It has converted the physician, the lawyer, the priest, the poet, the man of science, into its paid wage laborers.

—Karl Marx and Friedrich Engels, The Communist Manifesto, 1848

52 PROSPECT.ORG AUGUST 2023

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JANDOS ROTHSTEIN

AUGUST 2023 THE AMERICAN PROSPECT 53

last decade—with an almost mind-boggling speed—that the medical profession has lost its autonomy to corporate control.

As the JAMA article noted, “in 2012, 60 percent of practices in the U.S. were physician-owned.” At that point, only 5.6 percent were direct hospital employees. By 2022, physicians who are direct hospital employees climbed nearly tenfold, to 52.1 percent, with another 21.8 percent employed by other corporate entities. “Many physicians now are employed by consolidated corporate health care systems that span many different communities and increasingly are spread across multiple states,” the JAMA article points out.

Health care in the United States has long been notorious, of course, for rationing access to medical care by the calculus of ability to pay. Once that ability had been established, however, there was a presumption that a patient could get to see a doctor in a reasonable time period, and that the doctor or the clinic or the hospital would have the time and resources to adequately 54 PROSPECT.ORG AUGUST 2023

examine and treat the patient. Today, that’s become an iffy proposition. The consolidation of medical care into top-down institutions, many of them for-profit companies and even private equity firms, has altered, often radically, what physicians can do.

Private equity has managed to purchase large swaths of medical care. In more than a quarter of U.S. metropolitan statistical areas (MSAs), 30 percent or more of the physicians are owned by a single private equity firm, according to a report from the American Antitrust Institute. In 13 percent of those markets, that number is more than 50 percent. Private equity acquisitions of physician practices hit 75 deals in 2012; by 2021, they rose to 484.

One Kaiser Family Foundation article last December estimated that private equity firms controlled between 25 percent and 40 percent of the staffing in the nation’s emergency rooms, where lifesaving had traditionally eclipsed profitability as the standard to be met. Four of the top six emergency medicine employers are private

equity firms; one of the others, US Acute Care Solutions, was private equity–owned until physicians bought it out two years ago.

Added to that are the consolidations of hospital networks, where mega-mergers continue to be announced. As of 2016, 90 percent of all MSAs had what would be termed “highly concentrated” hospital markets. In Pittsburgh, 71 percent of all licensed hospital beds can be attributed to one company, the University of Pittsburgh Medical Center (UPMC).

Hospital consolidation and private equity influence have led to higher prices, reduced access, and worsening health outcomes, economic and government studies show.

But in addition, the new criteria that the new owners have imposed on the practice of medicine have affected the basics of physicians’ work.

“We’re called upon to deal with traumatic events on a daily basis, but we’re told we can’t care for patients as much as we want to,” says Katie Esse, a neurologist who works for the Allina chain of hospitals in Minne-

RINGO CHIU / AP PHOTO

The Committee of Interns and Residents, seen here protesting in Los Angeles, has seen its membership grow 58 percent in the past two years.

sota. Allina, ostensibly a nonprofit health system, was recently cited in The New York Times for denying treatment to patients with unpaid medical bills, including children and the chronically ill. The chain suspended this policy for the pandemic before restarting it in April 2021.

Allina has 12 hospitals and 15 urgent care facilities in the state, and Esse’s duties include dealing with patients at all 27, through telemedicine. “Often, while I’m on a video with one patient, I’m getting paged constantly to get on calls with other patients. Patients can’t get in to see their primary care physicians, who are booked up, and are told instead to go to clinics or the ER, or, more recently, to send messages to their doctors. I have primary care colleagues who get up to 100 in-box messages a day. You can never get caught up.”

The sheer volume of work that residents and many attending physicians now confront, and the ticking-clock (and ticking cash register) pressures that their employers impose on them, have consequences that go well beyond exhaustion and burnout, though those consequences are surely apparent. The loss of control, the inability to change their conditions of work and, with that, some of the scope and efficacy of treatment, has prodded an increasing number of doctors to do something new under the American medical sun: join a union.

To be sure, only a small slice of physicians are currently unionized: 5.9 percent. Even at that level, they’re not far from the overall rate of unionization among the nation’s private-sector workforce, which is just 6.1 percent. But by all previous standards, doctors are now positively flocking to unions.

The Committee of Interns and Residents, for instance, has seen its membership grow by 58 percent in just the past two years, its ranks swelling from 19,000 doctors to 30,000. During this time, CIR, which is an affiliate of the Service Employees International Union, won union recognition elections—by substantial margins—at such storied hospitals as Massachusetts General Brigham, Montefiore, George Washington, Stanford, and USC Keck. To handle the hundreds of requests from doctors during this time, CIR staff has grown from 60 employees to 100.

This wave of unionization began in the wake of the COVID pandemic, which not only posed obvious dangers to health care workers, but also led to roughly one-quarter of those workers opting to leave the industry.

Those who stayed on the job, as the overwhelming majority of doctors did, had to take up that slack by working longer hours.

The confluence of the pandemic’s more grueling working conditions and the growing control of those working conditions by investors, corporations, and insurance companies that viewed patients as consumers, provided the spur to unionization. One poll of physicians conducted in November of last year found that 51 percent of clinicians were willing to join a union, but believed they wouldn’t be able to do so—a belief that reveals, among other things, the still very limited efforts of unions to make contact with physicians. The conventional wisdom among doctors, says Esse, used to be that they “thought it was illegal for us to unionize. Every time I brought the issue up, colleagues told me that we were essential, that there was something unethical in our joining a union.”

Clearly, that’s not what younger doctors believe today, as the poll revealed that the desire to unionize was strongest among the young. While three-fourths of doctors in their thirties said they were willing to join a union, the share of older doctors who shared that sentiment declined with successive decennial age groups.

The increased willingness of the young to form unions ref lects both the long-standing structure

Interns and residents today are members of what polling reveals to be the

most pro-union generation in nearly 60 years.

of the medical profession, and the more recent hurdles that young doctors must surmount. Much like universities’ nonmedical graduate students, who’ve been unionizing at a torrid rate over the past two years, interns and residents have long been viewed and treated by hospitals more as exploitable students than valued workers. The industry standard calls for them to work up to 80 hours a week, and with the dislocations and resignations that accompanied and now have followed the pandemic, they’ve been frequently required to work longer, often reducing their hourly wages to under $20. Hannah Abrams, who completed her residency at Mass General in June, notes that intern and residents’ pay scales aren’t really adequate to meet the cost of living in cities like Boston.

At the same time, today’s interns and residents “start their careers with more debt than any professionals in history,” says CIR’s Sunyata Altenor. Several decades ago, that debt averaged roughly $50,000; today, it has soared to $250,000 or even $300,000.

The changing demographics of doctors has been another factor in the push toward representation and unionization. Once a profession that was overwhelmingly white and male, the f ield now contains a substantial percentage of immigrants, and 51 percent of medical students today are women. Medical residencies almost always encompass the years between doctors’ mid-twenties and early thirties, when families often form and children are born. Even a topline residents program like that at Mass General, Abrams notes, doesn’t provide child care benefits—a program that Mass General doctors will negotiate for when contract talks with management commence.

Finally, interns and residents today are members of what polling reveals to be the most pro-union generation in nearly 60 years, with union approval ratings that in some polls exceed 75 percent. The agonizingly slow recovery from the 2008 financial crash and ensuing Great Recession was particularly arduous for millennials, many of whom responded by backing the presidential campaigns of democratic socialist Sen. Bernie Sanders (I-VT). Confronted with the traditionally exploitative demands of medical residencies, the added burdens of working through a pandemic, reduced levels of staffing, and the transformation of their profession into that of employees—in AUGUST 2023 THE AMERICAN PROSPECT 55

many cases, of profit-seeking companies—it shouldn’t be that surprising that so many young doctors are turning to unions.

Like their contemporaries who work as teaching and research assistants at universities, the residents who’ve been seeking to unionize over the past two years almost invariably succeed. The reason for their high win rate is simple: Unlike assembly-line workers or retail salespersons or restaurant waitstaffs, they can’t be easily replaced.

The main weapon that American businesses customarily deploy to keep their workers from unionizing is to threaten and even carry out the firing of pro-union workers during their campaigns (which is illegal, but for which the penalties are negligible).

That threat simply doesn’t work when the workers can’t be readily replaced; there is no reserve army of unemployed residents lurking about. This dynamic is why teaching assistants and docents and think-tankers and now doctors are winning union recognition elections, while blue-collar and service-sector workers hardly ever even come close.

That said, most hospitals and medical groups still wage campaigns opposing their doctors’ efforts to unionize. Not to do so, apparently, could invite investor dismay or scorn from peer institutions or violate some unwritten code of American business. Allina, the nonprofit hospital chain in Minnesota, brought in the nation’s premier union-busting law firm, Littler Mendelson, to deter its doctors’ efforts. Physicians were barraged with text messages and emails that urged them to vote no on unionization. Management held multiple meetings telling workers that going union would only make things worse. Doctors were “strongly encouraged to come to these meetings,” Esse says. In workplaces where employees are more readily replaced, however, the workers wouldn’t be merely “encouraged”; they’d be required to attend.

At Mass General, Abrams says, doctors experienced the same kind of anti-union messaging from the hospital, and workers were also invited to meetings where program directors said that bringing in a union might diminish departments’ flexibility to provide certain kinds of benefits. “The invitations to the meetings meant your attendance was expected,” she says.

But penalizing doctors for nonattendance goes beyond what hospitals can do to profes56 PROSPECT.ORG AUGUST 2023

sionals who know they can’t really be sacked without disrupting the hospital’s business.

That’s especially true when the profit margins of the hospital depend on doctors being perpetually productive, to maximize the moving of patients through the system.

Where Littler Mendelson and its unionbusting counterparts can have their greatest effect in that kind of workplace probably comes in the post-election period, where votes can be challenged if the election was close, and in delaying the bargaining that is supposed to lead to a contract.

To date, the surge in doctor unionizations is largely confined to interns and residents, many of whom work at university hospitals affiliated with the same universities that have seen their teaching and research assistants go union as well. As I’ve noted, a common generational and sectoral sensibility is at play here, as is the fact that interns and residents spend more of their time sharing the same workplace and working conditions than older attending physicians do.

Nationally, there are two unions that focus almost entirely on representing attending physicians, but their combined membership barely exceeds 10,000. One of those unions is the Doctors Council, an affiliate of the Service Employees International Union (SEIU), which recently won recognition at two of Allina’s 12 Minnesota hospitals. The Doctors Council began in 1959 as a city employee union for doctors employed by the Departments of Health and Welfare in New York City; at the time, doctors who worked by the session were paid $5.00 an hour, and those who worked full-time, about $7,000 per year (about $73,000 today, well below what doctors command).

Unlike the hospitals that CIR has been able to organize, the Allina hospitals organized by the Doctors Council are preponderantly not teaching hospitals but community hospitals. There, much of the work that residents perform at the Mass Generals is performed by older attending physicians.

It should come as no surprise, then, that the organizing campaigns at those two Allina hospi-

tals were initiated by the facilities’ hospitalists, the admitting physicians and care managers who do much of the work that is done by residents in teaching hospitals.

Allina hospitalists, says Esse, may have 20 to 25 patients a day whose care they need to coordinate, whose families they need to talk with, and whose conditions they must record in writing at the end of the day. The hospitalists are under constant pressure to move recovering patients to other facilities, though other facilities may not have available beds. Like many other attending physicians who work in community hospitals, their hours may approach those of residents in teaching hospitals.

Esse makes clear that the work environment at Allina is far from toxic, and that the financial strain the chain is under is real. But that strain has placed a heavy burden on hospital employees. In the past few years, management has reduced matching contributions to the doctors’ retirement benefits, and stopped funding for their continuing medical education, though the CME funding has since resumed. It was, Esse says, “a perfect storm” of problems— not just the elimination of what had been routine benefits and the overall lack of resources but also the fact that these decisions came from above with no input by or discussion with the medical professionals who did Allina’s work.

Even as the campaign to unionize those two Allina hospitals was proceeding, the company tried to ensure that the organizing didn’t spread to the other ten hospitals in the state. The union’s efforts to sway doctors at those other hospitals frequently encountered fearful responses, despite the limits of what the company could do to its

The unionization of physicians is about

trying to create a more humane and patient-centered health care system.

Allina Health System has 27 hospitals in Minnesota; the Doctors Council won union elections at two of them.

EVAN FROST / AP PHOTO

professional workforce. “The only thing they didn’t do is threaten to fire doctors,” says Doctors Council Organizing Director Joe Crane, a former graveyard shift assemblyline worker at a Frito-Lay plant who became a professional labor organizer. “But the fear is still there.”

It may be that older physicians in midcareer have more at stake than younger doctors; it may be that they come from a less diverse and progressive generation of physicians than today’s interns and residents.

For the time being, it seems clear that the doctors seeking to unionize, and succeeding at it, will be interns and residents.

Given the constraints that afflict many medical institutions today, what is it that doctors hope their unions can realistically achieve?

The first is representation—by which doctors mean not just more demographic balance among decision-makers, but the presence of their voices in their institution’s deliberations. “Not enough of the people who see patients are involved in the decision-making process,” says one physician,

who asked for anonymity because of a current union campaign. “We need people who see the problems firsthand. If the rate of doctor and nurse retention is to rise, as it needs to, if patient care is to get better, that’s what we need. A union could make doctors part of the process.”

Usually, says Abrams, it will be doctors and nurses who sound the alarm on issues of safety, as was frequently the case during the pandemic, when masks and other safety equipment wasn’t sufficiently available.

That’s one reason, she says, why Mass General interns and residents voted so heavily for a union, which would open a regular channel for such concerns to promptly reach management. During the pandemic, she and her colleagues realized that “we needed an organized body to better protect us if this were to happen again.”

Ultimately, however, the unionization of physicians is less about the kind of wage and working condition issues that are the basics of labor relations than it is about trying to create a more humane and patientcentered health care system. “When you

talk about doctors unionizing,” says Crane, “what’s driving it is the moral injury to physicians’ raison d’être, the sheer fact that they can no longer advocate for either patients or themselves.”

For example, Esse and other doctors have lamented the shorter time slots they have to actually meet with patients. “If we can help make physicians realize the leverage they can have with a union,” Crane says, “maybe they can win, who knows, a couple more minutes with a patient. Many doctors today have to sit on what are effectively death panels. These are the things that are driving them to unionize.”

Most doctors are cognizant of how many of the basics of American health are deteriorating, with whole segments of the population experiencing shorter life expectancies, rising rates of maternal mortality, and deaths of despair. Winning back a share of the control over what they can do for patients is clearly not a sufficient remedy to what ails American medicine. But it’s a necessary one, and one for which a growing number of doctors are prepared to fight. n AUGUST 2023 THE AMERICAN PROSPECT 57

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58 PROSPECT.ORG AUGUST 2023

CULTURE What’s at Stake in the Hollywood Writers’ Strike Streaming has given the studios one more way to exploit writers—and the writers are pushing back.

SAG-AFTRA president Fran Drescher, seen picketing with the Writers Guild. The actors union is now also on strike.

CHRIS PIZZELLO / AP PHOTO

By Catherine L. Fisk Members of the Writers Guild of America are striking for most of the same reasons they have gone on strike about once a decade since the 1940s. The studios and production companies are paying astronomical compensation to executives (half a billion dollars to the head of Warner Bros.; over $200 million to the CEO of Netflix over the last five years, according to an analysis by the Los Angeles Times), even while they’re cutting jobs and demanding writers and most people involved

in making TV and movies work harder, and more unpredictably, for less money. Perhaps that’s why actors with the SAG-AFTRA union went on strike themselves on July 13, over many of the same issues as the writers.

The Writers Guild estimates that overall earnings for writers have been declining since 2018. Indeed, pay for the handful of top executives is roughly the same as the total amount paid to all WGA members combined.

Executives insist that their nine-figure paychecks are not really so lavish because their pay is tied to stock value and it’s all just profit

sharing. But what the writers are striking for now, as in the past, is a very modest form of profit sharing, at a minuscule level compared to the execs’, and rules that allow writers to make a career in the business.

When the strike began in May, the WGA and the Alliance of Motion Picture and Television Producers (AMPTP) were far apart in terms of money, and as the strike entered July, there was still no agreement in sight.

But even the WGA’s estimate of the total cost of what it wants for all the thousands of writers in the industry is still less than what AUGUST 2023 THE AMERICAN PROSPECT 59

CULTURE the top ten executives earned over the last five years. The fight is now, and always has been, about whether writers will share the wealth generated by use of writers’ work in a new medium—streaming—and about putting restraints on the ability of companies to force writers to work for free, or for dramatically reduced compensation, early in the development process.

In every previous writers’ strike—1948, 1952, 1959-1960, 1973, 1981, 1985, 1988, and 2007-2008—the studios and production companies insisted that the future was too uncertain to enable them to commit to a formula for writer compensation that would enable the writers’ pay to be pegged to the success or profits the companies earned from their work. They have always said the profitability of new media—broadcast TV in the 1940s and ’50s, reuse of movies on TV in the ’50s and ’60s, cable TV in the ’70s, videocassettes in the ’80s, DVDs in the ’90s, and streaming today—was too speculative to agree to any formula to compensate writers except for the time spent on the single job of writing a script. The writers have always insisted that they should be paid not only an hourly or weekly rate for writing a script, but also that some tiny portion of revenue generated from the use or reuse of writers’ work should be shared with the writers. As one writer I interviewed after the 2007-2008 strike said to me, “If they’re making money, they can’t turn around and say, ‘Oh, we don’t know the business model.’

Well, you know what? You got some money in your pocket. That’s your business model.”

Major changes in how screen entertainment is made or distributed have prompted strikes many times before. Toward the end of World War II, as writers saw studios laying off writers and anticipated that the new technology of TV would create many new opportunities for studios to make money reusing old scripts, a group of leading writers insisted that writers should own their scripts and license them to movie studios.

That’s the way that playwrights get paid, and it made sense to writers—good scripts created good movies that would be shown repeatedly on TV or would be remade as TV shows. Some of the most successful Hollywood writers—including Dalton Trumbo and Ring Lardner Jr.—were the biggest advocates of writer ownership. They were driven out of the industry in late 1947 after Congress forced every union to banish anyone from leadership who refused to swear they weren’t 60 PROSPECT.ORG AUGUST 2023

Writers on the Emmy-nominated Bridgerton have received relatively little of the financial rewards of the huge hit. a communist, and the studios blacklisted suspected communists. Writer ownership died as a major organizing issue when their names disappeared from the screen.

In place of script ownership, writers went on strike for, and won, the contractual right to be paid residuals. In 1953, after striking, writers got a contractual right to be paid residuals for each time a TV program or made-for-TV movie was rebroadcast. In the late 1950s, as the number of movies released annually and the number of writers on contract with the movie studios were plummeting, the movie studios decided to sell their vast catalogs of old movies to TV. This was a boon to TV networks hungry for content and a windfall for the studios, but it was appalling to writers in both media who saw the companies profiting from the reuse of writers’ work with no compensation for writers. So writers struck and won residuals for post-1948 theatrical films shown on TV. (Writers of pre-1948 movies agreed to forgo the payment of residuals, and instead that money was pooled to form the basis of the writers’ pension plan.)

In the days of broadcast and cable TV, writers working on successful shows, or movies that replayed on TV, could expect significant residuals. That would tide them over during the lean times between projects. A writer working on a network show (which typically had 22 episodes per year, requiring about 40 weeks of work) had a steady job that could support a family. And

if that show proved to be popular, with lots of reruns, writers shared the financial rewards of the reuse of the work. As one TV writer explained to me: “Residuals reward success. If a show tanks and never airs anywhere else, the company doesn’t have to pay residuals. But in success, the company has to share with the creator some portion of that success, a tiny portion of that success.”

Protecting the right to residuals for distribution of material in new media has forced writers to strike over and over again.

In 1981, writers struck for the right to be paid residuals for cable TV. In 1985, writers struck briefly over residuals for videocassette (VHS) sales. They accepted a deal that many writers thought inadequate. In 1988, writers struck again, hoping both to gain some compensation for residuals on VHS, and to ensure residuals for foreign sales.

The producers, however, flatly refused to discuss VHS residuals, leading writers to the bitter lesson that once they agree to a residuals formula for a medium, AMPTP will never agree to overhaul it. For many years, companies profited handsomely from VHS and DVD sales, and writers’ compensation did not reflect that success.

Today, sharing the wealth from successful shows is yet again a central sticking point in the negotiations because the companies refuse to share crucial information about the current new medium—streaming—with the WGA. Streaming services like

What makes American TV and movies the envy of the world is that the Writers Guild made Hollywood treat its writers as an essential part of the creative process.

Netflix refuse to say how much they make even from hit shows, so writers have no way of really knowing whether the residuals they receive for internationally popular shows reflect their success. An Emmy-nominated writer of Bridgerton on Netflix, which has reportedly been watched by 82 million accounts for a total of 625 million hours, told the L.A. Times that she and the other writers on the show have received relatively little of the financial rewards of that huge hit. The WGA has proposed, but the companies have refused to negotiate over, a viewership-based residual arrangement that rewards the writers of programs with greater viewership. The WGA also seeks an increase in the residuals paid on the number of streaming service subscribers, especially for high-budget shows streamed overseas, but at last report the parties were far apart as to what those residuals should be.

But the current strike is about more than money. Residuals are not just about writer wealth; they are about the ability of writers to make a career in the industry. Over several decades, the industry has increasingly forced writers to be far more entrepreneurial about their careers than they were in the heyday of the movie studios, when writers were salaried employees bound by long-term contracts. TV writing, which used to be a relatively steady job working on 22 episodes over about 40 weeks a year, punctuated by an offseason to find a new job if necessary or desired, is now an endless series of shortterm gigs, writing just 12, or 8, or 5 episodes.

On top of that, the companies now want to avoid paying writers for all the work that writers have historically done to create TV. The companies have long sought, and the Guild has long prohibited, having writers work for free to develop an idea and see if it sells. Today’s version of that involves gathering a few writers for a few weeks to develop an idea for a series and to write several epi-

sodes. After the writers are dismissed, the executives decide whether to give the green light to make the show. If the show gets the green light, the scripts will be filmed and the writers in these “pre-greenlight” rooms will not get the opportunity, long cherished by writers, to be involved in production.

Television has long been a medium in which writers play a role in producing episodes; they don’t just hand in a script and then wait to see what turns up on the screen.

They traditionally have worked with the cast, the directors, and the many creative and technical production workers in bringing the script to life. That work teaches them how to write effectively for a show depending on the size of the budget. One writer told me that he’d learned while working on an action show to avoid writing scenes that call for a character to fall into the water because it’s expensive to hire a stunt double, and even more so if the scene has to be shot several times so the actor has to dry off between takes. This kind of experience is crucial to writers in developing the many kinds of specialized knowledge required of showrunners, who are the writers in charge of creating and producing shows.

Writers worry these “development rooms” (writers call them “mini-rooms” because so few writers are employed) will become the norm and erode the pay and standards across the industry. So the WGA has demanded that the number of writers hired and the term of employment be comparable to what is done for shows that have already gotten the green light for production. The companies, predictably, cite artistic freedom and flexibility, and have refused to discuss any minimum number of writers in a pre-greenlight room or the number of weeks of work they will be guaranteed. Nor have the companies made any counteroffer to the WGA’s proposals that guarantee a certain number of writers will be employed through the production process or in postproduction. The parties are still far apart even on the minimum compensation to be paid to writers employed on pre-greenlight projects, although the companies have agreed to an increase in the weekly pay if three or more writers are employed for ten or fewer weeks before the first season of a new series.

Finally, there is the threat that companies will use AI rather than people to write scripts. The WGA has proposed that AI cannot be used to write or rewrite scripts, or as source material, and that scripts covered by

the WGA contract cannot be used to train AI, either. The AMPTP says only that it will meet to discuss AI. While it may be fanciful today to think that AI could write a script, it may not be long before AI could churn out scripts for established shows, especially if it is trained on decades’ worth of WGA writers’ creativity and hard work.

The stakes in this current round of negotiations are high because the WGA has learned from experience that once a compensation formula or work rule is written into the contract, the AMPTP is extremely reluctant to negotiate any improvements. The bad deal writers accepted for VHS residuals in 1981 prompted two further strikes in 1985 and 1988, but the writers never gained back the ground they lost. The 2007-2008 strike (which was about residuals for streaming) lasted 100 days because writers feared that whatever they got then would be the best they could ever get. Even though the companies can no longer claim that the streaming business model is untested, they still resist sharing the wealth.

For as long as there have been TV and movies, the companies have found reasons why writers had to give up ownership and control of their scripts and do more work for less money. The Writers Guild formed in 1933 when studio execs claimed that the Depression made pay cuts essential for everyone (except themselves, of course). The Guild was compelled to abandon many of its claims in January 1941 under the exigencies of the war, and in 1947 because of the alleged communist threat, and in the ’50s because TV was a mortal threat to the movies, and on and on. Despite all that, by virtue of its many strikes, the Guild has been able to win just enough power for writers to ensure that the industry’s products are both popular and, every now and then, classics. As one writer told me, what makes American TV and movies the envy of the world is that the Guild made Hollywood treat its writers as an essential part of the creative process, and pay them enough to enable them to make a career, rather than burning through an endless number of underpaid recent college or film school graduates.

This strike, in short, is about preserving that creative system. n Catherine L. Fisk is the Barbara Nachtrieb Armstrong Professor of Law at UC Berkeley and the author of Writing for Hire: Unions, Hollywood, and Madison Avenue.

AUGUST 2023 THE AMERICAN PROSPECT 61

CULTURE

The Real Problem With Asset Managers Rich people collect the vast majority of capital income. There’s a better way.

By Ryan Cooper The Problem of Twelve: When a Few Financial Institutions Control Everything

By John Coates Columbia Global Reports Our Lives in Their Portfolios: Why Asset Managers Own the World

By Brett Christophers Verso Over the last couple of decades, asset managers have become core to the global financial system, rolling up vast wealth portfolios of perhaps $100 trillion in total. Passive investment firms like BlackRock, Vanguard, and State Street have grown explosively over the last 20 years and account for most of the increase. Then there are actively managed firms like Blackstone, KKR, or The Carlyle Group. There is some overlap, as most passive firms have active divisions.

Two new books—The Problem of Twelve: When a Few Financial Institutions Control Everything, by John Coates, and Our Lives in Their Portfolios: Why Asset Managers Own the World, by Brett Christophers—take a hard look at the world of asset managers. They assemble a convincing case that actively managed firms are socially toxic, but leave aside the most interesting questions about passive ones.

The point of passive investing, of course, is to do nothing with your investment. One typical strategy is to buy a representative sample of a stock exchange like the S&P 500 (hence the name “index fund”) and just sit on it indefinitely. That allows the investor to collect dividends and benefit from appreciation. Index funds’ transparent structure and rock-bottom fees—there’s almost no overhead in buying and holding a whole exchange—have attracted stupendous quantities of capital.

Active investors, by contrast, take direct 62 PROSPECT.ORG AUGUST 2023

control of the assets they buy. Both books present convincing arguments that such investments, especially in the form of private equity, tend to be horrible.

Coates’s “problem of twelve” refers to a situation “when a small number of actors acquire the means to exert outsized influence over the politics and economy of a nation.” In private equity’s case, this involves using mostly borrowed money to buy out companies and load them up with debt, forcing subsequent cost-cutting through mass layoffs or quality degradation. The business’s success or failure is immaterial as long as the fund managers extract maximum value. The government is a willing conspirator, granting tax benefits to debt finance and allowing private equity to accept institutional investment without transparency and disclosures that would be mandatory for public companies.

Christophers focuses on asset manager ownership of physical assets like houses, roads, water and gas utilities, and wind and solar farms, because these bear directly on “the question of who owns the homes we live in and the infrastructures we depend upon to go about our daily lives.” Water systems in New Jersey and Montana, a metro line in Korea, and the city of Chicago’s parking meters are among the horror stories of investor control.

Both books are on less firm ground when it comes to passive funds. Coates argues plausibly that index fund firms could exert potentially decisive control over every publicly traded company in the country. Since most shareholders don’t vote, a minority activist investor can have a lot of influence.

But there is little evidence of index fund companies actually doing this in a serious way. Coates’s few examples include some pushes from BlackRock toward “environmental, social, and governance” investing, meaning things like green energy, and new expectations for diversity, and gender fairness. Elsewhere, State Street told compa-

nies in which it had invested that it expected at least 30 percent of their board members to be women—a flexing of corporate power but not exactly a crisis.

That this is the best evidence Coates could muster suggests that index funds only rarely fuss with their assets, and when they do, it is as much a half-hearted branding exercise as anything else. This is hardly surprising—the whole point of index funds is to scoop up capital income as cheaply as possible. Detailed oversight of such a vast investment pool would be expensive and probably impossible at current staffing levels; BlackRock has only about 19,500 workers to manage $9.1 trillion in assets.

If the investment were divided up equally, each employee would oversee a portfolio of about $470 million, in addition to all their current responsibilities.

For his part, Christophers largely ignores index funds in favor of his story about infrastructure, which is indeed quite interesting and important. Yet saying this adds up to a novel “asset manager society” is a bit of a stretch. On housing, for instance, KKR might be a bad landlord, but two-thirds of Americans are still homeowners. And while Blackstone and its ilk have come up with new ways to obscure their ownership structure and avoid paying taxes, bloodsucking financiers have been around for centuries. Leveraged buyout operations were doing similar stuff in the 1980s; Jim Fisk and Jay Gould were doing even worse things in the 1860s.

However, index funds are something new.

As Coates describes usefully, nothing like BlackRock existed until the 1970s, and the sector only reached its current enormous size in the last decade. I find them both more interesting and more objectionable than either Coates or Christophers does.

BlackRock’s CEO Larry Fink might not be a ruthless sociopath like Gould was, but the best-case argument for his business is still a pure example of economic parasitism. BlackRock and Vanguard are excellent investment options for retail investors precisely because they allow someone with money to collect a return without lifting a finger.

Capitalism has always created inequality.

Economist Thomas Piketty has collected data showing that by the late 19th century, belle époque France was more unequal than it had been before the revolution of 1789.

A principal reason for this inequality was capital income. Those who own wealth typi-

The fact that a small minority of people control most of the national wealth is its own problem of twelve.

SETH WENIG / AP PHOTO

Larry Fink, CEO of BlackRock, which manages $9.1 trillion in assets cally collect a return, which they invariably reinvest into even more wealth rather than spending it. Absent countervailing taxes on capital or inheritances, this process snowballs into giant fortunes for a tiny minority, and little or nothing for everyone else.

The same process can be seen today. In the modern United States, capital gains are taxed far less than normal income, if at all— ProPublica reported that in 2011 Jeff Bezos qualified for the Child Tax Credit because he made so little traditional income—and those gains are heavily concentrated at the top. The top 0.01 percent of households make something like three-quarters of their income from capital.

Capitalists originally justified this benefit because they operated their own businesses and took on substantial risk. But index fund investors don’t choose what to invest in, let alone make operational decisions. And as far as risk, it is clear in modern times that should markets run into serious trouble, the government will be there with a bailout,

seen most recently with Silicon Valley Bank.

The fact that a small minority of people control most of the national wealth—which has been true for all of American history, even during the height of the New Deal— is its own problem of twelve. The evident fact that a large and growing share of that wealth can be piled up in a giant heap using deliberately brainless tactics without causing much economic disruption suggests that wealth inequality is not only pointless, but also could be ameliorated quite easily. All that is needed is a state-owned index fund, as Matt Bruenig has proposed.

It sounds utopian, but there is a working example of this right here in the United States: the Alaska Permanent Fund, which owns about $76 billion in various assets, and pays out the resulting dividend to every Alaskan resident. This dividend has ranged between about $1,000 and $3,300 in recent years; that payment is the main reason Alaska has the lowest income inequality of any state in the country. An even more

aggressive example can be found in Norway, where the government owns about threequarters of all national wealth, excluding owner-occupied homes.

Neither of these asset management institutions is mentioned in either book. While interesting in their own rights, Coates and Christophers have missed a central aspect of the asset management story.

For the problems he does document, Coates suggests a few “cautious and provisional” reforms, mainly about transparency and disclosure. These ideas are certainly worth trying, but won’t touch wealth inequality. Christophers seems to have no hope that the situation can be ameliorated, painting a grim portrait of a post-pandemic government that is “not a state newly persuaded of the merits of public ownership of critical infrastructures of socioeconomic reproduction.”

This pessimism might be responsible for one serious error. President Biden’s climate bill, the Inflation Reduction Act, “does not tackle the climate crisis by pledging the U.S. government to build, own and operate wind and solar farms,” Christophers writes. This is simply false. The IRA contains a “direct pay” provision that makes public and nonprofit entities, including federally owned institutions like the Tennessee Valley Authority and the Bonneville Power Administration, eligible for green-energy tax credits in the form of grants for the first time. This could grow into the largest investment in public power in decades.

(Christophers does acknowledge this, but only in an endnote.) Outside the federal level, New York state recently passed a bill creating a new public power agency to explicitly take advantage of this funding.

At any rate, both authors leave passive income untouched. Yet we don’t have to live in a world where a tiny minority of rich people collect trillions in nearly taxfree capital income while sitting on their backsides. The government can do that on behalf of everyone. n AUGUST 2023 THE AMERICAN PROSPECT 63

Top Ten Things I’d Give Up for Free Health Care Let’s make this trade.

By Francesca Fiorentini Americans have an obscene amount of privileges: stores catering to our every desire, global economic hegemony, and Zebra popcorn. That stuff is delicious. But if there’s one thing we’re lacking, it’s bidets—and health care. For all of our freedoms, Americans still can’t get proper medical attention without exorbitant costs and endless bureaucracy. (Does anyone else

have the number sequence memorized to talk to a real person at Blue Cross so you can chew them out for being charged $2,000 for an X-ray?)

Americans have been bought off with capitalism’s shiniest niceties and left without the fundamental right to be healed when sick.

So I’ve drawn up a list of creature comforts that I, as an American, would readily swap in order to be able to not pay a third of my monthly income to simply see a doctor once in a while.

1. Pressing 1 for English. This is a needless luxury. I’m fine with 5. It’s more central and easier to reach. Hell, I’ll do Up, Up, Down, Down, Left, Right, Left, Right, B, A, Select, Start like an old Nintendo if it means I can actually treat my chronic carpal tunnel syndrome.

4. 5G. Yes, it’s fast. But I’m OK with slower mobile speeds if I can get a free annual mammogram. Plus, 5G has already been demonized by anti-vax nutjobs who probably turned on Western medicine because a shaman they met on Craigslist was cheaper.

2. Scooters. You know the ones littering every city corner with dumb names like Lime and Unagi? They’re supposed to be cool and fun. But in a society without universal health care, scooters are truly a cruel irony, as borne out by the young woman I saw break her collarbone in broad daylight. That private equity– owned ambulance must’ve been pricey.

Let’s nix them and get free rides in the lifesaving bus.

5. Manhattan. The most iconic borough there is, the most symbolic of American grandeur, and yes, the most overrated. I’ve spent far too much money in this finance bro cesspool, and after the cringe Sex and the City reboot it’s clear that Manhattan’s heyday is over. Most people worth visiting live in Brooklyn or Queens anyway, and Prospect Park is mostly Central Park with fewer copcalling Karens. Sure, we won’t get to see The Lion King on Broadway, but we’ll be able to go to the gastroenterologist.

This is a smart swap.

3. Rock and roll. I know this is technically not mine to give. I’m sure the descendants of Muddy Waters and Screamin’ Jay Hawkins should probably weigh in here. But considering that some of the biggest rock legends are all Brits putting on an American twang, let’s just part with it in exchange for some of their sweet state-funded medical care.

You win, Mick.

64 PROSPECT.ORG AUGUST 2023

6. Amazon Prime. This one’s a biggie for me as an exhausted new mom with barely time to shower, let alone go shopping. Still, two-day delivery has lulled Americans into believing that we can just order our way out of illness, when no amount of elderberry lozenges delivered to your door can replace an actual

doctor. Give me health care instead, and not from Amazon!

7. Candy. Take my Snickers, Butterfinger, Fun Dip, and Sour Patch Kids. I am willing to eat nothing but the hard black licorice that the Dutch pass off as candy if it means I can hit up a dentist when I’ve eaten too much.

8. The military. Byeeeeeeeeeeeeee. Don’t let the blowback hit you on the way out.

9. Zendaya. Yes, I said it. The young Emmywinning actor is beautiful, talented, and I want to live inside her skin. But if Americans need to give her up to Germany or Canada, we must. She’ll continue to be charmingly adorable, she just won’t be ours.

10. A percentage of my annual income commensurate with my earnings. We won’t call them taxes, but Zendayas. If we all pay our fair share of Zendayas, and if literally every study that’s ever been done about single-payer health care is correct, then we will be saving trillions of dollars and have a system that actually helps all Americans.

P.S.: No, I’m not giving up Zebra popcorn.

From my cold dead hands. n

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ChatGPT in Classrooms How to Make It the Next Big Thing and Not the Next Big Problem

By Randi Weingarten, President AMERICAN FEDERATION OF TEACHERS

W

ith generative artificial intelligence platforms like ChatGPT looming large over U.S. classrooms, Jeffrey Ellis-Lee, an Advanced Placement government teacher at the Maxine Greene High School for Imaginative Inquiry in Manhattan, decided to conduct an experiment. He fed essay questions from previous years’ AP government exams into ChatGPT to see how it would do. The answers, much to his chagrin, were perfect. So, he gave his students an assignment: Take the seven-point rubric for grading the AP exam and make ChatGPT’s answers better.

And they did.

Ellis-Lee is one of millions of educators across the country grappling with the same issue: What should they do with generative artificial intelligence, like ChatGPT, in the classroom?

Ban it? That was the reaction to calculators in the 1980s, email in the 1990s and Wikipedia in the 2000s. Now, calculators are allowed to be used on the SAT and the ACT exams, and email and Wikipedia are teaching tools.

When New York City Public Schools tried to ban ChatGPT and other generative AI, students brought in hot spots to bypass the school’s internet and access them anyway. The schools have since walked back the ban.

leading artificial intelligence companies are warning that AI could replace humans entirely.

At the moment, creators of generative AI models cannot fully explain some of the technology’s greatest pitfalls, including why it sometimes generates false data, or how it will recognize deepfakes, which are manipulated videos or images that seem real, but aren’t. Racist and cultural biases are already appearing in AI algorithms, resulting in things like facial recognition programs that only recognize white faces, crime prediction programs that zero in on Black and Latinx faces, and robots that identify women as homemakers.

Policymakers need to develop regulations—with accountability—quickly, and they need to include educators in the process. Without educators’ input, programs could result in diminished teacher-student interaction time, leading to isolation and slowed emotional growth. Kids in low-income districts may not have the hardware or the internet access to take advantage of generative AI, and there could be no way of ensuring the information the programs are using is even accurate.

The American Federation of Teachers is committed to representing educators, students and our schools in the development of AI policy, and in providing the professional development and

tools educators need to use it. We are not going to let tech companies use our kids as guinea pigs again—we saw how that worked with social media. This time around, we demand real regulations with consequences attached.

First, we need assurances that our students’ data, their families’ data and teachers’ data are secure. If AI is going to be in our classrooms, we need to know the highest levels of data security and privacy come with it, and that there are consequences for misusing it.

Next, we need to set up safeguards against bias. All AI systems need to be trained and tested on data that includes everyone and treats everyone equally—and users need to be able to provide feedback on any perceived bias.

The educational value of AI needs to be safeguarded and accessible so that all students can use it, regardless of ability, background or learning style. Along the same lines, AI should promote collaborative learning, and its educational impact must be objectively evaluated by a third party.

Overall, each of the guidelines points to one thing: human oversight and decision-making.

AI should augment, not replace, human educators—and it should be regulated by humans to ensure accuracy, equity and accessibility.

AI is here. Our kids are already using it, and its role in our lives is only going to expand. Educators can learn to harness its strengths and teach our kids how to benefit from it, much like Jeffrey Ellis-Lee did. Generative AI is the “next big thing” in our classrooms, but developers need a set of checks and balances so it doesn’t become our next big problem.

This piece first appeared in The Messenger at themessenger. com/opinion/chatgpt-in-classrooms-how-to-make-itthe-next-big-thing-and-not-the-next-big-problem.

AI can revolutionize the way teachers teach and kids learn, but without the appropriate oversight and meaningful accountability, the pitfalls—such as data privacy violations, pre-programmed prejudice and unequal access—will not only cancel out the benefits but also harm students. If we have learned anything from the impact of social media on our kids’ well-being—which is so significant that the U.S. surgeon general issued an advisory warning regarding the mental health risks for adolescents—it’s that we can’t make the same mistake with generative AI. Policymakers have to get ahead of the risks. They cannot play legislative catch-up with a tool so profoundly influential that the CEOs of the world’s

Photo: AFT

The answer is to embrace it and to demand that AI developers adhere to a set of carefully crafted, ethical and accountability-rich regulations for the use of AI in our schools.

Weingarten (center) visits Crystal Lake Middle School in Lakeland, Fla., Sept. 21, 2022.

Follow AFT President Randi Weingarten: twitter.com/RWeingarten

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