qotd: Laissez faire health care pricing

National Bureau of Economic Research
August 2015
NBER Working Paper 21501
Health Care Spending: Historical Trends and New Directions
By Alice Chen and Dana Goldman

Over the last five decades, broad changes in the US health care system
have dramatically influenced growth in health care expenditures. These
structural changes have also influenced the trajectory of the health
economics research.

From the Conclusion

Chandra & Skinner (2012) categorize technological progress in health
care based on its impact on cost and health: (1) high-efficiency,
low-cost innovations; (2) costly innovations with high efficiency for
particular subgroups; and (3) costly innovations with uncertain
efficiency. The first two lead to large improvements in life expectancy,
but they are not to be blamed for the rise in health spending relative
to other nations. It is the third category that has been uniquely
abundant in the US.

There is question of whether efforts to control technology will induce a
harmful reduction in innovation, with personalized medicine – currently
showing great promise but also great expense – being a notable example.
We clearly need a better understanding of what precisely constitutes
innovation, how it diffuses, and whether it can be harnessed to slow
spending growth in a way that is socially desirable. Given the successes
of the past half century, this seems well within the realm of possibility.

http://www.nber.org/papers/w21501

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Health Affairs Blog
September 1, 2015
The Value And Limits Of Economic Evaluation In Policy Analysis
By Victoria Phillips

Health care resources, no matter how represented, are ultimately finite.
Trade-offs occur as spending in one area means that those same resources
are unavailable to fund another program. In spite of this, U.S.
policymakers remain reluctant to engage in conversations that even hint
at "rationing." This reluctance is evidenced by the fact that the
Patient-Centered Outcomes Research Initiative (PCORI) is legislatively
forbidden to include cost-effectiveness ratios in its comparative
effectiveness evaluations.

Diametrically opposed to the U.S. system, most other countries embrace
cost-effectiveness, whereby competing programs are evaluated in terms of
costs and the health gains they produce.

The U.S. reluctance to embrace cost-effectiveness analyses as a policy
tool is misguided, particularly as concerns about the level and
distribution of health care spending remain front and center. Foremost,
it means missed opportunities to lead much-needed discussions about the
inherent trade-offs in health care investments.

Following the model of the clinical literature, policy researchers,
analysts, and foundations should become familiar with economic
evaluation tools and integrate them into their work and reports as a
matter of course.

Cost-effectiveness analyses generally identify what must be paid to
generate a health gain. If the focus of an intervention is extending
life, results are reported as the cost per life-year gained. Little
appreciated is the notion that these analyses describe the cost and
health benefit produced. Only in limited circumstances, for example when
an intervention is cost-saving, do they prescribe that a particular
investment be made.

Extending life is one type of health gain, while improving quality is
another. Quality changes can be paramount in populations affected by
chronic conditions. The quality-adjusted life-year (QALY) is an outcome
measure developed by economists in the 1970s, which adjusts survival
gains by quality of life provided over the life-years.

At present the U.S. economic evaluation literature uses both QALYs as a
standard outcome measure and an informal cost-effectiveness ratio of
$100,000 per QALY gained.

PCORI, however, continues to focus on outcomes alone, including QALYs.

Curing Hepatitis C, Social Values, And Rationing

While cost-effectiveness analysis offers a solid starting point for
discussions about health care trade-offs and spending prioritization,
there are clear limits to its contributions in decision-making. New,
potent, and expensive drugs are a case in point as they increasingly
pose challenges for health systems and payers.

The new drug Harvoni offers a cure for Hepatitis C. This condition was
previously treated with Interferon costing $15,000 per course, while the
new regimen costs approximately $84,000. The budgetary implications of
providing it are game-changing, with California alone estimating a total
for Medicaid of $18 billion out of a $64 billion budget.

Such breakthroughs end the pretense that the U.S. does not need to
confront rationing. Further, as the chance is minimal that Harvoni will
be cost effective by any standard, determining whether to fund it falls
outside the cost-effectiveness domain. It will involve some stark
choices, ultimately reflecting social values, which the public seems
woefully unprepared to make.

Policy analysts can lay the groundwork now for these more complex
discussions by incorporating cost-effectiveness and the language of
trade-offs into their work. This includes embedding these concepts into
research, briefs, commentaries, and policy discussions, along with
helping edge PCORI in a similar direction.

http://healthaffairs.org/blog/2015/09/01/the-value-and-limits-of-economic-evaluation-in-policy-analysis/

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Comment by Don McCanne

Although there are many factors contributing to the increases in health
care spending, the advances in technology such as new drugs, innovative
surgical procedures, advances in imaging, and now, the potential of
pharmacogenetics in personalized medicine, are playing an increasing
role in driving up health care costs.

The entrepreneurial drive in health care seems to be expanding as a
manifestation of the more general trend of mega-wealth seeking behavior.
The outrageous overpricing of the drugs for hepatitis C is but one
example of this behavior. But just think of the potential for
pharmacogenetics and personalized health care - seven digit pricing
would not be beyond the aspirations of the next generation entrepreneurs
in the medical-industrial complex.

It is now commonplace for prices to be based not on costs but rather on
value attained. Since a quality adjusted life year (QALY) is currently
considered to have a value of $100,000, it does not take much
imagination for these entrepreneurs to assign a price of $1,000,000 to
personalized medicine interventions that add ten QALYs to an
individual's life. Though these numbers look preposterous now, the new
prices we are already seeing indicate that we are headed in that direction.

The United States is unique in having a laissez faire attitude toward
pricing in health care. All other nations use some sort of public
control of pricing. Although our government does play a limited role
through public programs such as Medicare and Medicaid, in general we
tend to rely on market forces when markets are mostly about getting the
highest prices the consumers will bear.

We can no longer sit back and watch more and more of us being priced out
of health care. Although as a nation we are ready to accept comparing
the effectiveness of various approaches in health care, we now have to
make the decision that evaluations must also include cost-effectiveness
analyses. Federal law currently prohibits cost evaluations under the
Patient-Centered Outcomes Research Initiative (PCORI). That prohibition
must be lifted.

Under a single payer national health program, abusive pricing would not
be tolerated. Opponents say that government efforts to moderate pricing
would stifle innovation and research. Nonsense. There is no way that the
medical-industrial entrepreneurs would walk away from trying to get as
large of a share as they can of the $3 trillion that we are spending on
health care.