Laissez faire health care pricing

Health Care Spending: Historical Trends and New Directions

By Alice Chen and Dana Goldman
NBER Working Paper 21501, National Bureau of Economic Research, August 2015

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.


The Value And Limits Of Economic Evaluation In Policy Analysis

By Victoria Phillips
Health Affairs Blog, September 1, 2015

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.



By Don McCanne, MD

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.