Unbiased Analysis of Today's Healthcare Issues

What is Reference Pricing?

Written By: Jason Shafrin - Jul• 28•14

To reduce utilization of pharmaceutical products, many countries have opted to use reference pricing. Reference pricing is a system where patient coinsurance payments depend not only on the price of the drug but also the price of alternatives therapies.  As the name indicates, reference pricing sets patient coinsurance rates as the difference between the drug’s retail or list price and the price of the “reference” product.  Often a reference product will be a generic version of a product, or the most cost-effective molecule available in a class.  Patients pay some portion of the difference between the drug’s list price and the reference price.

For instance, consider the case where a Drug A $1000 per month, Drug R (the reference drug) costs $200, and patient coinsurance is 10% of any cost above the reference price.   In this example, the patient would pay $80/month [i.e., (1000-200)*.1] for the more expensive drug.

Reference pricing is widely used around the world.  After reference pricing was introduced in Germany in 1989, it spread quickly.  By 2010, 24 out of 32 EU countries used pharmaceutical reference pricing alone or in combination with other pharmaceutical price regulation policies. (see Pharmaceutical Health Information System website)
Although reference pricing is not popular in the U.S., the motivation behind reference pricing does influence commercial insurers copayment rates.  Commercial insurers will often place drugs into copayment tiers not only based on their cost and effectiveness but how these parameters vary relative to competitor therapies.

There are two types of reference pricing.  External reference pricing sets the reference price as a function of prices of substitute products in other countries; internal reference pricing sets the reference price as a function of prices of domestic substitutes.

A paper by Kaiser et al. (2014) examines how reference pricing is used in Denmark.


Did Hospital VBP work?

Written By: Jason Shafrin - Jul• 27•14

How can Medicare improve quality and reduce cost? One idea is to introduce value-based purchasing (VBP). For instance, Medicare’s hospital value-based purchasing (HVBP) system increases payment rates for hospitals that demonstrate high quality. A paper by Ryan et al. (2014) explains the program in more detail.

Under HVBP, acute care hospitals—those paid under Medicare’s Inpatient Prospective Payment System—received payment adjustments beginning in October of 2012 based on their performance on 12 clinical process and 8 patient experience measures from July 1, 2011 through March 31, 2012. HVBP is budget neutral, redistributing hospital payment “withholds” from “losing” to “winning” hospitals. These withholds are equal to 1 percent of hospital payments from diagnosis related groups (DRGs) in the initial implementation period. Incentive payments in HVBP are based on a unique approach that incorporates both quality attainment and quality improvement, incentivizing hospitals for incremental improvements and foregoing the all-or-nothing threshold design of other programs.

The authors use a difference-in-difference methodology by matching hospitals in the IPPS system with those who were not. Hospitals outside of IPPS include hospitals in Maryland and critical access hospitals (CAHs). This matching is likely imperfect as CAHs–by definition–are different than those in the IPPS system.

Based on this approach, did HVBP lead to improved health outcomes?  The answer is maybe.  On the side of ‘no’:

We found no evidence that improvement in clinical process or patient experience performance was greater for hospitals exposed to HVBP compared to a matched comparison group of hospitals that were not exposed to HVBP. We also found no evidence that the effect of HVBP varied based on hospitals’  initial clinical process or patient experience performance.

However, hospitals knew about HVBP years prior to actually receiving payments. Further, HVBP is based on long-standing quality metrics. In fact, in 2003 Section 501(b) of the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) mandated the creation of an Hospital Inpatient Quality Reporting (Hospital IQR) program. Hospitals may have been anticipating these payments for many years. Thus, one should not be surprised by the following finding:

We did, however, find some evidence that hospitals that were ultimately exposed to HVBP had greater improvement on clinical process performance when we assumed that the effects of HVBP began 3 years prior to the start of financial incentives. Whether this improved performance was driven by the expectation of HVBP, or whether it resulted from other factors, is unclear.

The debate surround the efficacy of VBP is yet to be settled.


Weekend Links

Written By: Jason Shafrin - Jul• 25•14

First biosimilar hits the market

Written By: Jason Shafrin - Jul• 24•14

Making a generic version of a single molecule drug is fairly straightforward.  Making a replica of a biologic treatment, however, is not.  Nevertheless, Congress signed into law the Biologics Price Competition and Innovation Act of 2009 (BPCI Act) to create a fast-track approval process for biological products that are demonstrated to be highly similar an FDA-approved biological product.  These products are known as biosimilars.

Today, this legislation has bore fruit.   FierceBiotech reports:

The FDA accepted Novartis’ application to sell a knockoff of Amgen’s biological treatment Neupogen, making the company a pioneer among those looking to capitalize on a soon-to-come U.S. market for biosimilars that is expected to explode.

Novartis is the first to file for a U.S. biosimilar approval under the FDA’s newly created pathway, according to the company, looking to market its take on a treatment for patients with low white blood cell counts that brought in $1.4 billion for Amgen last year. The drug, developed as filgrastim, is designed to prevent fever and infections in cancer patients taking chemotherapies that hamper bone marrow activity.

Is this a breakthrough? Yes and no. Although biosimilars are new to the US, Sandoz (the generic division of Novartis) already sells three biosimilar drugs, including filgrastim, in about 60 other countries.

Cavalcade of Risk #213

Written By: Jason Shafrin - Jul• 23•14

There are many types of risk. There are health risks and financial risks, systematic risk and idiosyncratic risk. And some risks are riskier than others:

In this week’s edition of the Cavalcade of Risk, the best of the blog-o-sphere give their opinions on a handful of risky issues.

The next CoR host is Jaan Sidorov of The Population Health Blog.

CBO presents ominous debt projections

Written By: Jason Shafrin - Jul• 21•14

Like most years, in recent history, the Congressional Budget Office’s 2014 Long-term Budget Outlook is not rosy.

Between 2009 and 2012, the federal government recorded the largest budget deficits relative to the size of the economy since 1946, causing its debt to soar. The total amount of federal debt held by the public is now equivalent to about 74 percent of the economy’s annual output, or gross domestic product (GDP)—a higher percentage than at any point in U.S. history except a brief period around World War II and almost twice the percentage at the end of 2008…Twenty-five years from now, in 2039, federal debt held by the public would exceed 100 percent of GDP

The good news for fiscal hawks is that healthcare spending has slowed in recent years. In fact, CBO stated that it has “substantially reduced its 10-year and long-term projections of spending per person for Medicare, for Medicaid, and for the country as a whole.”

The bad news is that the future of healthcare costs also looks grim for two reasons. First, the rising age of the US population will increase the burden of health care costs. Second, “the expansion of federal support for health insurance under the ACA, which will significantly increase the number of people receiving benefits from Medicaid and make some people eligible for federal subsidies for health insurance purchased through exchanges (or marketplaces).

Further, economic growth in recent years has been fairly anemic and thus health care spending as a share of the economy has inched slowly higher.

In CBO’s extended baseline, net federal spending for those programs (that is, spending net of offsetting receipts for Medicare) grows from an estimated 4.8 percent of GDP in 2014 to 8.0 percent in 2039; in that year, 4.6 percent of GDP would be devoted to net spending on Medicare and 3.4 percent would be spent on Medicaid, CHIP, and the exchange subsidies.

In other words, by 2039 one in 12 dollars generated by the economy would go towards federal government health care payments.


HIV Developments: The Good and the Bad

Written By: Jason Shafrin - Jul• 20•14

The World Health Organization estimates 35 million people and more than 1 million people in the US have AIDS. Further, 18% of Americans with HIV are unaware of their infections.

Nevertheless, over the last decade, the US has made major strides in reducing HIV incidence. The BBC reports that a new JAMA study found that:

the [HIV] diagnosis rate [in the US] fell to 16.1 per 100,000 people in 2011 from 24.1 in 2002

Even this figures may understimate the declining incidnece. Over the past decade, HIV testing has rose, indicating that the true drop in incidence may be even larger than the numbers presented above.

Although there is much uplifting HIV news on the macro in the US, current events have not been as hopeful. A number of AIDS researchers have died on the Malaysia flight MH17. Vox reports:

The HIV/AIDS community is mourning the loss of Joep Lange, a prominent HIV researcher and former president of the International AIDS Society, who died on flight MH17 on his way to an international AIDS conference.

“Joep is one of our giants in terms of AIDS research and AIDS access to treatment and care in poor places around the world,” said Richard Marlink, executive director of the Harvard School of Public Health AIDS Initiative. “He worked in Thailand on vaccines, in Africa on access to care and medical education. On top of all that was just a gem of a person.”

A Dutch citizen, Lange was professor of medicine and head of the department of global health at the University of Amsterdam. He had been involved in HIV treatment and research since 1983, just as the virus was emerging as a global health threat.

Lange was one of the key researchers behind several pivotal antiretroviral therapy trials, including projects involving the prevention of mother-to-child transmission of the virus in both the developing and developed world, according to the Amsterdam Institute of Global Health and Development.

And this is just one of the people killed on MH17. Other AIDS researchers who died in the crash include:

  • Pim de Kuijer, STOP AIDS NOW!
  • Lucie van Mens, Director, AIDS Action Europe
  • Maria Adriana de Schutter, AIDS Action Europe
  • Glenn Thomas, World Health Organisation
  • Jacqueline van Tongeren, Amsterdam Institute for Global Health and Development

A tragedy, but their work lives on.


Healthcare.gov vs. Amazon.com

Written By: Jason Shafrin - Jul• 18•14

Which one is easier to use?  The answer to this is clear: Amazon.  Of course, health insurance is a much more difficult product for people to understand than most good at Amazon.  However, many policymakers may have underestimated the amount of customer service new enrollees in Healthcare.gov need.  The Washington Post reports:

Just 13 percent of assistance programs said they spent, on average, less than an hour with each person they helped. Most spent between 1-2 hours, but some averaged much higher.


President Obama clearly oversold how easy it would be to purchase insurance.

Just before HealthCare.gov’s awful launch in the fall, President Obama said Americans would be able to go online to shop for health insurance the “same way you’d shop for a plane ticket on Kayak or a TV on Amazon.” That, of course, was a sales pitch to get people to look at the enrollment Web site (before we knew how bad it’d be at the start). But today’s polling data and similar polls in recent months show that just isn’t the case — and the law’s implementers need to plan appropriately for that.

HWR is up

Written By: Jason Shafrin - Jul• 17•14

Jennifer Salopek has posted  the July edition Health Wonk Review: Polar Vortex Edition at Wing of Zock.

Defining “comparative advantage”

Written By: Jason Shafrin - Jul• 16•14

Don Boudreaux describes comparative advantage using an interesting example.

HT: Marginal Revolution