Value-based pricing has become all the rage of late among health policy wonks. Medicare aims to tie 90% of reimbursement to some measure of value by 2018. The AMA has endorsed value-based pricing for pharmaceuticals. Organizations such as IVI and ICER propose different approaches for measuring value as well.
Typically, value is measured as the health benefits patients with a disease receive multiplied the monetary value of a 1-unit increase in health (often the value of a QALY), less the cost of the treatment.
However, a recent working paper by Lakawalla, Malani and Reif claim that this standard approach misses the value healthy individuals receive from a treatment. Further, they claim that the value of a treatment to healthy people is very large.
Why would healthy people value a treatment for a disease they do not have? In short, risk aversion. Patients may not have the disease, but typically have some positive probability of having the disease later in life. Thus, the availability of new technology provides a form of insurance that in the case that the person does have the disease in the future, it will be much less burdensome.
The authors provide the following example:
Think of a healthy consumer facing the risk of developing Parkinson’s disease3 in the years before the discovery of effective dopamine-related treatments that reduce disease symptoms. In the absence of a treatment, contracting Parkinson’s might reduce her quality of life on a 0 to 1 scale from .8 to .4. The consumer could not insure herself against this risk, because real-world insurers did not (and do not) sell pure indemnity insurance contracts that make payments to consumers conditional on the occurrence of illness alone. Moreover, healthcare insurance was a poor substitute, because there were no effective treatments to cover. As a result, this consumer had to bear the full risk of Parkinson’s related symptoms herself.
Now consider the introduction of a new technology like Levodopa. Before Levodopa, Parkinson’s patients stood to lose 50% of their quality of life. After Levodopa, however, developing Parkinson’s becomes less costly, lowering quality of life from 0.8 to only 0.7. Notice how Levodopa’s introduction compresses the variance in the quality of life between the Parkinson’s and non-Parkinson’s states. This compression is valuable to consumers who dislike risk. In addition, the advent of the treatment immediately makes healthcare insurance more valuable, because there are finally effective technologies for insurance to cover. Conventional economic valuations of health technology ignore these two sources of value, but focus exclusively on the 0.3 gain in average quality of life produced.
Lakdawalla and co-authors separate out two forms of insurance value above and beyond the standard approach described above (the authors describe the standard, risk-free approach as the risk free value [RFV]). First, there is self-insurance value (SIV), which is the additional value of a treatment that accrues to uninsured individuals since their risk of a severe decline in health in the even that they contract a disease decreases. The second form of insurance value is the market-insurance value (MIV), which the authors state “represents the incremental value of being able to use health insurance to substitute for the indemnity insurance market. Medical technology is essential to this substitution because health insurance can only be used to fund consumption of medical care.” MIV occurs because typically patients owe a copay or coinsurance. Reducing the copayment or coinsurance when patients are sick is valuable because their baseline utility is lower and thus a marginal increase in utility in a sick state is worth more than in a healthy state due to the decreasing marginal utility.
Overall, this paper takes some standard economic concepts—risk aversion—and applies them to a topical debate about how to measure value for new treatments. Other paper such as recent work by Sanders et al. (2016) have already cited the insurance value components as being useful for inclusion in future cost-effectiveness studies.
- Darius Lakdawalla, Anup Malani , Julian Reif. The Insurance Value of Medical Innovation. NBER Working Paper.