Cost Effectiveness

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Why does cost effective care spread so slowly

May 27, 2011 in CER | No comments

According to Fuchs and Millstein, here’s why:

  • Insurers hesitation to standardize coverage.  Standardization of coverage would force insurance companies to compete primarily on the basis of price, which would put pressure on their profits.
  • Employers bear too much of the marginal cost from employees choosing expensive health plans.  Because companies wish to avoid alienating employees, only 20% of large employers require workers who choose more expensive plans to pay the marginal difference in cost.
  • The public does not understand why cost effectiveness is good for them.  The general public does not typically realize that higher health insurance cost are not paid by employers, but by the employees themselves through lower wages in the long run.
  • Legislators need money.  Legislators seek campaign contributions from health industry stakeholders who benefit from the current inefficient arrangements.
  • Hospitals fear cost-effectiveness means lower reimbursements.  Hospital administrators often resist efforts to reduce hospital occupancy for fear that decreases in revenue will jeopardize their ability to cover large fixed costs.
  • Physicians fear pay cuts and loss of professional autonomy.
  • Drug and device manufacturers will lose profits.  Although manufacturer with unique products can sell their goods for a high price, there are alternatives to most medical products.  In these cases, firms attempt to create the perception that their products are unique to justify high prices.  Marketing and lobbying are vital parts of these efforts.

Source: Victor R. Fuchs, Ph.D., and Arnold Milstein, M.D., M.P.H “The $640 Billion Question — Why Does Cost-Effective Care Diffuse So Slowly?” NEJM, May 18, 2011.

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Economics of the Timing of Influenza Vaccine

April 28, 2010 in Vaccinations | No comments

Although the H1N1 influenza virus has garnered most of the media attention, protecting children against standard strains of influenza has generally been shown to be cost effective.  However, the cost effectiveness depends on the timing.  The flu season generally lasts from September to June, but flu generally has the highest incidence in November and December. A paper by Yee et al. (2010) claims that getting all kids immunized could save society between $6.4 million and $9.2 million.  Even third party payers (i.e., insurers) save between $4.1 and $6.1 million due to decrease hospitalization and illness.

The authors find that vaccinating children is cost-effective until December for trivalent inactivated viral vaccine (TIV).  Live attenuated influenza vaccine (LAIV) , however, is only cost effective through November.  But should you believe these recommendations?

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Does spending improve outcomes?

March 12, 2010 in P4P, Public Policy, Quality | No comments

From a paper by Weinstein and Skinner (NEJM 2010):

“Moreover, there is considerable variation in health care expenditures and a weak or even negative association between spending and outcomes, such as mortality at the regional level and quality measures at the state level. This evidence has been interpreted to mean that cutting back on these putatively useless or harmful services would simultaneously reduce cost and improve health. In contrast, several cross-sectional studies that have shown positive associations between spending and outcomes have been interpreted to show that more spending leads to better outcomes.”

“A recent study using chart-review data from the 1994–1995 Cooperative Cardiovascular Project categorized “…hospitals as either high-adopting facilities or low-adopting facilities, according to their rates of use of aspirin, beta-blockers, and coronary reperfusion in the treatment of acute myocardial infarction. The researchers found that the high-adopting hospitals had consistently better rates of risk-adjusted survival, at no additional cost to Medicare. But after stratification according to the hospitals’ adoption rates, there was a positive but diminishing effect of spending on the health outcome (12-month survival)…The cost-effectiveness ratios at the margin were $95,000 per life-year or more but with slightly better returns for the hospitals that were slower to adopt cost-effective practices…”

“Another study showed that regions that had high rates of revascularization for patients with acute myocardial infarction received good health value for the expenditure on the intervention.  Despite this, there was essentially a zero association between spending and outcomes across regions. The explanation is that the high-revascularization areas were also less likely to use beta-blockers and aspirin for their patients.”

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Comparative Effectiveness vs. Cost Effectiveness Research

March 11, 2010 in Public Policy, Quality | 6 comments

Comparative Effectiveness has been a hot topic in health services research. According to a recent article in the New England Journal of Medicine, “the American Recovery and Reinvestment Act of 2009 authorizes the expenditure of $1.1 billion to conduct research comparing ‘clinical outcomes, effectiveness, and appropriateness of items, services, and procedures that are used to prevent, diagnose, or treat diseases, disorders, and other health conditions.’”

Comparative effectiveness compares how effective various medical treatments improve health outcomes.  This sounds like the course we want to take.  Most policymakers laud the health benefits of comparative effectiveness research, but some people claim that comparative effectiveness research can also save cost.

This is most easily seen in the case where a treatment is completely ineffective.  If research can prove a treatment is ineffective, then insurers could save a lot of money by not covering this type of treatment.  This is especially true if the treatment is expensive.

However, comparative effectiveness treatment could also increase cost.  Assume that there are two treatment currently in use: Treatment A and Treatment B.  Let us say that treatment A costs $1,000 and has a 90% cure rate and Treatment B costs $10,000 and has a 95% cure rate.  According to comparative effectiveness research, we should always use Treatment B.  Yet this would significantly increase costs.

Most health economists argue that cost effectiveness research is provides a better way to improve health and decrease cost.  In the example above, should we cover Treatment B?  The answer is likely yes if this is a very serious disease (e.g., cancer) but likely not if the disease is less serious (e.g., the common cold).  Some readers may believe insurers should always cover Treatment B no matter what.  However, would you be willing to pay increased premiums that would occur if treatment B were covered?  Would you feel the same way if Treatment B cost $100,000?  or $10 million?  What if the cure rate was only 90.1%?

At some point, there must be a trade-off between cost and benefit.  Admittedly, these are very difficult decisions in practice, but because there are limited healthcare resources, we must ration care.  Yes, I said it, we must ration care.  I’ve said this before.  This rationing can take many forms: the scope of what your insurance company (or Medicare) will cover, waiting lines, or increased prices you must pay out of pocket for medical services.  The government wants to avoid making these tough choices because it is politically unpopular.  Politicians don’t want to be labelled  the sentator who “killed Grandma” or “instituted a death panel.”  But to truly decrease cost and improve quality, cost effectiveness rather than comparative effectiveness is the prescription we need.

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Tanner on Obamacare

June 15, 2009 in Public Policy | 2 comments

Cato Institute Senior Fellow Michael Tanner is not a big fan of some health care reforms that are being proposed.  He reviews recent health reform proposals in his Obamacare article.  I review a few of his arguments below.

  • Employer Mandate.  Tanner believes employer mandates are a bad idea and I wholeheartedly agree.  Large firms can efficiently offer health insurance and will continue to do so to attract employees.  For small firms, however, they do not have the scale to efficiently offer health insurance.  The employer mandate would stifle small business growth and put a drag on the economy.  An economics experiment also showed employer mandates will adversely affect small businesses.
  • Individual Mandate.  One reason for the individual mandate is that the cost of the uninsured is passed on to the insured through higher premiums or higher taxes.  Tanner, however, notes that “uncompensated care…[costs] as much as $40.7 billion per year, with 85 percent of that cost borne by federal, state, and local governments.  But…the United States currently spends roughly $2.4 trillion annually on health care, …[which] amounts to about 1.7 percent of the total U.S. health care spending. Other estimates put it slightly higher, at 3–5 percent.”  So an individual mandate will not greatly reduce costs.  Secondly, enforcing an individual mandate will be difficult.  Massachusetts instituted an individual mandate in 2005, but 200,000 people still remained uninsured.  Strict enforcement of an individual mandate will be costly to administer and will mostly go after poor people who couldn’t afford health insurance to begin with.  
  • Cost-effectiveness programs.  The stimulus packaged authorized “$1.1 billion for the federal Agency for Healthcare Research and Quality to conduct a ‘comparative-effectiveness research program.’”  Is this a good idea?  Tanner argues that Americans don’t want the government deciding what type of care they can get.  But of course, private insurance companies decide what type of care their enrollees can get all the time.  If there is a government health insurance plan, investing in cost-effectiveness research reduces the chance that taxpayer funds are wasted.  Of course, if you want to pay for a procedure out of pocket, you would be allowed to do this yourself.  Tanner claims that government cost-effectiveness research could crowd out cost-effectiveness research by private insurers.  However, the government is more likely than private health plans to share its findings publicly; since information is a public good, government cost-effectiveness research is welfare improving.

Source: Tanner, Michael D. (2009) “Obamacare to Come: Seven Bad Ideas for Health Care Reform” Cato Institute Policy Analysis no. 638.

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$1.1 billion for Comparative Effectiveness Research

March 10, 2009 in Current Events, Public Policy | No comments

Regarding my post on Monday, Obama’s stimulus package–a.k.a. the American Recovery and Reinvestment Act (ARRA)–includes 1.1 billion dollars for clinical comparative effectiveness research.

According to the American Academy of Family Physicians (AAFP), ARRA “allocates $1.1 billion for comparative clinical effectiveness research, including $300 million for the Agency for Healthcare Research and Quality and $400 million each for HHS and NIH to conduct this research.”

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