Editor’s note: For more on this topic, see Steven Pearson’s response to this post, also published today on Health Affairs Blog.
Last year, the Department of Health and Human Services (HHS) announced a historic initiative to shift Medicare’s reimbursement paradigm. Instead of paying for the “volume” of care, Medicare would now aim to pay for “value.”
Medicare’s announcement coincided with renewed interest in the private sector in finding new ways to align prices with value in health care. Both private payers and delivery systems have begun to embrace the possibilities of innovative pricing arrangements for pharmaceuticals and of rewarding quality throughout health care. Experiments with bundled payments and other innovative pricing approaches continue to gather momentum. Nearly all market participants share the goal of reducing spending on low-value care strategies and shifting it towards higher-value uses.
Health technology assessment (HTA) will likely play an integral role in health care’s paradigm shift. We cannot reward value until we properly measure it. While the details of value measurement continue to be vigorously debated, nearly unprecedented consensus has emerged over the need to align reimbursement and utilization with value.
The ICER Framework
More controversial, however, is the role of budgetary criteria in determining value and in governing access to health care technologies. A notable example is the methodology used by the Institute for Clinical and Economic Review (ICER), which holds that conventional approaches using cost-effectiveness analysis to measure value are insufficient. According to this view, even high-value technologies that exceed a certain spending threshold should be subjected to additional scrutiny before being granted market access.
ICER contends that budgetary criteria (termed “health system value” in ICER’s framework) help prevent further increases in premiums for employers and individuals straining under the burden of rising health care costs. The organization further contends that budgetary considerations also protect fiscally constrained public-sector payers from having to cut spending on education, transportation, law enforcement, and other critical areas outside health care.
The Problems With Adding Explicit Budgetary Criteria To Value Assessments
In an important sense, ICER’s budgetary criteria respond to a genuine problem payers face when confronted with expensive new medications that affect large numbers of patients. Moreover, arguments in favor of fiscal discipline resonate with voters and business leaders weary of overspending in government. However, the case for adding budgetary tests to measure value on top of traditional value assessments is problematic on several levels.
Penalizing new widely applicable high-value technologies
A major concern is that the budget criteria ignore waste and inefficiency in the existing system and penalize high-value new technologies. Because everyone agrees on the importance of excluding low-value technologies, and because ICER already imposes a cost-effectiveness constraint, adding budgetary criteria serve to penalize a subset of high-value technologies — indeed, high-value technologies that affect the most people are penalized the most. At a time when the health care system struggles to encourage high-value care, this strategy becomes counterproductive.
Casual observation and abundant research suggests that there is more than enough low-value “fat” to be trimmed from the health care system without also needing to prune desperately needed high-value care of any kind. The Institute of Medicine supports this view, estimating that as much as 30 percent of health care spending could be eliminated without harming patient health. Thus, trimming the fat should provide more than enough protection for fiscally constrained public payers. Admittedly, targeting this waste and inefficiency is very challenging, but the push towards a value-based system demands that initiatives focus on strategies that promise to address these areas.
Treating health care as an expense rather than an investment
ICER’s budgetary criteria, which use a five-year time horizon, also encourage the myopic view that health care is an expense, like buying a bottle of wine or seeing a movie. Yet, many economists and policymakers have long recognized that high-value health care is instead an investment, involving short-term costs that produce even larger long-term benefits. Novel therapies for hepatitis-C represent a case in point. Even the most expensive treatment scenarios—treating all patients with diagnosed hepatitis-C—pay off in the long run. Considering only savings in medical costs, investing in treating all patients today would pay off within 14 years. The payback period becomes even shorter if we consider the value of health improvements to patients.
Indeed, an intervention’s upfront cost is often a poor indicator of value, whether the intervention is a drug, device, vaccine, or public health program. Excluding high-cost/high-value therapies might lead to less value for society in the long run. Statins provide another example of the sort of high-cost/high-value therapies that budgetary criteria aim to scrutinize. To be sure, statins rank as one of the single most expensive drug classes ever launched, racking up over $300 billion in costs over their first 20 years of use. Yet, over the same period, statins returned over $1.2 trillion in value to society.
Highly Active Antiretroviral Therapies (HAART) for HIV are yet another instructive case. Prior research finds these drugs have delivered benefits of over $60 billion to society, 20 times the total cost of the drugs. The paradigm shift in health care aims to strengthen this link and to encourage the adoption of high-value technologies. Payers considering whether to cover and how to pay for new drugs might well want to consider budget projections alongside traditional value assessments. But the quick-fix relief promised by explicit budgetary criteria in technology assessments to inform a “value price” distracts us from the primary health policy challenge of our time: Reforming the marketplace to encourage the identification, adoption, and use of high-value health care to improve the health of Americans.
The Real Tasks: Experimentation And Reform In Health Care Payment And Delivery
To be sure, the challenges are daunting and individual organizations, such as ICER, cannot tackle them alone. The depth, difficulty, and duration of the problems in the marketplace defy a single solution. Health policy at local, state, and federal levels, and in the private and public sectors, should instead seek to identify and remove barriers to experimentation in the payment and delivery of health care, and to reward successes appropriately.
Reimbursement is one area ripe for testing. Novel payment approaches, from bundled payments to performance-based compensation, aim to reward providers when patient health improves and penalize them when it does not. Providers who are rewarded for health improvements will naturally seek to generate value and avoid wasting resources on low-value procedures and technologies. For example, a single bundled payment for hip fracture surgery would encourage hospitals to perform surgery as efficiently as possible, and to invest in follow-up care that would avoid readmissions. Similarly, money-back guarantees for drugs that fail to work reward innovators whose drugs are most effective.
However, regulatory barriers to such strategies persist. To take one example, many drug manufacturers shy away from innovative pricing, in part because of the possible deleterious consequences on their Medicaid best-price calculations. A money-back guarantee might result in a very low price being charged to a small payer that has a few poor outcomes. In turn, this might lock in that same low price for every state Medicaid program. Medicaid best-price rules were never intended to have this effect, but so far, CMS has done little to clarify how the regulations would be applied to pricing and contracting innovations.
Yet, experiments in reimbursement are by themselves inadequate. Currently, the rewards for success are skewed towards extremes. On the one hand, tax subsidies for health care insurance make rewards “too rich” by inflating the willingness to pay for medical technology. Rolling back the tax advantages of employer-provided health insurance could substantially mitigate this issue. On the other hand, public and private payers often fail to enjoy the long-term benefits of their investments in the health of their beneficiaries. Patients switch private insurers before long-term benefits are realized, and short-term budget cycles preclude a long-term perspective by public payers.
Several solutions have been proposed. The simplest would be a star rating system for private insurers that most consistently make long-term investments in their beneficiaries’ health. Others, like “health coins” or “hand-off payments,” involve novel financial mechanisms that reward insurers for making long-term investments even if their beneficiaries depart before the health benefits arrive.
Health care in the US continues its long overdue march away from volume and towards value. The drug value frameworks entering the US health care landscape are a welcome part of this trend. Using narrowly construed budgetary criteria as part of the frameworks, however, is problematic. It harkens back to an earlier era in which cost and utilization considerations reigned supreme, while value and health were sidelined.
Nearly everyone now agrees that value-based health care is the right destination for the US health care system, but there remains a long road to travel. Hitching myopic budget criteria to worthy value assessments represents a wrong turn.
Authors’ Note
Dr. Lakdawalla and Dr. Neumann hold the positions of chief strategy officer and principal scientific advisor, respectively, at Precision Health Economics, a health care consultancy to the life sciences industry.
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