In their Health Affairs Blog post, Darius Lakdawalla and Peter Neumann raise numerous concerns about the inclusion of potential budget impact estimates alongside what they view as more traditional analyses of the “value” of a health care service. They advocate instead for increased experimentation with new forms of payment and delivery of care.
I agree that these experiments have the potential to improve value for patients and the health care system in the future. But I believe Lakdawalla and Neumann underappreciate how budget impact analyses can help catalyze innovative pricing and payment approaches. I will expand on this and also take the opportunity to address what I believe are misunderstandings in their article regarding the conceptual background of the Institute for Clinical and Economic Review’s (ICER’s) potential budget impact analyses, how the information is intended to be used, and how it is actually being used by insurers and policymakers.
It’s Not Whether To Think About Budget Impact, But How
I would start with a question that critics of budget impact assessment often ignore: What type of economic perspective and information currently influences decision-making by insurers in the US? Without a doubt—and insurers are the first to admit this—it is budget impact. Considerations regarding budget impact, and not measures of long-term cost-effectiveness, have dominated the way that insurers assess the economic impact of all health care services, not just drugs. There is a logic to this perspective but also obvious perverse outcomes.
Budget impact is a reasonable consideration because insurers work in rapid cycles with purchasers and individual subscribers, translating short-term cost projections into planned insurance premiums for the coming year. Rapid cost growth in the short term, especially when it increases beyond anticipated inflation rates, pushes quickly upstream to purchasers and policymakers who have to make their own short-term decisions about how to find the needed resources. This may lead to decisions to increase deductibles or otherwise reduce health benefits for employees; public insurers might need to consider reducing next year’s education budget to find the funds to keep a state Medicaid program afloat.
In addition, for provider groups that bear financial risk, budget impact analyses inform very real short-term decisions about how to allocate resources to maximize the quality of health care within a given budget. A rapid increase in costs resulting from the significant budget impact of a new drug might lead to decisions to forgo hiring of needed new staff, or delay of introduction of other new services. Quite simply, budget impact, and not long-term cost-effectiveness, determines how affordable health care insurance will be in coming years and shapes what health care can be provided with the resources available.
Yet, the perverse influence of an undiluted focus on budget impact cannot be overstated. A narrow short-term perspective blinds policymakers, insurers, and providers to the need to reshape the delivery system and reframe payment mechanisms to “make room” for new, and potentially expensive, interventions that will help patients and pay off in the end. Here I could not agree more with Lakdawalla and Neumann: If an economic analysis of new interventions is focused only on the short term, relying solely on budget impact estimates, patients and our health care system will be the ultimate losers.
But we do not advance the kind of discussions that are needed to manage the potential tension between long-term value for money and short-term budget impact by pushing budget impact assessment into a dark, back room. The idea that having analyses of long-term value and budget impact in the same report will somehow taint decisions could only be imagined if budget impact were not already dominating the playing field. I believe that leaving budget impact out entirely would only reinforce its silent power over too many decisions. That is why ICER includes potential budget impact assessment as an element in our reports, and why we bring all our reports to public meetings where these issues can be debated, in public, with all stakeholders around the table.
For High-Cost, Broadly Applicable Treatments, Leaving Out Short-Term Budget Effects Is Inconceivable
Can we really believe that public discussion about Sovaldi and other new treatments for hepatitis C could have been held without a clear eye on both long-term value for money and short-term budget impact? The only other topics of ICER reports for which potential budget impact has played an important role in the discussion have been new treatments for high cholesterol and heart failure — both conditions for which new treatments are indicated for over 10 million Americans. With this potential scope of use, can we expect insurers and other policymakers not to wrestle with the tension between long-term value and short-term budget impact?
If we cast our eyes forward, just imagine the long hoped-for day when a new drug comes to market that improves outcomes for the 5.4 million Americans suffering from Alzheimer’s disease. Let’s assume that this new drug only requires one year of treatment and improves cognitive function significantly, thereby adding an average of two years to life expectancy after diagnosis, from eight years to 10 years. Nursing home expenses would be postponed but ultimately not saved. If we were to assign a hypothetical price for this drug at the threshold of $100,000 per additional quality-adjusted life year (QALY), a level representing reasonable or even good long-term value for money, the price of the drug would be approximately $200,000 for the course of treatment.
The one-year budget impact of treating all eligible patients at this “reasonable value” price would be $1.08 trillion dollars. Even if only half of eligible patients were treated in the first year, the budget impact would be $540 billion. That cost would dwarf the combined expense each year for the National Institutes of Health ($31 billion), Homeland Security ($41 billion), the Veterans Administration ($65 billion), and the Department of Education ($77 billion). It is five times the combined total of what all states and cities spend annually on police and fire department services, and almost as much as we spend on the entire defense budget ($585 billion).
Do we welcome this drug? Absolutely! Do we have to have a serious national discussion about how to manage the short-term budget impact? How could we not? That discussion would certainly include consideration of a lower price, and possibly the creation of a long-term payment mechanism that stretches payments out over time. It seems likely we would also need to talk about prioritizing patients for treatment, as happened with Sovaldi when it was first introduced, or maybe we could find ways to rapidly shift resources from other parts of our economy: defer new aircraft carriers to help Medicare pay for this new drug?
My point is this: These questions reflect the discussion we need to be able to have as a nation, not just insurer by insurer. And given the pace of important innovation in new drugs, with a wave of new, highly priced drugs arriving to treat large numbers of patients, it is not a discussion that can wait. Both now, and in the future, we won’t be able to do justice to the importance of the issues raised if we pretend that a drug’s potential budget impact is somehow not relevant to deciding whether and how to take action to maximize its value for the health system.
Misconceptions About ICER’s Process
Let me turn briefly to address some of the specific misunderstandings about ICER’s approach in Lakdawalla and Neumann’s post. First, they use the term “budget criteria” and claim that our approach mandates that a drug meet these criteria “before being granted market access.” This is not true. Our potential budget impact assessments do estimate whether, without active management of uptake, a new drug’s budget impact might pass a threshold, what we call an “alarm bell,” indicating the potential to contribute to growth in overall health spending that is faster than growth in the national economy.
But we have never suggested that a drug with good long-term value for money that exceeds this budget impact threshold should be strangled in the cradle, whether by the Food and Drug Administration or by insurers. The goal of having an alarm bell is to send a signal, based on transparent, publicly available calculations, that policymakers may need to work together, as early as possible, to figure out how to bring to patients a desirable new treatment of good long-term value in a way that can be affordable for both patients and the health system.
Second, this approach in no way “penalizes” new, widely applicable high-value treatments. ICER reports do not imply that such treatments should be “excluded.” To the contrary, the fundamental intent of our reports is to make sure that long-term value for money is the anchor of considerations about how to manage new treatments for large populations. Companies that make high-value treatments for large populations will continue to fare splendidly in the marketplace and continue to find ample incentives for future innovation — especially if they work with insurers and other stakeholders to develop innovative payment and pricing mechanisms that can sustain the affordability of a growing number of important new drugs. To my knowledge, no insurer in the US has decided to not cover a drug as a result of the potential budget impact assessment information in our reports. Not one.
How do insurers use the potential budget impact information? Anecdotally, insurers have told me that they use it as a rough benchmark to their own estimates of potential uptake among their members. Insurers have found budget impact analysis, when combined with our long-term value for money analysis, to both spur and support negotiations around pricing that have led to innovative payment mechanisms linked to real-world outcomes. Insurers have also said that including budget impact information in the value conversation has helped elevate and make more transparent the downsides—the real opportunity costs—that they see within the health system as drug prices and drug spending have increased.
Third, the claim that considering potential budget impact is unnecessary because we should eliminate the low-hanging “fat” in our health system is an important perspective, and ICER has done reports analyzing how best to leverage the Choosing Wisely recommendations to do just this. These efforts do and should continue, and ICER intends to continue our own efforts to help identify true “waste.” However, I can only say that finding the mythical 30 percent of health care that can be easily cut to create all the financial flexibility we need for new innovation is a lot harder than Lakdawalla and Neumann suggest.
Lastly, including potential budget impact information alongside long-term cost-effectiveness information does not treat health expenses as a cost instead of an investment. It only puts all health care expenses on the same, equal level and acknowledges that expenses to invest in one health care service may make it more difficult to invest in equally beneficial services for other patients. All health care services are investments in the future and, to be ethically consistent, we must view expenses for education and other social goods in the same light: as socially desirable investments. It is critical not to treat new drugs as special in a way that minimizes the reality of the opportunity costs that occur with spending for one health service versus another, and for health services versus other social investments.
Agreement On The Importance Of Long-Term Value
I would like to close with another acknowledgment and agreement that Lakdawalla and Neumann are right to emphasize the importance our health care system should attach to the long-term perspective on value. This is, and will continue to be, the anchor of the ICER approach to value and value-based pricing. However, while we are openly considering public input on options for improving how we calculate and communicate our potential budget impact analyses, we view their inclusion in our reports as integral to our broader mission.
Keeping budget impact considerations off the table, to be factored in only post-hoc by insurers or provider groups in ways unknown, would be a mistake. It would rob our nation of the chance to bring the public directly into the critical discussions about health care and health insurance that we need to have if we are going to support the kind of innovation that will bring true long-term value to patients and the health system.
Author’s Note
Steven Pearson is Director of the Institute for Clinical and Economic Review.
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