Cost-Effectiveness and Comparative Effectiveness: Strategies for Maximizing Value of Health Spending?

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In 2005, Americans spent approximately $2 trillion on health care services, or 16 percent of the gross domestic product (GDP), and researchers estimate that aggregate spending may exceed 20 percent by 2015.^1,2 Medicare and Medicaid expenditures alone comprise 4.6 percent of the U.S. economy, and this number is expected to increase to 5.9 percent by 2017.³ Such growth in spending is attributed in part to insufficient preventive services, inappropriate medical care, increased prevalence of chronic disease, high administrative costs of providing insurance, and increased demand for innovative medical technologies. Despite increased spending, the health status of the United States remains low relative to other countries that spend less on health care, suggesting wasteful and inefficient health care resource allocation in America.⁴

Technology assessment may reduce waste, increase efficiency

Technological advancements-including pharmaceuticals, medical devices, and medical procedures-driven by consumers' demand for the newest and best care are one of the major cost drivers.⁵ Because insurance companies pay for most medical technologies, physicians and patients are unaware of the true price of the technologies. Therefore, physicians often prescribe and patients often use more costly technologies, even when the comparative effectiveness of treating interventions is unknown or minimal on the margin. Greater utilization of technologies increases the demand for innovation, and subsequently, health care spending. As a result, third-party, private payers are beginning to incorporate costs-through mechanisms such as cost-effectiveness analysis-into the decision-making framework for covering medical technologies.⁶ The Centers for Medicare and Medicaid Services (CMS), however, does not consider costs, or use cost-effectiveness analysis, in its decision framework for determining which technologies will be covered. Instead, CMS bases its coverage determinations on the proven clinical effectiveness of technologies, as well as their "medical necessity."

Cost-effectiveness analysis is an economic principle used to efficiently allocate a limited number of resources across a discrete number of parties or programs when the real price of the good is unknown. Cost-effectiveness weighs the marginal cost of a service with the determined benefit, typically measured by quality adjusted life years (QALY). Cost-effectiveness is an appropriate tool for analyzing health care goods because consumers are unaware of the real price of the services they receive.⁷ While true cost-effectiveness allocates resources across various programs, in practice, cost-effectiveness ratios are ranked against an arbitrarily determined threshold.⁸ Values below the threshold are deemed cost-effective and are subsequently funded, and ratios above the threshold are considered cost-ineffective and are not funded.

Ethical, methodological concerns hinder adoption of cost-effectiveness by public payers

U.S. policymakers have not adopted cost-effectiveness analysis due in part to political resistance and ethical concerns. Americans are averse to rationing, resent coverage and treatment decisions that are based on costs and not need, and fear that cost-effectiveness may limit access to technological advancements.⁹ HCFO-sponsored research led by Louis F. Rossiter, Ph.D., at the College of William and Mary found that barriers such as blockbuster drug competition and regulatory hurdles for pharmacogenomics products-genetically targeted drug therapies that potentially reduce the length of time that patients are on medication and the number of medications required by patients-may undercut the cost-effectiveness of pharmacogenomics products and their widespread adoption by public and private payers. ^10,11 Moreover, third-party payers fear litigation, and some physicians believe that cost-effectiveness analyses erode the physician-patient relationship, as basing treatment decisions on cost may prevent physicians from serving as the patient's advocate.^{12, 13}

Concerns also exist regarding the methodology for determining cost-effectiveness ratios and the applicability of the ratios across the entire population. QALYs are often based upon clinical results data determined by various models that can produce biases-due to a number of assumptions-that may dramatically alter the ratio.¹⁴ In addition, cost-effectiveness analysis does not incorporate the public's preferences for resource allocation. The public may believe that certain populations, such as the critically ill or pediatric population, receive treatment regardless of whether the treatment is cost-effective.¹⁵

Coverage decisions often based on effectiveness, not cost

While cost-effectiveness research has been used by countries such as the United Kingdom and Australia in making coverage determinations, it has not been used by the U.S. government. Rather than using cost as the basis for coverage decisions, CMS and other health care payers base decisions on the effectiveness of technology. Peter Neumann, Sc.D., and colleagues at Harvard School of Public Health conducted HCFO-sponsored research examining Medicare coverage decisions and whether these decisions are synonymous with societal cost-effectiveness evidence. They found that coverage decisions were based on available clinical evidence, the quality of which is often fair or poor.

While many private health plans do consider cost when determining which medical technologies to cover, effectiveness remains the main determining factor in coverage decisions. A 2001 survey of medical directors representing 228 health plans found that 93 percent of all the health plans and 98 percent of the large health plans covered medical services that were more effective, regardless of cost.¹⁶ Only 40 percent of the medical directors used cost-effectiveness analysis, but many agreed that cost-effectiveness should be incorporated into the decision-making process, in addition to effectiveness considerations.¹⁷

Policymakers are exploring comparative effectiveness as means for reducing waste

As health care costs continue to rise, with little evidence of improved health outcomes, researchers, policymakers, and payers alike are exploring ways to implement medical technology assessments that improve allocation of resources to more effective medical treatments. Policymakers are exploring comparative effectiveness-which compares the efficacy of one technology to that of another-as a strategy for eliminating the use of ineffective medical care, reducing waste, and potentially increasing the value of health spending.¹⁸ Section 1013 of the Medicare Modernization Act of 2003 authorized up to $50 million to the Agency for Healthcare Research and Quality (AHRQ) to prioritize and conduct research examining the clinical effectiveness of determined medical technologies.¹⁹ To date, only $15 million in fiscal years 2004 to 2007 have been appropriated to AHRQ's comparative effectiveness research.

In addition, in May 2007, Congressman Tom Allen (D., Maine) and Congresswoman Jo Ann Emerson (R., Missouri) introduced H.R. 2184, the "Enhanced Health Care Value for All Act," which would allocate $3 billion dollars over five years to comparative effectiveness research. Moreover, in August 2007, the House of Representatives passed H.R. 3162, "Children's Health and Medicare Protection Act (CHAMP)," which would provide more than $300 million to comparative clinical effectiveness over the next three years. While the Senate has not yet taken up corresponding legislation, the bills indicate policymakers' awareness of the need to improve the value of health care and reign in health spending.

Conclusion

Comparative effectiveness and cost-effectiveness may not generate cost savings. If a prevalent, cost-effective technology or service is used by a large number of people, the financial impact may be greater than a less cost-effective technology.²⁰ These strategies, however, may assist policymakers with redirecting resources from less effective to more effective medical technologies, which may improve value and control health care spending.²¹

The following selected grants from HCFO's portfolio may help inform policymakers who are working to use medical technology assessments to increase value of the health spending. For other cost-related grants see www.hcfo.net.

Title: The Emerging Market for Pharmacogenomics and Health Care Competition
Institution: College of William and Mary
Principal Investigator: Louis F. Rossiter, Ph.D.
Grant Period: February 2004 - April 2005

How does pharmacogenomics (PGx) fit or fail to fit within the current systems of financing and organization of health care? The researcher (1) gathered information and summarize the PGx products and services available now or in the near term; (2) conducted open-ended interviews of key informants regarding the way suppliers are bringing these products to market; and (3) studied the implications for financing and the organization of the delivery system, including reimbursement rules, for at least three current health care products and services that are being affected or replaced by PGx in the near future. The objective of this study was to suggest ways in which current payment methods could be changed to accommodate PGx and how a larger study could use patient-level claims data to design changes or a new system to recognize PGx.

Title: Cost Effectiveness, Quality and the Future of Medical Technology Assessment
Institution: Harvard School of Public Health
Principal Investigator: Peter Neumann
Grant Period: July 2002 - June 2004

How does Medicare assess and make coverage decisions for new medical technologies? First, the researchers will conduct an in-depth descriptive and multi-variate explanatory analysis of 100 CMS coverage decisions over the past 12 years. They then will compare Medicare's processes and decisions with those of other health technology assessment (HTA) organizations. Specifically, the researchers will examine 6 key questions: 1) What technologies has Medicare formally assessed in the past decade? 2) What are the key determinants of Medicare coverage decisions? 3) Have coverage decisions been consistent with evidence of societal cost-effectiveness? 4) Have the same technologies been assessed by other HTA organizations? 5) What "best practices" for technology assessment surface from an investigation of key technology assessment organizations in the U.S. and abroad? and, 6) What role can cost-effectiveness play in future assessments in the U.S. (given data limitations, multiple societal objectives, and likely political opposition)? The objective of the study is to inform decision makers about HTA processes and to reveal "best practices" about technology assessment as they consider whether to cover new medical technologies.

Title: Evaluation of Medicare's Local Medical Review Policies for New Medical Technologies
Institution: University of Minnesota
Principal Investigator: Susan Bartlett Foote, J.D.
Grant Period: May 2001 - December 2003

How does variation in coverage decisions affect access to new technologies and equity for beneficiaries in the Medicare program? Are Medicare's Local Medical Review Policies (LMRPs) in need of reform? LMRPs are one of two ways that HCFA evaluates new technologies and procedures in order to make coverage determinations. According to the researchers, a small number of technologies are reviewed through HCFA's national process, where decisions are made uniformly across the country. However, the majority of such coverage decisions are made by local carriers and intermediaries under contract to HCFA, with the LMRPs binding only in the local jurisdiction. The researchers evaluated variations in LMRPs by analyzing: 1) the players - who participates in and influence decisions; 2) the process - how decision-making procedures differ; 3) the evidence - how evidence of value is solicited and measured; and 4) the outcomes - measuring and mapping timing and content patterns. The objective of the study was to provide policymakers considering the virtues of a more uniform national coverage policy, relative to a more flexible local policy, with better information about the extent of LMRP variation, the sources of variation, and the implications for flexible decision making, beneficiary access, and Medicare equity.

1 "Covering Health Issues 2006-2007," Alliance for Health Reform, 2007. Also see www.allhealth.org/sourcebookcontent.asp?CHID=17
2 Government Accountability Office, Health Care Spending, Pubic Payers Face Burden of Entitlement Program Growth, While All Payers Face Rising Prices and Increasing Use of Services, Testimony of A. Bruce Steinwald, Director, Health Care before the Subcommittee on Military Construction, Veterans Affairs, and Related Agencies, Committee on Appropriations, House of Representatives, GAO-07-497T, February 15, 2007. Also see www.gao.gov/new.items/d07497t.pdf
3 "Rising Health Care Costs Pose Challenge, CBO Reports Says," Kaiser Daily Health Policy Report. Kaiser Family Foundation, August 24, 2007. Also see www.kaisernetwork.org/daily_reports/rep_index.cfm?DR_ID=47104
4 Wilensky, G. "Developing a Center for Comparative Effectiveness Information," Health Affairs, November 7, 2006: w572-85.
5 "Covering Health Issues 2006-2007," Alliance for Health Reform, 2007. Also see www.allhealth.org/sourcebookcontent.asp?CHID=17
6 Neumann, P. "Getting Better Value for Our Health Spending," Expert Voices, National Institute for Health Care Management, July 2007.
7 Detsky, A. and A. Laupacis. "Relevance of Cost-Effectiveness Analysis to Clinicians and Policy Makers," Journal of the American Medical Association (JAMA ), Vol. 298, No. 2, July, 11, 2007, pp: 221-224.
8 ibid.
9 Neumann, P. "Why Don't Americans Use Cost-Effectiveness Analysis," The American Journal of Managed Care, Vol. 10, No. 5, May 2004, pp: 308-312.
10 Grimaldi, B. "Pharmocogenomics: an Assessment of Market Conditions and Competition," Changes in Health Care Financing and Organization Findings Brief, AcademyHealth, March 2007. Also see http://www.hcfo.org/publications/pharmacogenomics-assessment-market-conditions-and-competition-0
11 Baker, T. "The 5 Stages of Biotechnology Management," Biotechnology Healthcare Journal, Vol. 2, No. 1, February 2005, pp: 45-50.
12 Neumann, P. "Why Don't Americans Use Cost-Effectiveness Analysis," The American Journal of Managed Care, Vol. 10, No. 5, May 2004, pp: 308-312.
13 Ubel, P.A. 2000. Pricing Life: What It's Time for Health Care Rationing. Cambridge, Mass: MIT Press.
14 Detsky, A. and A. Laupacis. "Relevance of Cost-Effectiveness Analysis to Clinicians and Policy Makers," JAMA, Vol. 298, No. 2, July, 11, 2007, pp: 221-224.
15 Neumann, P. "Why Don't Americans Use Cost-Effectiveness Analysis," The American Journal of Managed Care, Vol. 10, No. 5, May 2004, pp: 308-312.
16 Garber, A. "Cost-Effectiveness and Evidence Evaluation as Criteria for Coverage Policy," Health Affairs, May 19, 2004, w4: 284-296.
17 ibid.
18 Neumann, P. "Getting Better Value for Our Health Spending," Expert Voices, National Institute for Health Care Management, July 2007.
19 Wilensky, G. "Developing a Center for Comparative Effectiveness Information," Health Affairs, November 7, 2006: w572-85.
20 Detsky, A. and A. Laupacis. "Relevance of Cost-Effectiveness Analysis to Clinicians and Policy Makers," JAMA, Vol. 298, No. 2, July, 11, 2007, pp: 221-224.
21 Neumann, P. "Getting Better Value for Our Health Spending," Expert Voices, National Institute for Health Care Management, July 2007.