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Value Of Innovation

The Price Of Progress: Prescription Drugs In The Health Care Market

Abstract

 
Pharmacy costs are rising in excess of general and medical cost inflation, leading to calls for price and utilization controls by public and private payers. Such controls would be ineffective and counterproductive because they would attempt to reverse two profound, historic phenomena at work in the U. S. health care system. The added costs associated with breakthrough medicines represent a major structural shift from the provision of traditional medical services to the consumption of medical products; they also represent the creation of economic, social, and public health utility that we value as a society. The balkanization of medical delivery, institutionalized under traditional reimbursement strategies and galvanized by federal law, does not adequately account for or efficiently accommodate this rotation and increased utility. Federal and state laws regulating health insurance and provider risk sharing need to be revamped to encourage rather than constrain the social progress embodied in expensive, breakthrough medical technologies.

Despite the managed care industry’s often conflicting signals and cost containment strategies with regard to new medicines, Americans today have access to more and better drugs. The number of prescriptions filled in the United States increased from 2.0 billion in 1994 to 2.5 billion in 1998 and was projected to reach 2.9 billion in 2000; more than 35 percent of the $100 billion spent on prescription drugs in 1998 went for drugs introduced since 1991.³

Now, the bad news: This medical progress is expensive. In numerous therapeutic areas, better medicines increase costs, at least in the short run; in other areas, better medicines that reduce costs in the short run add costs in the long run. Burton Weisbrod and Craig LaMay summarize this overarching impact of innovation in their observation that "the use of antibiotics to prevent deaths from infections can cause people to live longer and hence to die from heart disease and cancer, which typically entail even greater costs."⁴ By contrast—and in sharp conflict with many of the presumptions of managed care—bad fmedicine is cheap, and bad public health even cheaper. A pointed example is the economics of smoking: Although a smoker consumes more medical costs than a nonsmoker with equivalent demographics in a given year, after fifteen years the nonsmoker will have consumed more total health care costs because of increased longevity.⁵ If we want to solve Medicare’s longest-term economic problems, we would aggressively promote smoking by the elderly. This economic paradox of population health economics is so steeped in common sense that we have fully overlooked it, distracted by public health idealism and a generation of managed care marketing that has convinced us that quality and cost are not inversely related.

As a society, we value the good news associated with our medical progress, and we are clearly willing to pay for it. This willingness—and the aggregate improvements in mortality and morbidity we gain for our added drug expenditures—is quantified in Frank Lichtenberg’s study of drug costs in this volume of Health Affairs.⁶ Weisbrod and LaMay’s analysis of the march of technology-driven medical progress quantifies our movement toward evermore expensive interventions. They found that in the group of diagnosis-related groups (DRGs) established under prospective payment in the mid-1980s, low-price groups outnumbered high-price groups thirteen to one. "For the subsequently added categories reflecting new technological developments," they wrote, "the ratio was exactly reversed...For example, liver transplantation, one of the new DRGs, has a price some fifteen times the base."⁷ The medical progress embodied in liver transplantation—made possible less by breakthroughs in surgical technique than by the development of immune system–modulating drugs—is costly, increases life expectancy for tens of thousands of patients with liver disease, and has a multiplier effect on long-term medical costs for society.

Such technology-driven breakthroughs are the engines of spending growth aggregated in Victor Fuchs’s 1999 analysis of Medicare spending trends. Fuchs found inflation-adjusted increases in Medicare spending per beneficiary of 4–5 percent per year, versus real gross domestic product (GDP) growth of 1.2 percent during the same time period.⁸ He attributed these increases to new medical technologies; acknowledging the positive impact they have on life expectancy and health status for the elderly, his solution is to shift much of the expense growth related to these technologies directly to their recipients through higher cost sharing. Fuchs’s proposal echoes a growing desperation in public and private health care purchasing circles for solutions to this "problem" of our medical progress. As David Mechanic observes, we have entered "a new era in which it is more difficult to balance the possibilities of medicine and public expectations against the willingness to finance them."⁹

Before we can find such a balance—and consequently determine who should pay—we need to deconstruct what are, in clinical reality, highly aggregated, medically heterogeneous, technology-driven spending increases. Measuring and allocating the economic impacts of medical progress is complicated; the task runs headlong into every major health policy debate. It would be much easier if, as opposing parties to the managed care debate seem to believe, higher drug costs uniformly increased or decreased total costs. Unfortunately, a simple binary answer does not exist. It is precluded by the wide variety of disease states, complexities of population medicine, and numerous economic conflicts enshrined in our current health insurance funding mechanisms. A simple answer is further precluded by the U.S. health care system’s use of profit-seeking organizations in opposing corners of the marketplace: Drug companies are rewarded for inducing demand for drugs, regardless of long-term economic value; insurers are rewarded for constraining that same demand, regardless of long-term economic effect. The use of "managed care" strategies to undo the resulting gridlock adds still more complexity and confusion to the marketplace’s allocation decisions, as the investment horizons of commercial managed care companies diverge, often widely, from society’s investment horizons.

While many breakthrough therapies do reduce medical costs over the long run, a large subset do not pay off quickly enough for health insurers with quarterly financial targets. Public policy proposals like that of Fuchs—and corporate policy actions involving changes to health benefit designs—all seek to create a uniform response to a not-uniform problem. Debate over our specific choices seems always to devolve back to a list of competing alternatives: restrict patient access; shift costs to the recipients of progress; shift risk to providers; or share through higher premiums the cost increases. Each of these strategies is valid, appropriate, and potentially coexistent—but only when applied with a clinical and economic sophistication eluding those on a quest for a uniform policy solution, health benefit design fix, or new reimbursement "paradigm."

This paper has four objectives: (1) to debunk popular mythology surrounding the negative impact of increasing pharmacy costs on overall medical costs; (2) to deconstruct the jumble of economic effects associated with new medicines; (3) to illustrate why insurers tend to interpret these effects negatively and thus perpetuate the popular mythology; and (4) to suggest broad insurance reforms that would ameliorate much of this potentially dangerous perpetuation while accommodating our great medical progress.

Health Care’s ‘New Economy’

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In the aggregate and in the short term, "expensive" new drug technologies are a bargain for society. Increased spending on drugs that specifically manage disease, preclude or delay surgeries, or reduce hospital admissions and lengths-of-stay pay for themselves many times over. Added pharmacy costs that offset other medical costs represent the economics of progress. They reflect a profound, permanent movement in our health care system away from medical labor and toward medical technology—a belated catching-up of health care with the rest of the "new economy." The added costs associated with breakthrough drugs represent a major structural shift from the provision of traditional medical services to the consumption of medical products, a systemic rotation from labor to capital. About three-quarters of all visits to a physician end with a drug prescription, a number that has not changed over time.¹⁰ What has changed is the clinical effectiveness of those drugs.

The clearest result of this rotation is a decade-long reduction in hospital admissions and lengths-of-stay.¹¹ With regard to use of physician-services, the data are mixed, pointing to the equal validity of diametrically opposed arguments about the impact of new drugs on those services: Many argue that newer and better drugs drive more people to more doctors for more prescriptions; others argue that newer and better drugs keep patients—especially those with chronic disease—medically stable and less reliant on physician monitoring and palliative care. The empirical effects of these countervailing arguments probably cancel each other out; this would explain why the physician expense component of the total U.S. health care economy remains constant, while the drug component rises and the hospital component falls.¹²

A crystalline illustration of this rotation arises, in compressed form, through an examination of the treatment of AIDS and human immunodeficiency virus (HIV) infection over the past decade. The Department of Veterans Affairs (VA) reports a 434 percent aggregate rise in the costs of HIV/AIDS treatment between 1992 and 1998, with drug costs for antiretroviral therapy increasing 546 percent. In 1992 drugs accounted for approximately half of overall HIV-associated costs, but by 1998 they represented 78 percent of costs.¹³ How these aggregate economics work at the level of the individual patient is borne out in a study of AIDS patients in the Florida Medicaid program. In the late 1990s a subset of the program’s AIDS patients was managed through a special waiver program. More aggressive drug therapies for waiver participants resulted in higher drug costs: $971 versus $411 for nonparticipants. Nonetheless, overall medical spending for waiver participants was much lower: $2,005 versus $2,848 for nonparticipants. As the study’s researchers note, "Although waiver enrollees had higher drug spending, these represent only a fraction of the higher inpatient costs incurred by nonwaiver enrollees."¹⁴ A separate study of the same economic phenomenon found that "for each 10 [percent] increase in protease inhibitor use, per-member per-month oral medication costs increased $86, whereas overall healthcare costs decreased $135."¹⁵

This same economic rotation has occurred in nearly as compressed a form in the treatment of psychiatric illness. Breakthroughs in antidepressants and antipsychotics—often cited as a major contributor to overall medical cost inflation—have greatly affected inpatient psychiatric admissions and lengths-of-stay. According to a study by Lichtenberg, "Drug treatments have saved the cost of keeping about 400,000 patients in mental institutions about $25 billion annually."¹⁶ These economic improvements are confirmed in the inverse: Several studies have shown that when patients’ access to psychotropic drugs is arbitrarily restricted by insurers, patients use hospital care at a cost to those insurers that greatly exceeds the drug cost savings they foolishly attained.¹⁷

What is the overall economic effect of this rotation and the medical progress it represents? High-price new drugs may be the cheapest weapon we have in our ongoing struggle against rising overall medical expenses; unfortunately, we do not have sufficient data to prove this. Ambitious health services and medical economic researchers take note: Aside from the Lichtenberg study in this volume of Health Affairs, which found positive aggregate economic returns associated with the rotation of patients toward newer, more expensive drugs, there is no aggregate study that examines, for all drug classes across a population, the correlation between changes in drug use and costs and other medical services use and costs. I am aware of only three studies that explore the relationship between use of drugs and other services across large populations. All three are associative; two focus on narrow clinical areas; and two use proxies (formulary status and reimbursement) as markers for drug utilization. Most remarkably, all three studies prove the drug utilization management hypothesis in reverse: The more a third-party payer limits patients’ access to drugs, the higher its total health care costs are in excess of drug-cost savings.

Stephen Soumerai and Helene Lipton found that a Medicaid program’s restriction of reimbursement to three drugs "increased the rates of institutionalization in nursing homes, emergency mental health visits, and full-day or half-day hospitalizations in community mental health centers—all at costs far in excess of the drug savings."¹⁸ Susan Horn found that the more restrictive a drug formulary, the greater the total health care costs for five major, drug-intensive diseases, in excess of the cost savings associated with the formulary’s restrictiveness.¹⁹ Lichtenberg found in an earlier study that hospital admissions, length-of-stay, and surgical procedures declined most rapidly for those diagnoses with the greatest increase in the total number of drugs prescribed and the greatest change in the distribution of drugs, by molecule.²⁰

The best way to analyze this rotation from medical services to pharmaceutical technology may be to look at broader changes in the mix of medical spending. Tufts University researchers found that during the 1990s prescription drug costs increased from a 5.5 percent share of total health care spending to 8.5 percent, while hospital expenses decreased from 37 to 33 percent. As stated earlier, physician costs held constant over the same time period.²¹ This was confirmed by Donald Moran in his survey of managed care executives: "While hospital and physician care spending trends remain in the 2–5 percent range," he reported, "pharmacy costs are rising rapidly."²² (A 2–5 percent increase represents a decrease or constancy in real terms.) The health insurance lobby claims an overall drug spending increase of 19 percent in 2000.²³ The Tufts research and Moran survey both corroborate other reports by health insurers and self-insured employers of 15–20 percent annual increases in pharmacy costs.²⁴

These pharmacy cost increases are something of a public relations convenience for the nation’s health insurers. The belief that these drug cost increases are driving comparable health insurance premium increases is reported at face value by the business media.²⁵ But even a 20 percent annual increase in a care component that represents only 8.5 percent of all spending does not explain premium increases of the same magnitude. Let us assume that because of their generous benefit plan design, the typical health maintenance organization (HMO) has reached the point at which 10 percent of its medical-loss ratio (MLR) is spent on drugs. Even a whopping 20 percent increase in an HMO’s pharmacy line item from this baseline figure—five points more than what most HMOs are reporting—takes the HMO’s pharmacy costs from ten points to twelve points of its MLR. These additional two points do not foot with employers’ reports of average annual premium increases of 9 percent in 1999 and 10–15 percent 2000.²⁶ More importantly, this analysis does not assume any improvement elsewhere in the MLR for associated reductions in hospital costs.

This is not meant to trivialize the fact that drug costs are indeed increasing; it is intended only to modulate the noise created about those costs by insurers and employers. Higher premiums, supported by insurer price "signaling" throughout the business media, have served to restore health insurance profit margins. Premiums have been increasing far out of proportion to increases in total medical costs over the past three years because health insurers have crawled out of the trough of the classic health insurance underwriting cycle, which hit its low in the 1994–1996 period, when all health insurers were engaged in a pricing war that everybody lost.²⁷ Pharmacy component cost increases over the same period have been scapegoated for the totality of the premium inflation problem for three reasons: the high visibility of drug prices; a failure of the system to adapt to the economic rotation described earlier; and a lack of data quantifying the relative value increases (or lack thereof) at play within this rotation by respective therapeutic area.

Few in health care purchasing circles will admit the real truth: Rising drug costs are, in general, part of the solution, not part of the problem. Unfortunately, acknowledging and accepting this bottom line is problematic, thanks to the complex clinical heterogeneity at its heart. The overall price we pay for our medical progress is the sum total of numerous conflicting economic impacts, by therapeutic area—impacts that I break down and explore below.

The State Of The Artlessness

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Health insurers tend to scapegoat increasing drug costs for the totality of their premium increases because of their own conflicted economic motives. With 20 percent annual enrollment turnover and quarterly financial targets, investments in the long-term health status of their covered lives via more aggressive pharmaceutical care does not make business sense—especially in the absence of data regarding those investments. Absent such data and subconsciously aware of this conflict (if not consciously aware, at least among their accounting versus medical management ranks), insurers attempt to manage drug costs using crude and usually ineffective traditional utilization review methods and benefit plan design manipulations.

For the insurer, these penny-wise methods may or may not be pound-foolish in general, depending on clinical sphere. For society, these methods have the same productive versus perverse economic effects, measured along a vastly different time scale; this puts the point where the economic effect reverses itself off into a very different clinical sphere. What few data we have show that these methods, for selected clinical spheres, are extremely pound-foolish. Soumerai’s study of a Medicaid program’s movement to a three-drug maximum found large reductions in the use of critical drugs: "Large drops were observed for ‘essential’ medications, such as insulin (28 percent), thiazides (28 percent), and furosemide (30 percent)."²⁸ These specific reductions increased net medical costs in the short run, while putting vulnerable patients at high medical risk.

When clumsy efforts like arbitrary drug "caps" do not work, purchasers use other methods to shift "excessive" drug costs to patients, with insufficient thoughtfulness on the means or effects of doing so. They increase copayments across the board or based on pricing deals they strike with drug companies, independent of the highly variable clinical and economic value embodied in different classes of drugs. The effects of drug cost shifting on those with the most medical need are borne out in a study by Bruce Stuart and Christopher Zacker. They found that

the predicted impact of Medicaid copays is to reduce annual drug use by 15.5 percent...Medicaid recipients in very good or excellent health reported virtually identical utilization rates (twelve per year) across the two sets of states...Drug use among both groups increases markedly as health status deteriorates, but the rate of increase is much lower in copay states. Persons in fair health who reside in copay states reported nearly 40 percent fewer prescriptions than did their counterparts in noncopay states. For persons in poor health, the difference is 27 percent.²⁹

As health care purchasers and payers seek to constrain spending on new drugs, they should do so with a selectivity based on clinical and economic value—a sophistication that stands in stark contrast to the price-driven "tiering" of coverage and copayment most use today.³⁰ Absent this selectivity, insurers are missing those rare opportunities to save money while improving quality. Their compulsion to save money at the expense of quality is confirmed in their current approach to drug utilization review (DUR). Most DUR systems, according to a separate study by Soumerai and Lipton, "focus on errors of commission, without examining problems of underuse; they also emphasize savings in the short-term (e.g., reductions in doses or refills of costly medications) rather than longer-term efforts to achieve system-wide savings (e.g., reduced rates of hospitalization due to increased compliance with antihypertensive regimens)."³¹

The clinical crudeness of most DUR methods flies in the face of managed care’s own rhetoric about "disease management." As I explored at length in these pages last year, health plans are the unwitting victims of their own success: Increasing use of drugs for chronic diseases is the fulfillment of managed care’s marketing messages about improving quality. A study by Robert Dubois and colleagues confirmed that increasing utilization, not increasing prices, was driving pharmacy cost inflation for managed care plans.³² Based on these data, we can draw but one conclusion: Drug utilization is increasing within managed care populations despite the use of DUR. Here we stumble upon the essential conflict at the heart of managed care: DUR as currently practiced and disease management as mostly theorized work at cross purposes. This gridlock may explain why the real if unspoken driver of premium increases— administrative costs—continues to rise. As an insurer simultaneously attempts to manage disease and drug costs, it is revving the gas pedal while jamming ever harder on the brakes.

A different approach by insurers to manage the economics of medical progress embodied in higher pharmacy costs has also failed. In the middle and late 1990s insurers tried to shift risk for drug costs to physician groups. This worked in theory but fell apart in practice. Why? Because this shifting of pharmacy risk—along with risk for all physician services—did not carry the full economic value of the broader systemic rotation embodied in higher relative drug spending. Physician organizations bore all of the financial downside of increasing drug costs, but few were integrated sufficiently with hospital organizations to pick up the financial upside. The results are hardly surprising. According to a study of pharmacy risk transfer by pharmaceutical manufacturer Aventis, "Drug cost growth under capitation initially was below that of other systems but still above targeted rates. Over time the capitation rates rose, the amount of risk transferred to physicians declined, and spending growth accelerated."³³ Drug and physician service risk transfers were especially popular in California, which helps to explain why so many physician organizations there went bankrupt in the late 1990s.

Pharmacy risk transfer failed for many of the same reasons that capitation has failed: the chronic disintegration of medical services management under contracts that necessitate meaningful integration. According to Lipton and colleagues, "In contrast to other types of...risk-sharing arrangements, HMOs may transfer risk for drug costs to physician groups without relinquishing control of core pharmacy functions, such as formulary decisions. While HMOs might retain some core pharmacy functions to achieve ‘seamless’ care across physician organizations, avoid fragmentation at the HMO level, and ease administration for employers, we hypothesize that an opposite outcome—greater fragmentation of patient care at the physician group level—may compromise quality."³⁴ Often desperate attempts to shift the financial burdens associated with medical risk, while not accommodating their broader financial benefits, are symptomatic of an antiquated health insurance system and have inspired uncounted health care business failures. These attempts represent the micromanagement of a broken system, a spastic rearrangement of the exam room furniture in the Titanic’s medical clinic.

From this, we can draw one sad conclusion: Our current health insurance system—including Medicare, which was built to mirror that system—is hopelessly out of step with the inevitable rotation of medical care delivery from services to technology. The absence of a Medicare outpatient prescription drug benefit is the most glaring illustration of this problem. If we have a problem with the increasing pharmacy costs associated with our medical progress, it is because public and private insurers have exposed us most where they should have least. These insurers have simply failed to keep pace with medicine’s technology-driven good news. Slapping prescription coverage onto the current Medicare program (that is, adding a dreaded "Part C" to what long ago should have been a unified Parts A and B) will perpetuate all of the problems associated with the current balkanization of care financing and delivery.

Before suggesting reforms to public and private insurance systems that clearly chafe against what should be a natural and desirable systemic rotation, we need to deconstruct its specific components. In the next section I illustrate how the changing mix of drug costs and other medical expenses affects payers with the maddening task of rationalizing and managing aggregate health care spending.

The Six Faces Of Pharmacy Economics

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The only way to solve a complex problem is to break it down into its component parts. This would be particularly useful in its own right, given the current confusion and lack of good data regarding the economics of pharmaceutical progress. There are several value propositions for pharmaceutical care, many of which stand in stark contrast to each other. Taken together, they reflect the clinical heterogeneity of the progress we have made in medicine.

The fast-pays. Several "expensive" new drugs lower short-term health care costs. These drugs are a bargain for payers and society, compared with the cost of the services and chronic diseases that they delay, manage, or prevent. A good example is anticoagulant therapy for stroke: The lifetime costs for a severe stroke average $100,000, while anticoagulant therapy costs just $1,095 a year.³⁵ The expensive new class of "atypical" antipsychotic medications have the same effect, again proven in the inverse. Soumerai found that "limits on [drug] coverage...resulted in immediate 15–49 percent reductions in the use of antipsychotic drugs, antidepressants and lithium, and anxiolytic and hypnotic drugs. It also resulted in coincident (43–57 percent) increases of 1 to 2 visits per patient per month to community mental health centers, sharp increases in the use of emergency mental health services and partial hospitalization. The estimated average increase in mental health care costs per patient [under the limits] exceeded the savings in drug costs by a factor of 17."³⁶ The new AIDS drugs also fall into the "fast-pay" class, at least from the payers’ perspective, even if they ultimately increase longest-term costs for society.

The slow-pays. Some "expensive" new drugs decrease medical costs but only after several years. The clearest example of these "slow-pay" drugs is the new class of selective estrogen receptor modulators (SERMs), such as Evista (raloxifene). Although there are many conflicting data, the theory (and a few preliminary studies) of SERMs argues that they increase bone-mass density, reduce osteoporosis, and prevent costly hip fractures in the elderly—but only when taken years before any symptom onset. These drugs also may protect women against heart disease, but the economic effects of this clinical benefit are also many years down the road. Numerous types of heart disease drugs also fall into the "slow-pay" class. Many of these drugs are the core tools of disease management programs; as described earlier, they generally increase rather than decrease costs in the short run. The clearest example of this foil to the conventional wisdom is diabetes, a poster child of the disease management movement. One HMO study found that diabetics in a highly managed system used "recommended care services—glucose tests, eye exams—at a higher rate (substantially higher) than other parts of the country, one of the reasons costs are higher."³⁷ With payback periods occurring years after therapeutic initiation, "slow-pay" drugs are not (or should not be) popular with insurers focused on quarterly or annual financial targets. This may explain why these drugs—especially the SERMs and antihypertensive drugs—are the subject of widespread direct-to-consumer (DTC) advertising.

The narrow-pays. Some "expensive" new drugs decrease overall medical care costs for only a narrow clinical subpopulation and thus do not offset their aggregate medical costs. These drugs tend to address clinical problems that are imprecise, difficult to diagnose, or highly prevalent with a broad range of symptom severity. Many are subject to an economic paradox described by Weisbrod and LaMay: "Since total health care expenditures depend on both expenditures per case and the number of cases treated, a new technology may decrease costs per case but increase costs in the aggregate."³⁸ Examples of clinical conditions treated by "narrow-pay" drugs are congestive heart failure, obesity, depression, and diabetes; each of these involves a wide range of clinical indication, from mild symptoms that affect only quality of life to severe symptoms that result in hospitalization, major disability, and death. Cholesterol management provides a good illustration of the economic problem here. Lichtenberg found that "hospital costs were $8million lower among the 2221 volunteers who got the drug [cholesterol-lowering simvastatin], but the medicine itself cost $11 million."³⁹ Contrary to much managed care rhetoric but consistent with its reimbursement practices, most vaccines sit squarely in the "narrow-pay" class; immunizations have to be administered to large populations to prevent scant disease incidence and costs.⁴⁰

The diffuse-pays. Some "expensive" new drugs increase medical costs but decrease non medical costs. Vaccines for common problems such as the flu fall into this class, which explains why employers often pay for and administer them directly, rather than relying on insurers that have minimal economic interest in their effectiveness. Other drugs in this class, such as nonsedating allergy medications, treat medically inexpensive but productivity-reducing conditions. Similarly, the expanding use of selective serotonin reuptake inhibitors (SSRIs) for mild depression, obsessive-compulsive disorder, and social phobia—the source of much fury by health insurers— have clear economic value for employers. These diffused economic impacts are quantified in Lichtenberg’s study in this volume of Health Affairs, which found positive associations between increases in drug spending and reductions in missed work days. Unfortunately, few employers have the technical means or intellectual bandwidth to relate pharmacy cost data to their employee productivity data; they also have numerous legal disincentives not to do so. This orphaning of their economics explains why, as a group, these drugs also receive ample DTC advertising.

The pay-me-laters. Some "expensive" new drugs lower short-term health care costs but increase long-term costs. These drugs embody the economics of smoking in reverse: They improve health status, short-term costs, and life expectancy, while guaranteeing higher costs over the long run. The most notable drugs in this class are several new biotechnology products, in particular Pulmozyme (dornase alfa, recombinant), for the treatment of cystic fibrosis, and Avonex (interferon beta-la), for multiple sclerosis. In the absence of such breakthrough drugs, these horribly disabling diseases entail high rates of hospitalization and palliative drug care. Despite the short-term advantages of AIDS drugs, they too ultimately may fall into this category.

The no-pays. Several new drugs do not save anybody money; they merely improve people’s lives. Many have derided these drugs as "recrea-ceuticals," even when, in the case of a drug like Viagra (sildenafil citrate), they treat conditions that directly affect a critical component of the human experience. Other drugs in the "no-pay" class treat mild obesity, severe acne, toenail fungus, or overactive bladder. Also included in this class are expanded indications for SSRIs, including one for "premenstrual dysphoric disorder," or the medicalization of severe premenstrual syndrome (PMS).

Toward A Belated Artfulness

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The complex business of assigning drugs to economic classes should fall to the nation’s insurers, and their reimbursement strategies should follow suit. Through a combination of ruthless honesty and hard data, insurers can and should determine their investment returns on specific drugs and manage drug benefits accordingly. The implementation of thoughtful, value-based payment for "expensive" drugs constitutes the quintessence of truly "managing care." If insurers have difficulty identifying drugs’ economic classes, they should look to the DTC advertising they find so infuriating: slow-pays, diffuse-pays, and no-pays get the most DTC treatment; marketing mixes for the fast-pays and narrow-pays still lean toward physician detailing, journal advertising, and managed care marketing.

How should health insurers pursue this difficult set of allocations? Obviously, they should embrace and promote the fast-pays. Because economic returns on the slow- and diffuse-pays accrue to employers while raising costs for fully insured plans, insurers should acknowledge this value transfer with their employer-customers and design drug benefit packages accordingly. The more problematic classes are the pay-me-laters and narrow-pays; insurers need to adopt sophisticated analysis and disease management techniques to optimize the economic effectiveness of drugs in these classes.

The best tool for making these determinations already exists: cost-effectiveness analysis (CEA). To date, insurers have failed miserably at using CEA, a methodology that combines cost and quality data into a simple ratio that allows for drug-to-drug comparisons of value. Researchers of all stripes have noted that few insurers use any sort of CEA in their drug coverage decisions.⁴¹ According to Marc Berger, CEA has not been mobilized by the health plans because of a "short-term parochial financial perspective, while CEA takes a long-term view which captures all costs, benefits, and hazards regardless of to whom they accrue."⁴² This perspective can be modified through regulatory reforms that discourage health plan disenrollment, moving the line of demarcation between fast-pays and slow-pays outward and thus encouraging insurers to embrace more slow-pays.

Until insurers adopt the analytic sophistication of CEA for all drugs, they will continue to do what Mechanic calls "implicit rationing" of medical resources in arbitrary and often counterproductive ways. Mechanic notes that "fairness requires that rationing take place in an informed context and not by stealth...The consequences of implicit rationing processes should be as open as possible, should be reviewed routinely by medical peers and through outside audit, and should be an important topic for discussion within health care institutions."⁴³ The use of CEA to determine this line of economic demarcation will accomplish a belated and important goal: bringing transparency to managed care pharmacy decisions.

Who Pays The Price Of Progress?

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We all pay the price of progress, ultimately, through often indirect and tortuous means. If so, then the best way to rationalize the conflicting value propositions created by "expensive" new drugs is to fix several major flaws in our current health insurance system that obfuscate those value propositions, as follows. (1) Establish tax parity for all health benefits and noncovered medical expenses; this would neutralize the role of the employer in switching health plans, reduce enrollee turnover, and push out the pharmaceutical investment horizon for insurers. (2) Relax federal laws that galvanize the separation of physicians and hospitals and thus doom the market’s desire to manage pharmacy costs by managing provider economic incentives. (3) Establish federal mandates for classes of drugs with enormous clinical value but negative economic returns, eliminating the compulsion of insurers and self-insured employers to underpay for drugs in the narrow-pay and pay-me-later classes.

Detailing and debating the merits of these important reforms is well beyond the scope of this paper. Rather, I sketch each one briefly in the context of pharmaceutical progress and leave it to others to go the next arduous mile. For now, it is important to frame each of these ideas within its essential context: If pharmaceutical progress is indeed the single greatest economic pressure on our current health care system, then it is appropriate to view reforms of the entire system through the prism of pharmacy economics.

Tax parity. Annual turnover rates of 20 percent among health plan enrollees are the inevitable marketplace result of restricting premium tax–deductibility to direct, employer-sponsored health coverage. Employers shop for coverage on behalf of their workers, and most offer access to only one or two insurers in a given year.⁴⁴ When they switch insurers, employees are forced to follow suit. As Moran reports, "As long as enrollees in managed care plans switch plans every few years, economically rational managed care entities should be expected to underinvest in pharmaceutical-based intervention strategies whose benefits were less than immediate."⁴⁵

By liberalizing the tax benefit associated with health coverage, we liberate the health insurance marketplace. Under tax parity, employers would allocate pretax compensation for employees. Those employees would then be free to choose whatever insurer appeals to them; they would be more likely to remain with that insurer over time and as they change jobs. The resulting enrollment stability would move the pharmaceutical investment horizon for insurers outward; it would also encourage them to compete on the real value they bring directly to employees—and to consumers purchasing coverage in a liberalized, open retail market. Tax parity also would allow consumers to spend pretax dollars on drugs that fall far outside insurers’ investment horizons and coverage. This would encourage consumer-driven market demand and pricing for pharmaceutical progress that has no economic value for any third party, but much value for consumers: the no-pay "recrea-ceuticals." This is consistent with the current movement toward patient cost sharing on many no-pay drugs and echoes Fuchs’s argument that the beneficiaries of new technologies should be paying their associated costs.

Modification of foolish federal laws. As the failure of provider risk sharing for pharmacy costs painfully illustrates, the balkanization of medical delivery under current reimbursement systems precludes the market’s ability to exploit the dynamics of the medical resource rotation described in this paper. Provider groups can and will accept economic risk for drugs—especially the high-cost injectables administered in the ambulatory setting—if they can capture the economic rewards of reduced hospital costs. Unfortunately, a generation of antikickback and Stark "self-referral" laws stands in the way. Modifying these laws to accommodate pharmacy risk sharing represents a broader regulatory reform that the system desperately needs anyway: the belated economic integration of physician and hospital organizations. "Gain-sharing" programs are one obvious way to achieve this integration; unfortunately, to date the market’s efforts to institute such programs have been hamstrung by the perpetuation of these overreaching and archaic laws.

Federal benefits mandates. As our taxonomy of pharmacy economics indicates, many clinically important drugs provide negative economic value: They improve the quality of people’s lives while increasing costs in the short and the long run. These are the drugs nobody wants to pay for—employers, insurers, or at-risk providers. Access to such drugs is highly variable and made ever more complicated for patients as insurers attempt to control their medical costs and compete on premiums. This marketplace gamesmanship further splinters insurance coverage and increases the destructive uses of medical underwriting; its end result is increased cost burdens on the most vulnerable patients, defeating the whole purpose of insurance. Because the cost for these drugs represents the creation of social and public health utility—increased life expectancy, reduced disability, and improved quality of life for patients with chronic and terminal illnesses—we should mandate coverage for these drugs, at the federal level, accompanied by a federal law against medical underwriting. Federal mandates that supercede state laws will level the health insurance playing field nationally and locally and will preempt Insurers’ attempts to splinter and subdivide drug coverage for the highest-cost drugs with negative economic returns.

The time for these reforms is now. The addition of a Medicare outpatient drug benefit promises to exacerbate all of the tensions and conflicts raised in this paper. If, as proposed, the new benefit does ultimately mirror the private sector’s pharmacy benefit management system, then we need to fix the worst marketplace failures of that system. The health insurance market is struggling mightily to pay for our great medical progress. Today, doing the right thing for patients is too often the wrong thing for insurance company shareholders. Reforms that neutralize this conundrum are consistent with a central feature of the U.S. health care system: our unwillingness to say "no" to progress and to the patients benefiting from it. As Berger observes, "Society has not been willing to accept that there are limits on health resources... Suggestions that there is a core of effective services which should be available to all and other services which could be provided based on ability to pay have not found wide-spread support."⁴⁶

If Berger is right—and the managed care backlash is strenuous proof that he is—then we should accept this fact of our medical progress and adapt our insurance system accordingly. Our society will not tolerate explicit rationing. Our only recourses are to make implicit rationing transparent and to pay for our medical progress the good old-fashioned way: collectively, through better health insurance coverage.

Editor's Notes

 
J.D. Kleinke is president of Health Strategies Network, a health information technology research company in Denver, Colorado. His most recent book is Oxymorons: The Myth of a U.S. Health Care System (Jossey-Bass, October 2001).

The author acknowledges the research and editorial assistance of Kathleen Ford.

NOTES

Top Health Care's 'New Economy' The State Of The... The Six Faces Of... Toward A Belated Artfulness Who Pays The Price... NOTES

 

1. T.A. Waidmann and K.G. Manton, "International Evidence on Disability Trends among the Elderly," 18 June 1998, <aspe.os.dhhs.gov/daltcp/reports/trends.htm> (18 June 2001); and K. Manton et al., "Chronic Disability Trends in Elderly United States Populations: 1982–1994," Proceedings of the National Academy of Sciences USA 94 (March 1997): 2593–2598.
2. Data collected from the National Heart Association; National Center for Health Statistics; and Centers for Disease Control and Prevention.
3. S.M. Foote and L. Etheredge, "Increasing Use of New Prescription Drugs: A Case Study," Health Affairs (Jul/Aug 2000): 165.
4. B.A. Weisbrod and C.L. LaMay, "Mixed Signals: Public Policy and the Future of Health Care R&D," Health Affairs (Mar/Apr 1999): 116.
5. J.J. Barendregt, L. Bonneux, and P.J. van der Maas, "The Health Care Costs of Smoking," New England Journal of Medicine (9 October 1997): 15.
6. F. Lichtenberg, "Are the Benefits of Newer Drugs Worth Their Costs? Evidence from the 1996 MEPS," Health Affairs (Sep/Oct 01): 241–251.
7. Weisbrod and LaMay, "Mixed Signals," 121.
8. V.R. Fuchs, "Health Care for the Elderly: How Much? Who Will Pay for It?" Health Affairs (Jan/Feb 1999): 11.
9. D. Mechanic, "Muddling Through Elegantly: Finding the Proper Balance in Rationing," Health Affairs (Sep/Oct 1997): 83.
10. S.B. Soumerai and H.L. Lipton, "Computer-Based Drug-Utilization Review—Risk, Benefit, or Boondoggle?" New England Journal of Medicine (15 June 1995): 24.
11. Tufts Center for the Study of Drug Development, Outlook 2001 (Boston: Tufts University, 2001).
12. Ibid.
13. C. Petersen, "HMOs Get What They Pay For with HIV Treatment," Managed Healthcare (November 1999): 40.
14. J.M. Mitchell and K.H. Anderson, "Effects of Case Management and New Spending," Health Affairs (July/Aug 2000): 233. Drugs on Medicaid AIDS
15. Petersen, "HMOs Get What They Pay For," 42.
16. F. Lichtenberg, "Do (More and Better) Drugs Keep People Out of Hospitals?" American Economic Review (May 1996): 384–388.
17. Ibid.; Soumerai and Lipton, "Computer-Based Drug-Utilization Review"; and S.D. Horn et al., "Intended and Unintended Consequences of HMO Cost-Containment Strategies: Results from the Managed Care Outcomes Project," American Journal of Managed Care (March 1996): 253–264.
18. Soumerai and Lipton, "Computer-Based Drug-Utilization Review."
19. Horn, "Intended and Unintended Consequences."
20. Lichtenberg, "Do (More and Better) Drugs Keep People Out of Hospitals?"
21. Outlook 2001.
22. D.W. Moran, "Prescription Drugs and Managed Care: Can ‘Free-Market Détente’ Hold?" Health Affairs (Mar/Apr 2000): 70.
23. S. Lueck, "Spending on Prescription Drugs Rose 19 Percent," Wall Street Journal, 8 May 2001.
24. This number has been reported throughout the health care business press and has been conveyed to the author by numerous managed care executives and employer health care purchasers.
25. R. Rundle, "Calpers Rejects 2002 Health-Care Bids as Too High and Asks for Resubmission," Wall Street Journal, 23 February 2001.
26. Towers Perrin survey, as reported by C. Rauber, "Bruising Battles Ahead for Providers, HMOs," Modern Healthcare (15 February 1999): 52.
27. J.D. Kleinke, Bleeding Edge: The Business of Health Care in the New Century (Gaithersburg, Md.: Aspen Publishers, 1998).
28. S. Soumerai et al., "Payment Restrictions for Prescription Drugs under Medicaid: Effects on Therapy, Cost, and Equity," New England Journal of Medicine (27 August 1987): 550–556.
29. B. Stuart and C. Zacker, "Who Bears the Burden of Medicaid Drug Copayment Policies?" Health Affairs (Mar/Apr 1999): 208–210.
30. J.D. Kleinke, "Just What the HMO Ordered: Managed Care and the Paradox of Increasing Pharmacy Costs," Health Affairs (Mar/Apr 2000): 78–91.
31. Soumerai and Lipton, "Computer-Based Drug Utilization Review."
32. R.W. Dubois, "Explaining Drug Spending Trends: Does Perception Match Reality?" Health Affairs (Mar/Apr 2000): 240–247.
33. M. Chernew et al., "Pharmaceutical Cost Growth under Capitation: A Case Study," Health Affairs (Nov/Dec 2000): 266.
34. H.L. Lipton et al., "Managing the Pharmacy Benefit in Medicare HMOs: What Do We Really Know?" Health Affairs (Mar/Apr 2000): 52.
35. B. McCaughey-Ross, "How to Beat the High Cost of Aging," Wall Street Journal, 21 October 1999.
36. S. Soumerai et al., "Effects of a Limit on Medicaid Drug-Reimbursement Benefits on the Use of Psychotropic Agents and Acute Mental Health Services by Patients with Schizophrenia," New England Journal of Medicine (8 September 1994): 650–655.
37. M. Edlin, "External Comparisons Help MCOs Get a Handle on Diabetes Costs," Managed Healthcare Executive (January 2001): 40.
38. Weisbrod and LaMay, "Mixed Signals," 116.
39. Lichtenberg, "Do (More and Better) Drugs Keep People Out of Hospitals?" 384.
40. L. Russell, Is Prevention Cheaper than a Cure? (Washington: Brookings Institution, 1987).
41. Numerous articles by Uwe Reinhardt, Paul Langley, Marc Berger, Robert Epstein, and the author.
42. M. Berger, "The Once and Future Application of Cost-Effective Analysis," Joint Commission Journal on Quality Improvement (September 1999): 455–461.
43. Mechanic, "Muddling Through Elegantly," 91.
44. E. Holve, L. Levitt, and J. Wang, "Employer Health Benefits 2000 Annual Survey" (Menlo Park, Calif.: Kaiser Family Foundation and Health Research and Educational Trust, 2000), 54.
45. Moran, "Prescription Drugs and Managed Care," 73.
46. Berger, "The Once and Future Application."

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