Don’t Blame the Medical Innovators

Health economists are fond of saying that medical technology is to blame for rising health care costs. Some – including me – have also pointed out that about 30 percent of health care spending is wasteful.

Given that personal health care spending is more than $2 trillion annually, this suggests the capacity for enormous savings if we could limit technological growth.

However, health improvement also confers enormous benefits—so much so that they may outweigh all other gains in material wellbeing. And all the new devices, medications, and treatments have allowed us to make progress fighting even the most tenacious diseases, like cancer. The President’s most recent Economic Report even makes this case.

Reconciling these alternative views of the role of technology is central to the debate about how to control health expenditure growth. There can be little doubt about the great value of medical technology when put to its best use.

The problem is not medical technology per se – it is how it diffuses into practice. Diagnostic tests can lead to earlier and more effective treatment, but they can also lead to the diagnosis of clinically undetectable but costly ‘pseudo-disease,’ which left undetected and untreated would have no bearing on physical wellbeing.

An implantable defibrillator for someone with life-threatening arrhythmias – like Dick Cheney – is extremely cost-effective, but less so for people with milder disease, as Hlatky and colleagues have shown. Opponents of the Affordable Care Act rallied against analyses like these, since they suggested “Death Panels” or rationing.

So why not let price do the rationing, as it does in other markets? When you buy an umbrella on the street in New York City, it is more expensive than in Fresno, California (assuming you can find one there). That reflects market conditions, especially differences in demand.

So, the first reform we need is value-based pricing. Reimbursement should be linked to value – just as it does in the market for umbrellas. Patients with life threatening arrhythmias should pay more – actually their insurers should pay more – than for patients for whom the evidence is more limited.

Value-based pricing also means we decouple reimbursement from quantity. Take for example Amgen. In the early 1980’s, Amgen was a small start-up that isolated the gene for EPO, a protein which improves red blood cell levels among patients with anemia. Amgen developed a way to manufacture EPO in hamsters. The result was about $37 billion in sales, with much of this revenue coming from Medicare. (The drug also won the Tour de France 7 times!)

However, Amgen was sued because physicians were overusing EPO and driving up hematocrit levels beyond what was clinically warranted. All of this could have been avoided if we reimbursed for EPO the way we do in other fields where the product is based on intellectual property and with relatively low costs of production. Microsoft does not charge you every time you boot up your computer, nor does Disney every time you play a DVD. EPO should have been reimbursed as a license – the insurer pays a fixed cost per year for whatever amount of the drug is clinically warranted. In that world, physicians would have the right incentives to prescribe.

The second reform we need is to do something about the high costs of development. High regulatory barriers discourage the development of new products, especially in an era of personalized medicine where we can genetically type your disease and develop personalized therapies to attack it. Our system is redundant in this regard.

Take for example Phase 3 studies, designed to establish “substantial evidence” of a drug’s benefit. These studies account for 40% of all R&D costs, and 90 percent of the cost for approved drugs. The amount of time it takes has also nearly doubled in the past 2 decades. Now most people will say that we do this to make sure drugs work. However, there is a hidden cost for all this effort – all the patients who will be harmed because of the delay in access to therapy.

The reality is that we now live in a world with sophisticated insurers who would require an evidence base before reimbursement, and a liability system that already puts manufacturers on the hook for any harmful products they market. Thus, it would be welfare-enhancing, and perhaps cost-reducing, if we had a policy that allowed manufacturers to conduct limited marketing and use for indicated conditions after Phase I and II, with the collection of evidence.

(This may sound like a crazy idea, but that is exactly what we do when we allow doctors to prescribe treatments off-label. The only difference here is that we aren’t waiting until a previous indication already exists.)

The bottom line is that innovators respond to the perverse incentives in the health care system, just like physicians, hospitals, and everyone else. There are solutions on both the regulatory side and the reimbursement side that tilt the playing field to ensure we continued to innovate, but only if it made sense for population health.

This post was originally published on LinkedIn