Should the United States Import the UK Model for Medicare and Medicaid?

Critics of the Obama administration's recent health care reform rightly focus on the $1 trillion cost of the legislation and fears that it will add to already unsustainable federal health care commitments for Medicare and Medicaid. Defenders point to the legislation's cost-saving provisions, like the Independent Payment Advisory Board (IPAB) which, starting in 2014, will recommend automatic Medicare spending cuts if costs grow faster than an average of the consumer price index and health care inflation.

For the fiscally minded, so-called "automatic" cuts may sound good, but in this case they're a mixed blessing. That's because their impact is likely to fall first on pharmaceutical or medical-device innovation (hospitals and physicians are exempted from IPAB's knife until 2020). In fact, one likely IPAB recommendation--embraced by Dr. Donald Berwick, the new administrator of the Centers for Medicare and Medicaid Services--would be for Medicare to create a new "cost effectiveness" standard for covering medical products. Technologies that didn't pass this test would receive less generous Medicare reimbursement.

"Cost-effectiveness" is economic jargon for what appears to be the self-evident goal of trying to improve patient health at the lowest cost. The problem is our current approach to assessing health care benefits fails to capture the full value of innovation, both in the short and long term. If (as seems likely) we soon place cost- and price-controls on such innovation, we risk short-circuiting U.S. medical and technological progress that has improved the health of so many in the United States and around the world.

Economists have long recognized that what looks like efficiency today may undercut innovation tomorrow.

In setting up IPAB, the U.S. may be borrowing an unfortunate model from overseas. Outside the U.S., valuing medical technologies is typically the responsibility of national health care systems that strive for fair and efficient access to new treatments under sharp fiscal constraints. In the United Kingdom, the National Institute for Health and Clinical Excellence (NICE) is charged with the difficult task of assessing new and existing medical technologies, and making recommendations that guide the coverage decisions of the national health care service (NHS), which pays for almost all patient care in the U.K. Indeed, NICE is often held up as a model for IPAB to follow.

How has NICE performed in practice? Its decisions are routinely mired in controversy. Take the case of Avastin, a powerful drug for metastatic colon cancer that NICE recently rejected, deeming it too expensive for the benefits it offers patients. The U.K. government quickly came under fire from patient groups and physicians for denying approval for a cancer drug widely available in the U.S. and elsewhere in Europe. Indeed, cancer survival rates in the U.K. lag well behind those of the U.S. and other wealthy European nations, and some research suggests that NICE's restrictions on access to new medicines is partly to blame for the disparity. (In July the U.K. government effectively revoked NICE's recommendations, announcing a new 50 million pound fund to buy "too expensive" cancer drugs for patients.)

The Avastin controversy shows that it is impossible to disconnect individual drug reimbursement decisions from the broader social good and the overall benefits of medical innovation. To be fair, NICE carries out its responsibilities rigorously and tries to get the most out of scarce NHS resources. In 2009 NICE asked Precision Health Economics LLC, of which I am a managing director, to study the U.K. system and advise them on new approaches to valuing innovation. The lessons we learned from examining NICE are instructive for U.S. policymakers trying to assess the value of pharmaceutical and medical innovation:

First, economists have long recognized that what looks like efficiency today may undercut innovation tomorrow. Generally, lower prices through competition are desirable--but at the same time we need patent protection for new drugs. Patents help protect the prices of new drugs before generics become available. Without such protection (and the profit it helps generate), little pharmaceutical innovation would take place. When governments effectively impose lower prices on drugs under the guise of "cost-effectiveness" standards (through institutions like NICE or IPAB), they weaken patent protection and reduce incentives for innovation. This is particularly true for research into complex and difficult to treat diseases, like cancer. We do not want governments using cost-effectiveness standards to make an end-run around patents for the same reason we do not want to abolish the patent system: doing so will suppress innovation.

Second, reimbursement debates often focus on whether or not a new drug offers a therapeutic advance over existing treatments. This is too short sighted. Dynamic benefits only accrue over time as additional experiments uncover new (and often unpredictable) uses. In the case of pharmaceuticals, evidence suggests that a substantial share of utilization occurs outside the indication for which a new drug is first approved. (In cancer, for instance, the majority of treatments are used "off-label", i.e., for indications beyond those on the FDA approved label.) The recognition of such "spillover" benefits from innovative technologies should be built into reimbursement policy.

Third, limiting cost-effectiveness tests to clinical benefits for patients or explicit costs to the Medicare budget may fail to reflect the social costs of diseases. For example, certain illnesses (like cancer and Alzheimer's) are also associated with intensive financial and emotional costs and time constraints on a patient's family. Indeed, care related to mental illnesses or major physical disabilities often demand large financial and non-pecuniary commitments from working-age family members that go far beyond the direct health of the patient, a cost never captured in the Medicare budget. Drugs that reduce infirmity, improve the quality of life for terminally ill patients, or allow patients to function more normally and reduce the strain on family members for even short periods may be highly valued by family members and patients, even if they don't disrupt the overall trajectory of the disease. We often place high value on helping people who are in the greatest need, e.g., those in life-threatening circumstances, even when new treatments only extend lives by weeks or months.

Controlling costs in the short run is a vital part of efforts to reform the U.S. health care system. But it shouldn't come at the expense of future innovations, particularly as new technologies may allow us to prevent or cure deadly illnesses at much lower cost than is currently possible.

Tomas J. Philipson is a visiting scholar at AEI.

Photo Credit: Flickr user takomabibelot/Creative Commons

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About the Author


Tomas J.
  • Tomas J. Philipson is a visiting scholar at AEI and the Daniel Levin Chair in the Irving B. Harris Graduate School of Public Policy as well as an associate member of the department of economics at the University of Chicago. He was a senior health care adviser to the 2008 presidential campaign of John McCain and served in the Bush administration as the senior economic adviser to the commissioner of the Food and Drug Administration from 2003 to 2004 and subsequently as the senior economic adviser to the administrator of the Centers for Medicare & Medicaid Services from 2004 to 2005. Mr. Philipson is an editor of Forum for Health Economics & Policy and is on the editorial board of Health Economics and The European Journal of Health Economics. He has twice been the recipient of the highest honor of his field, the Kenneth Arrow Award from the International Health Economics Association, in 2000 and 2006.  Mr. Philipson is the cofounder of Precision Health Economics, is an adviser to the Gerson Lehrman Group, and is a consultant for Compass-Lexecon and Analysis Group.
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