Cost-Effectiveness Analysis of Branded Drugs With Market Demand and Insurance

OBJECTIVES

Cost-effectiveness analysis of branded pharmaceuticals presumes that both cost (or price) and marginal effectiveness levels are exogenous. This assumption underlies most judgments of the cost-effectiveness of specific drugs. In this study, we show the theoretical implications of letting both factors be endogenous by modeling pharmaceutical price setting with and without health insurance, along with patient response to the prices that depend on marginal effectiveness. We then explore the implications of these models for cost-effectiveness ratios.

METHODS

We used simple textbook models of patient demand and pricing behavior of drug firms to predict market equilibria in the drug and insurance markets and to generate calculations of the cost-effectiveness ratios in those settings.

RESULTS

We found that ratios in market settings can be much different from those calculated in cost-effectiveness studies based on exogenous prices and treatment of all patients at risk rather than those who would demand treatment in a market setting. We also found that there may be considerable similarity in these market cost-effectiveness ratios across different products because drug firms with market power set profit-maximizing prices.

CONCLUSIONS

We found that market cost-effectiveness ratios will always indicate an excess of benefits over cost. Insurance will lead to less favorable ratios than without insurance, but when insurers bargain with drug firms, rather than taking their prices as given, cost-effectiveness ratios will be more favorable.

Why 'Optimal' Payment for Healthcare Providers Can Never be Optimal Under Community Rating

This article extends the existing literature on optimal provider payment by accounting for consumer heterogeneity in preferences for health insurance and healthcare. This heterogeneity breaks down the separation of the relationship between providers and the health insurer and the relationship between consumers and the insurer. Both experimental and market evidence for a high degree of heterogeneity are presented. Given heterogeneity, a uniform policy fails to effectively control moral hazard, while incentives for risk selection created by community rating cannot be neutralized through risk adjustment. Consumer heterogeneity spills over into relationships with providers, such that a uniform contract with providers also cannot be optimal. The decisive condition for ensuring optimality of provider payment is to replace community rating (which violates the principle of marginal cost pricing) with risk rating of contributions combined with subsidization targeted at high risks with low incomes.

Comparing efficiency of health systems across industrialized countries: a panel analysis

Background

Rankings from the World Health Organization (WHO) place the US health care system as one of the least efficient among Organization for Economic Cooperation and Development (OECD) countries. Researchers have questioned this, noting simplistic or inappropriate methodologies, poor measurement choice, and poor control variables. Our objective is to re-visit this question by using newer modeling techniques and a large panel of OECD data.

Methods

We primarily use the OECD Health Data for 25 OECD countries. We compare results from stochastic frontier analysis (SFA) and fixed effects models. We estimate total life expectancy as well as life expectancy at age 60. We explore a combination of control variables reflecting health care resources, health behaviors, and economic and environmental factors.

Results

The US never ranks higher than fifth out of all 36 models, but is also never the very last ranked country though it was close in several models. The SFA estimation approach produces the most consistent lead country, but the remaining countries did not maintain a steady rank.

Discussion

Our study sheds light on the fragility of health system rankings by using a large panel and applying the latest efficiency modeling techniques. The rankings are not robust to different statistical approaches, nor to variable inclusion decisions.

Conclusions

Future international comparisons should employ a range of methodologies to generate a more nuanced portrait of health care system efficiency.

Accountable Care Organizations in California: Market Forces at Work?

Accountable care organizations (ACOs), one of the most recent and promising health care delivery innovations, encourage care coordination among providers. While ACOs hold promise for decreasing costs by reducing unnecessary procedures, improving resource use as a result of economies of scale and scope, ACOs also raise concerns about provider market power. This study examines the market-level competition factors that are associated with ACO participation and the number of ACOs. Using data from California, we find that higher levels of preexisting managed care leads to higher ACO entry and enrollment growth, while hospital concentration leads to fewer ACOs and lower enrollment. We find interesting results for physician market power - markets with concentrated physician markets have a smaller share of individuals in commercial ACOs but a larger number of commercial ACO organizations. This finding implies smaller ACOs in these markets.

Macro-level factors impacting geographic disparities in cancer screening

OBJECTIVES

Examine how differences in state regulatory environments predict geographic disparities in the utilization of cancer screening.

DATA SOURCES/SETTING

100% Medicare fee-for-service population data from 2001-2005 was developed as multi-year breast (BC) and colorectal cancer (CRC) screening utilization rates in each county in the US.

STUDY DESIGN

A comprehensive set of supply and demand predictors are used in a multilevel model of county-level cancer screening utilization in the context of state regulatory markets. States dictate insurance mandates/regulations and whether alternative providers (nurse practitioners) can provide preventive care services supplied by MDs. Controlling statistically for the supply of both types of providers, we study the joint effects of two private insurance regulations: one mandating that insureds with serious or chronic health conditions may receive continuity of care from their established physician(s) after changing health insurance plans, and another mandating that external grievance review is an option for all health plan coverage/denial decisions. These private insurance plan regulations are expected to affect the degree of beneficial spillovers from managed care practices, which may have increased area-wide cancer screening rates.

PRINCIPAL FINDINGS

The two private insurance regulations under study were significant predictors impacted by local market conditions. Managed care spillovers in local markets were significantly associated with higher BC screening rates, but only in states lacking the two forms of regulation under study. Spillovers were significantly associated with higher CRC cancer screening rates everywhere, but much higher in the unregulated states. Area poverty dampened screening rates, but less so for CRC screening in the states with these regulations.

CONCLUSIONS

Two state insurance regulations that empowered consumers with more autonomy to make informed utilization decisions varied across states, and exhibited significant associations with screening rates, which varied with the degree of managed care penetration or poverty in the state's counties. Beneficial spillover effects from managed care practices and negative influences from area poverty are not uniform across the United States. Both variables had stronger associations with CRC than BC screening utilization, as did state regulatory variables. CRC screening by endoscopy was more subject to market and regulatory factors than BC screening.

Managed care and the diffusion of endoscopy in fee-for-service Medicare

OBJECTIVE

To determine whether Medicare managed care penetration impacted the diffusion of endoscopy services (sigmoidoscopy, colonoscopy) among the fee-for-service (FFS) Medicare population during 2001-2006.

METHODS

We model utilization rates for colonoscopy or sigmoidoscopy as impacted by both market supply and demand factors. We use spatial regression to perform ecological analysis of county-area utilization rates over two time intervals (2001-2003, 2004-2006) following Medicare benefits expansion in 2001 to cover colonoscopy for persons of average risk. We examine each technology in separate cross-sectional regressions estimated over early and later periods to assess differential effects on diffusion over time. We discuss selection factors in managed care markets and how failure to control perfectly for market selection might impact our managed care spillover estimates.

RESULTS

Areas with worse socioeconomic conditions have lower utilization rates, especially for colonoscopy. Holding constant statistically the socioeconomic factors, we find that managed care spillover effects onto FFS Medicare utilization rates are negative for colonoscopy and positive for sigmoidoscopy. The spatial lag estimates are conservative and interpreted as a lower bound on true effects. Our findings suggest that managed care presence fostered persistence of the older technology during a time when it was rapidly being replaced by the newer technology.

Prison health care: is contracting out healthy?

US prison health care has recently been in the news and in the courts. A particular issue is whether prisons should contract out for health care. Contracting out has been growing over the past few decades. The stated motivation for this change ranges from a desire to improve the prison healthcare system, sometimes in response to a court mandate, to a desire to reduce costs. This study is a first attempt to quantify the impact of this change on inmate health. As morbidity measures are not readily obtainable, we focus on mortality. More specifically, we use a panel of state prisons from 1979 to 1990 and a fixed effects Poisson model to estimate the change in mortality associated with increase in the percentage of medical personnel employed under contract. In contrast to the first stated aim of contracting, we find that a 13% increase in percentage of medical personnel employed under contract increases mortality by 1.3%.

Is the United States an outlier in health care and health outcomes? A preliminary analysis

U.S. health care is often seen as an outlier, with high costs and only middling outcomes. This view implies a household production function for health, with both health care and lifestyle serving as inputs. Building on earlier work by Miller and Frech (2004), we make this argument explicit by estimating a production function from augmented OECD data. This allows us to determine whether the U.S. is literally an outlier; which turns on whether the United States is very far off the production surface. We find that the Unites States is somewhat less productive than the average OECD country, but that a substantial part of the observed difference results from poor lifestyle choices, particularly obesity.

The effects of pharmaceutical consumption and obesity on the quality of life in the organization of economic cooperation and development (OECD) countries

OBJECTIVE

The objective of this study is to validate our earlier work on life expectancy with more recent data and, more importantly, to extend it to examine quality of life, not only the length of life.

DESIGN AND SETTING

The analysis focuses on the production of health, disaggregating healthcare into pharmaceutical consumption and other healthcare. Going beyond our earlier work, measures of health include life expectancy and disability-adjusted life expectancy (DALE). Also, we consider the impact of obesity. The sample was 18 Organization of Economic Cooperation and Development (OECD) countries. The measure of pharmaceutical consumption is the best that is available for these countries.

MAIN OUTCOME MEASURES AND RESULTS

Confirming our earlier work, pharmaceutical consumption has a positive and statistically significant effect on life expectancy at 40 and 60 years (significant at the 0.05 level, based on a two-tailed test). The effects are slightly larger than in the earlier work. Turning to DALE, pharmaceutical consumption has a positive and statistically significant effect at birth and at 60 years (significant at the 0.05 and 0.01 levels, respectively), based on a two-tailed test. The effects on DALE are larger than the effects on life expectancy.

CONCLUSIONS

Increased pharmaceutical consumption helps improve quality of life, as well as life expectancy.

Consumer information, price, and nonprice competition among hospitals

The results of the empirical analysis in this paper indicate that broadly defined hospital quality declines in more concentrated markets. The direction of the effect of concentration on hospital charges is smaller and the direction is less clear. Prices are little, if any, lower in more concentrated markets. Hospital price-cost margins are higher in more concentrated markets. Higher concentration discourages price competition. The data do not support the increasing monopoly theory. Further, since hospital price-cost margins do not appear to remain constant, we must reject the redundant resources theory as well, though its stress on nonprice competition rings true. The empirical results are consistent with the traditional antitrust theory. In addition, consumer information plays a surprisingly important role. Consumer information is important in explaining hospital prices, and less important in hospital quality. Consumers are not passive; they do play a role in hospital choice. It is likely that more recent innovations in health insurance will increase consumer awareness. With an increase in consumer copayments, and more active insurer contracting, it is likely that future hospital competition is more likely to stress price, and future antitrust activity could lead to price reductions in addition to declining hospital price-cost margins.

Managed care, distance traveled, and hospital market definition

Does managed care insurance require patients to travel farther to receive hospital care? This question has major implications for antitrust policy and access to care. In spite of a general presumption that the answer is "yes," the question cannot be settled by a priori reasoning. Managed care has two effects on distance: 1) the direct effect of steering managed care consumers to particular hospitals, and 2) the indirect effect of higher managed care market share changing the market environment for consumers in general. The net effect of managed care on distance traveled could go either way. This paper measures both direct and indirect effects in a unique application of a spatial interaction model. We use individual discharge data, including payer information, from hospitals in 14 California counties over the period 1984-1993. We find that the direct effect leads to longer distances, but the indirect effect leads to shorter distances. Neither effect is large. Surprisingly, the net effect is slightly negative.

Is there a link between pharmaceutical consumption and improved health in OECD countries?

OBJECTIVE

The objective of this study was to determine whether there is a measurable health return associated with high pharmaceutical consumption in a sample of developed countries.

DESIGN AND SETTING

The study focused on the production of health, disaggregating healthcare into pharmaceuticals and other healthcare. We controlled for wealth and lifestyle factors. The sample consisted of 21 Organization for Economic Cooperation and Development (OECD) countries and the measure of pharmaceutical consumption used was the best available for a large number of OECD countries. We proxied health with life expectancies at birth, at age 40, and age 60.

MAIN OUTCOME MEASURES AND RESULTS

Pharmaceutical consumption had a positive and statistically significant effect on remaining life expectancy at age 40 and 60 years (significant at the 0.10 and 0.05 level, respectively, based on a 2-tailed test), although the effect on life expectancy at birth was small and not significant. Sensitivity analysis showed that these results were generally robust. A significant effect of pharmaceutical consumption on infant mortality was not demonstrated and results of the infant mortality model were very sensitive to small changes.

CONCLUSIONS

Increased pharmaceutical consumption helps improve mortality outcomes, especially for those at middle age and older.

Exclusive contracts between hospitals and physicians: the antitrust issues

Exclusive contracts between hospitals and physicians are common. In most instances they raise no anticompetitive concerns. However, especially in rural markets, exclusive contracts may be used to foreclose actual and potential competitors and thereby decrease competition. The courts should weigh the benefits and costs of exclusive contracts in these areas.