Health Care Economics
Research by
Alan M. Garber
Henry J. Kaiser Jr. Professor Professor of Medicine, Stanford School of Medicine
Professor of Economics (by courtesy)
Stanford Graduate School of Business
FOR FURTHER INFORMATION: Helen K. Chang, 650-723-3358, Fax: 650-725-6750
Getting More Bang for the Buck Out of Health Insurance
August 2005
STANFORD GRADUATE SCHOOL OF BUSINESS—Most health plans in the United States base coverage decisions on clinical studies of how well the procedure, device, or medication works, without considering costs. Professor Alan M. Garber argues that more attention to cost-effectiveness would reduce health care costs and insurance premiums without lowering the quality of care.
"Today we cover products and services that have been proven to work in randomized clinical trials. But the randomized trial standard is not always adequate to deal with new, more sophisticated, and more expensive technologies. Some such technologies offer health benefits that are modest, at best," says Garber, the Henry J. Kaiser Jr. Professor, who is also a professor of medicine at Stanford Medical School and who holds an appointment in economics at the Graduate School of Business. He also is a staff physician in the Veterans Affairs Palo Alto Health Care System.
Garber acknowledges that the notion of making decisions based on cost-effectiveness has long been a distasteful one to the American public. "For one thing, who would want to tally up costs and benefits while a loved one lies in a hospital bed gravely ill?" he asks.
But costs should not be invisible. The price of a product or service is often unknown to the consumer until after it is used, Garber says. "Even health insurance contracts with doctors and hospitals often omit the prices of individual services. So many health care transactions lack the pricing transparency required for the efficient operation of markets. The idea of value, which is so important in every other sector of the economy, has receded into the background. It's like running a business without knowing what your payroll, raw materials, and production costs are."
Cost-effectiveness analysis is a mathematical tool that considers not only economic factors but also the degree to which a given product or treatment is effective in extending someone's life and improving its quality. Were health insurers to better calculate what kinds of treatments and services give the "most bang for the buck," insurance premiums and individuals' out-of-pocket costs could be brought down without lowering the quality of care, Garber maintains. "It's a matter of making the system more efficient, not reducing care or suppressing the growth of new medical technologies," he says.
For a person suffering from severe heart failure, for example, a left ventricular assist device, coupled with the additional care that such patients receive, can cost hundreds of thousands of dollars each year for each patient—although nearly all treated patients will die within two years. Yet the expensive device is still covered under many insurance plans. Insurers could do better by analyzing the cost-effectiveness of therapies and medicines, says Garber, and choose to cover only those that give the best value for the money.
One of the drawbacks of this approach is that there is not a consensus about how to set a minimum or threshold to establish what is cost-effective. The state of Oregon, for example, attempted to combine cost-effectiveness with other information such as whether other treatments were available to establish a system to distribute Medicaid funds to a wider, uninsured population. The process was controversial. "Oregon started with a ranking of procedures based principally on cost-effectiveness, but developed a very different list after extensive public discussion," he wrote.
In the private sector, state regulations and the threat of litigation also have made it difficult for health insurers to consider denying coverage based on cost. Moreover, Garber notes, there can be strong vested interests in the status quo. "For example, several years ago, guidelines published by the Agency for Health Care Policy and Research included the claim that there was not good evidence that common back operations were effective against low back pain," he says. "A group of back surgeons mounted a highly effective campaign that nearly led Congress to cut off funding for the agency."
Overall, says Garber, health care costs are rising not because of increased waste but because of the proliferation of and increasing desire for new technologies. "As baby boomers age, the demand for better ways to prevent, diagnose, and treat disease will only increase," he observes. "Solutions being proposed to deal with health care costs, such as getting doctors and hospitals to implement health care information technology, will not be enough to solve this problem. We cannot fix our health care system until we find ways to encourage the adoption and delivery of high-value care."
A more effective mix of cost-effectiveness analysis with the more traditional clinical evidence of effectiveness is not without flaws, says Garber, but it offers hope in reducing costs. "The erosion of commercial health insurance and the growing burden of public health insurance programs may transform [cost-effectiveness analysis] from an academic curiosity to an essential tool for health care decision making."
—Marguerite Rigoglioso
Related Information
Cost-Effectiveness and Evidence for Evaluation as Criteria for Coverage Policy
Alan M. Garber
Health Affairs, Web exclusive, May 19, 2004 Details
Evidence-Based Coverage Policy
Alan M. Garber
Health Affairs, Vol. 20, No. 5 (2001)
Using Cost-Effectiveness Analysis to Improve Health Care
Peter J. Neumann
New York: Oxford University Press, 2005