It’s possible that price cuts lead to more care, not less

This is a guest post from Adrianna McIntyre, a graduate student studying health policy at the University of Michigan. Adrianna currently blogs at Project Millennial, tweets at @onceuponA, and will be joining TIE soon as the team’s first intern. 

We can thank former Vermont governor Howard Dean for reviving the “IPAB-as-a-rationing-body” meme again (you should read response pieces from Peter Orszag and Jonathan Cohn). The reality is that the advisory board is expressly prohibited from rationing care; all it’s really empowered to do is fiddle with reimbursements, and only if Medicare rates are climbing above a certain speed (they haven’t yet). But what if provision of care went up, not down, when reimbursements are cut? That’s what a new NBER paper (ungated) suggests, based on Medicare reforms and lung cancer treatment.

In 2005, Medicare cut reimbursements for physician-administered (Part B) drugs. The resulting changes to chemotherapy drug payment had an especially acute impact on physicians’ profit margins.

The 2005 reform, which replaced a reimbursement system based on list prices with one based on national average transaction prices, sought to remedy well known Medicare overpayments for Part B drugs. For chemotherapy, reimbursements averaged 29% above transaction prices in 1997 (Office of Inspector General (1997a)) and was 22% above by 2004, even after an initial fee reduction took effect (Government Accountability Office (2004)). Beginning in 2005, margins were administratively set at 6% above the national average transaction price for each drug. Thus, margins fell by nearly a factor of five, although this reduction was not uniform across drugs. Since chemotherapy accounted for over three-quarters of oncologist practice revenues in 2005 (Akscin and Barr (2007)), the drug mark-up accounted for more than half of their reported net income.

While Aaron’s post yesterday covered a problem of overdiagnosis and overtreatment in cancer, broadly speaking, for certain cancers in certain populations—say, lung cancer in the over-65 cohort—literature suggests undertreatment. And following the 2005 payment changes, the authors found an increased likelihood of chemotherapy treatment within 30 and 90 days of diagnosis. Moreover, they found that these changes in treatment improved health outcomes—the likelihood of death at 3, 6, and 9 months after diagnosis declined by 2-3%, relative to patients who were diagnosed before the reform. While these are modest improvements, they are statistically significant. (Obligatory lead-time bias caveat: to any extent that diagnoses occurred earlier following the reform, survival changes might not reflect actual longevity gains.)

Putting that together:

These results indicate that, in the presence of significant physician agency effects, an over-generous payment scheme can lead to physician rationing — i.e. the under-provision of care — and that better aligning payments to costs can lead to better outcomes at lower total cost. While we discuss under-provision in terms of rationing, the results are also consistent with doctors mistakenly believing they were providing the optimal amount of care prior to the reform and thus intentionally providing excess care post-reform. This alternative scenario is consistent with our model, but, if true, suggests an additional policy lever. Specifically efforts to promote evidence-based medicine might have improved outcomes even in the absence of payment reform, although without the cost-savings generated by the reform.

Austin has commented before that these changes likely reflect the latter, and the policy implications—that lower prices might improve otherwise underprovided care—strike me as particularly interesting. In the FFS system that we have, price levers are part of a rather limited tool set for encouraging evidence-based care and cost containment. Of course, it’s tougher in practice than in theory: with the 2005 Medicare reform, reimbursement fell for all chemotherapy drugs, and the researchers found that physicians shifted to drugs that caused the least shock to their bottom lines. Lowering the cost of certain treatments in isolation might just encourage a shift toward their more profitable counterparts. This also leaves us in a lurch on how to effectively to handle problems of overtreatment.

Dean was right about one thing: fee-for-service sets up incentives that complicate efforts to encourage cost-effective care or change our system from reactionary to one that actually promotes health. Few would quarrel with his assertion that we need to change those incentives—but eliminating the IPAB is hardly the place to start.

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