Reading list

Premium support: A primer, by Ron Haskins, Henry Aaron, James Capretta, Pete Domenici, and Alice Rivlin.

Court-Ordered Reimbursement for Unproven Medical Technology: Circumventing Technology Assessment, by John H. Ferguson, Michael Dubinsky, Peter J. Kirsch (Journal of the American Medicine Association)

Objective. —Because we found examples where courts of law ruled against insurance carriers that had been sued for reimbursement for unproven medical procedures, we conducted a case study to determine the reasoning behind these decisions that run counter to accepted medical science. Such actions circumvent health technology assessment and could contribute to escalating health care costs and poorer quality health care.

Data Sources. —A literature search identified 17 cases between 1980 and 1989 in which an insurance company was sued to reimburse a patient who had received an unproven or questionable health technology; 14 of these suits were decided in favor of the plaintiff, and the insurance company was ordered to pay. Discussed in this article are six of these cases, two involving Laetrile (amygdalin), two involving immunoaugmentative therapy, and two involving thermography, technologies that had previously been assessed as not safe, not effective, or inadequately evaluated.

Data Synthesis and Conclusions. —The circumstances determining how the courts arrive at these “unscientific” decisions fall into three general categories: (1) for legal reasons, the insurance contract is interpreted in favor of the insured; (2) the reluctance and/or inability, legal or otherwise, of the courts to use published scientific literature; and (3) the use of adversarial “expert” witnesses with potential conflicts of interest. To address this situation, we first urge the legal and insurance industries to cooperate in improving the contract language and process in a way that would be both legally and scientifically appropriate. Second, we encourage the courts to use and foster the use of published peer-reviewed scientific material as evidence whenever possible. Third, we recommend that the courts choose their own unbiased expert witnesses to interpret scientific material.

Value-Based Insurance Design: More Health at Any Price, by A. Mark Fendrick, Jenifer J. Martin, Alison E. Weiss (Health Services Research)

When everyone is required to pay the same out-of-pocket amount for health care services regardless of clinical indication, there is evidence of underuse of high-value services and overuse of interventions of no or marginal clinical benefit. Unlike most current health plan designs, value-based insurance design (V-BID) acknowledges heterogeneity of clinical interventions and patient characteristics. It encourages the use of services with strong evidence of clinical benefit and likewise discourages the use of low-value services. Implementing this concept into the national policy debate required a strategy that included conceptual framework development, program implementation, rigorous evaluation, media outreach, and an advocacy plan. Upon completion of this strategy involving several colleagues from multiple disciplines, Congress included language specifically authorizing V-BID in the Patient Protection and Affordable Care Act. A wide-ranging approach, planned as early as possible, can lead to the successful translation of health services research to policy.

Dynamic Inefficiencies in an Employment-Based Health Insurance System: Theory and Evidence, by Hanming Fang and Alessandro Gavazza (American Economic Review)

We investigate the effects of the institutional settings of the US health care system on individuals’ life-cycle medical expenditures. Health is a form of general human capital; labor turnover and labor-market frictions prevent an employer-employee pair from capturing the entire surplus from investment in an employee’s health. Thus, the pair underinvests in health during working years, thereby increasing medical expenditures during retirement. We provide empirical evidence consistent with the comparative statics predictions of our model using the Medical Expenditure Panel Survey (MEPS) and the Health and Retirement Study (HRS). Our estimates suggest significant inefficiencies in health investment in the United States.

Medicare Payment Reform and Hospital Costs: Evidence from the Prospective Payment System and the Treatment of Cardiac Disease, by Daeho Kim (Brown Univeristy)

Medicare’s Prospective Payment System (PPS) reform in 1983 tied hospital payments to the national average cost of each medical technology with the expectation of reducing health care costs. I show that an unintended consequence of PPS was to generate financial incentives for hospitals to expand treatments that had average costs greater than marginal costs due to sizable fixed investments – i.e., the Medicare payment would be greater than the treatment cost at the margin. In the context of cardiac treatments, coronary artery bypass graft (CABG) surgery has a greater average-to-marginal cost ratio than angioplasty, whose ratio is greater than drug therapy’s. I document that the PPS reform induced a profit margin that was five times higher for CABG than for angioplasty. I derive a simple model that allows each treatment’s effectiveness to vary by patient illness severity. The model predicts that hospitals, in response to PPS, will expand CABG use by treating patients for whom angioplasty is more cost-effective in order to exploit the greater economies of scale. To identify the impact of PPS on cardiac procedures, I exploit the discontinuity in Medicare eligibility at the age of 65. Utilizing data from before–and–after the PPS reform, I find a discontinuous change in CABG use at age-65 after the reform that implies an increase of 50 to 60 percent. Nearly all of the increase is driven by a composition change in the patients who receive CABG, with treatment expanded to patients who are observably healthier (i.e., fewer grafts or no comorbidity). Possible competing hypotheses do not exhibit changes at the age-65 threshold (e.g., disease incidence, insurance rates). The increased CABG use was not cost effective – the lower bound estimate of the cost per quality-adjusted life year was over one million dollars. The average cost payments of PPS provided incentives for hospitals to expand the use of technologies that have high fixed costs; an expansion that increased health care costs with possibly little health benefits.

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