INTEGRATING COST-EFFECTIVENESS …...This report on integrating cost-effectiveness analysis into the...

INTEGRATING COST-EFFECTIVENESS CONSIDERATIONS INTO

HEALTH POLICY DECISIONS

Report to:

The Agency for Healthcare Research & Quality and the Assistant Secretary for Planning and

Evaluation, DHHS

Center for the Evaluation of Value and Risk in Health Institute for Clinical Research and Health Policy Studies

Tufts-New England Medical Center

March 28, 2007

Final Report March 28, 2007 Tufts-New England Medical Center

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TABLE OF CONTENTS

ACKNOWLEDGEMENTS........................................................................................................ 3 EXECUTIVE SUMMARY ........................................................................................................ 4 FIGURE 1: A STRATEGIC PLAN TO INTEGRATE CEA IN THE U.S................................ 8 1 OVERVIEW AND OBJECTIVES......................................................................................... 9

1.1 Motivation and context .................................................................................................... 9 1.2 Objectives ........................................................................................................................ 9 1.3 Methods.......................................................................................................................... 10 1.4 Outline of report............................................................................................................. 11

2 THE PROMISE OF COST-EFFECTIVENESS ANALYSIS .............................................. 13 2.1 The potential value of CEA ........................................................................................... 13 2.2 Terminology................................................................................................................... 13 2.3 Views from the expert panel .......................................................................................... 14 2.4 Current processes used by health plans and payers ....................................................... 15

3 IDENTIFYING THE OBSTACLES .................................................................................... 20 3.1 Lack of cultural acceptance ........................................................................................... 20 3.2 Conflicting/weak incentives........................................................................................... 21 3.3 Inadequate evidence base............................................................................................... 22 3.4 Regulatory/legal barriers................................................................................................ 23 3.5 Ethical concerns ............................................................................................................. 24 3.6 Lack of infrastructure..................................................................................................... 26

4 THE PLAN AND ITS RATIONALE................................................................................... 27 4.1 Overview of the plan...................................................................................................... 27 4.2 Rationale ........................................................................................................................ 29

5 PHASE I: BUILDING CONSENSUS AND SUPPORT..................................................... 33 5.1 Identifying Leadership ................................................................................................... 33 5.2 Developing projects to study CEA ................................................................................ 34 5.3 Convening stakeholders ................................................................................................. 40

6 PHASE II: TRANSITIONING TO CEA.............................................................................. 42 6.1 Develop and implement legislative strategy .................................................................. 42 6.2 Report on Projects.......................................................................................................... 42 6.3 Ongoing consensus building.......................................................................................... 42

7 PHASE III: INTEGRATING CEA...................................................................................... 46 7.1 Increasing CMS use of CEA.......................................................................................... 46 7.2 Expanding CEA infrastructure / Creating a new institute ............................................. 49 7.3 Integrating CEA into other public and private initiatives.............................................. 52

8 EXPECTATIONS................................................................................................................. 53 9 REFERENCES ..................................................................................................................... 55 APPENDIX A: Panelists........................................................................................................... 61 APPENDIX B: Agenda of Expert Panel Meeting .................................................................... 67 APPENDIX C: Background Paper ........................................................................................... 70


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ACKNOWLEDGEMENTS This report on integrating cost-effectiveness analysis into the U.S. health care system reflects input provided by an expert panel comprised of senior officials at public and private health plans, including executive officers, medical directors, and pharmacy directors. The Panel members, whose bios appear in Appendix B, were: (Chair) Schumarry Chao, MD, MBA, President, SHC & Associates; (Panelists) Naomi Aronson, PhD, Executive Director, BCBS Technology Evaluation Center; Rhonda Driver, RPh, Clinical Pharmacist, Missouri Department of Social Services; Robert Epstein, MD, MS, Chief Medical Officer, Medco Health Solutions; Michael Fine, MD, Senior Medical Director, Health Net California; William Fleming, PharmD, Vice President, Pharmacy and Clinical Integration, Humana; Pam Hymel, MD, MPH, Medical Director, Cisco Systems; Mark Richerson, CDR, Director Department of Defense Pharmacoeconomic Center; Mark Rubino, RPh, Chief Pharmacy Officer, Aetna. This project was funded by the Agency for Healthcare Research and Quality under Contract No. HHSA290200500006C and by the Assistant Secretary for Planning and Evaluation, both of the U.S. Department of Health and Human Services. The authors of this report are responsible for its content. Statements in the report should not be construed as endorsement by the Agency for Healthcare Research and Quality, the Assistant Secretary for Planning and Evaluation, the U.S. Department of Health and Human Services, or the organizations represented by the panelists. This report was drafted by researchers at Tufts-New England Medical Center and the Harvard School of Public Health in Boston. Key members of the research team included Peter Neumann and Jenny Palmer of the Center for the Evaluation of Value and Risk in Health at the Tufts-New England Medical Center, and Norman Daniels and Karen Quigley of the Harvard School of Public Health. Members of the Panel attended and participated in a two-day meeting convened in Rockville, Maryland, May 31-June 1, 2006, and reviewed and provided comments on several drafts of the report. In drafting the report, the research team endeavored to capture the sometimes diverse views of the panel. Where differences were notable we have tried to draw attention to them. The authors thank Alison Timm and Jason Nelson for their excellent research assistance. We are also grateful to Marthe Gold, M.D. for her participation in the panel meeting, and for her helpful comments on several earlier drafts of this report. We also acknowledge Stirling Bryan, Ph.D. for his participation in the panel meeting. We appreciate helpful comments from William Lawrence and Joanna Siegel of AHRQ and Steven Sheingold of the Office of the Assistant Secretary for Planning and Evaluation (ASPE) at the Department of Health and Human Services. Finally, we acknowledge the role of several presenters to the Panel whose names appear in Appendix B.


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EXECUTIVE SUMMARY

Cost-effectiveness analysis (CEA) is an analytic technique used to quantify the costs and benefits of health care interventions. The approach offers a structured and quantitative approach to help health care decision makers achieve better value for resources expended. Consensus groups of experts in the field have recommended the technique. However, unlike their counterparts abroad, health payers in the U.S. have been reluctant to use the approach even as health spending continues to rise rapidly, and as data from many quarters indicate inefficiencies in the system.

Understanding resistance to CEA in the U.S. has been the source of numerous papers,

books, and conferences. The purpose of this project is to build upon that work in two ways. The first is to explore the views of health plan purchasers on the matter. The second is to develop a strategic plan for policymakers to address obstacles and to consider a framework and systems for supporting wider use of CEA, drawing on stakeholders as part of the solution.

The project is based upon the views of a panel of experts convened for this purpose. The

panel, consisting of medical and pharmacy directors at public and private health plans, discussed these issues at a two-day conference held on May 31-June 1, 2006.

Identifying the obstacles Reasons for resistance to CEA in the U.S. appear to be multi-faceted and tied to the

decentralized American health care system, to a political system in which advancing changes in health policy is difficult, to cultural attitudes against limit-setting exercises, and to concerns about the adequacy and appropriateness of the evidence. We classify barriers to the use of CEA into six categories: 1) lack of cultural acceptance; 2) conflicting or weak incentives; 3) inadequate and/or inappropriate evidence base; 4) regulatory and legal barriers; 5) ethical concerns; and 6) lack of infrastructure.

The strategic plan and its rationale The vision for the strategic plan is a further integration of cost-effectiveness analysis

into the American health care system as a means of helping to achieve more equitable delivery and better value for dollars spent. We envision three pillars to support the vision: increasing use of CEA by the Centers for Medicare and Medicaid Services (CMS); creating a new independent institute to conduct and oversee CEAs and to provide a forum for addressing methodological, ethical, and legal issues; and integrating CEA into other public and private initiatives.

The strategic plan envisions three major steps or phases towards integration: building

consensus and support (short-term, 1-2 years); transitioning to CEA (intermediate term, 2-5 years); and integrating CEA (longer-term, 5-10 years). Each phase incorporates a series of initiatives as outlined in Figure 1.


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Rationale. The expert panel saw benefits and challenges from expanding the use of CEA and supported a coordinated initiative towards furthering CEA integration. Importantly, the strategic plan is put forth with a belief that CEA is one input into decisions, and that it provides a technique that can and should be used flexibly. Moreover, we emphasize that CEA should not be viewed as antithetical to ongoing efforts to advance the use of incentives into the health care system but as a tool that can exist alongside such initiatives and even enhance their design. Another premise is that what is often called the conventional wisdom about the lack of acceptability of CEA in the U.S. among the American public has never truly been tested. The rationale for the plan stems from a belief that research, consensus building, and public leadership is essential in order to move forward on CEA integration. A key challenge in the privately delivered decentralized system is that individual health plans lack incentives to use CEA: even as health plan officials acknowledge that the approach can help achieve better overall value for spending, they are fearful of being the first to use it and drawing criticism for rationing health care.

Public leadership is also important because the government already pays for half of

all health care delivered in the U.S. Medicare, as the single largest payer, is the most logical agency to assume a leadership role. Considering the relative costs and benefits of Medicare services is particularly important in light of the program’s fiscal challenges. Medicare’s efforts could help the program achieve better value and would also provide a powerful signal to the rest of the health care system. Importantly, it would build upon recent efforts by the Office of Management and Budget which call for Federal regulatory agencies in the U.S. to use CEA to provide information about which regulatory alternatives provide the most health gains per unit of resource investment.

The strategic plan also affirms the value of a new independent institute to conduct

research and to issue guidelines for the field. A new institute would provide a permanent entity to provide information to public and private payers. An independent institute would possess a measure of freedom from narrow interests and short-term political pressures. It could also provide a forum for a host of ethical, legal, and political issues that surround CEA.

Phase I: Building consensus and support (1-2 years). Building consensus and stakeholder support around the need to confront the nation’s health challenges and the potential role of CEA in the process will be crucial. It will be important to educate people about the potential role and flexibility of CEA and to build consensus on how and when CEA should be used. Part of the challenge will involve conveying the idea that CEA is a technique to enhance value and is not simply an instrument for cost containment. It will be important to proceed in transparent fashion with ample opportunity for dialogue from diverse groups of stakeholders. The Panel envisioned consensus building as an ongoing activity. Leadership at various levels, including federal, state, and private sector will be required to provide the vision and to establish the conditions for change. We call on private foundations,


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employers, consumers, health plans and professional groups to participate actively in execution of the plan. We also call for leadership within the Executive Branch and in Congress. We also recommend a series of activities, including demonstration and research projects designed to explore the potential value of CEA and to experiment with approaches for its implementation. Finally, we also advocate for the convening of public forums, conferences and workshops. Many countries that have adopted CEA undertook public discussions and established national commissions to create an explicit framework for considering resource allocation decisions. Phase II. Transitioning to CEA (2-5 years). In the intermediate term, we envision a series of steps to solidify support for CEA integration and to learn from projects developed in Phase I. This includes the development and implementation of a legislative strategy to lay the groundwork for longer-term integration. The strategy would include ideas for targeting key legislators and staffers, for building support among a broad coalition of groups including employers, health plans, patients and health professionals, for enlisting academic champions, and for holding hearings on the issue. The plan also envisions the dissemination of reports based on the research and demonstration projects developed in Phase I, and ongoing consensus building in the form of workshops and conferences. Phase III: Integrating CEA (5-10 years). In the longer term, the plan envisions integration of CEA at various levels. We highlight the three goals noted above: increasing Medicare’s use of CEA; creating a new institute; and integrating CEA into other public and private initiatives. Congress could authorize in statute the criteria that Medicare should use in covering new technologies, including the use of cost-effectiveness analysis. Furthermore, we recommend that Congress, when legislating new benefits to the Medicare program, direct CMS to determine the most cost-effective strategy for implementing the new service. We also suggest that CMS incorporate CEA into other areas, including the use of CEA to inform payment rates and incentive-based programs, such as its pay for performance initiative.

An independent institute could issue guidance to the CMS and other public and private health care payers on health technologies (including drugs, medical devices, diagnostic techniques, and medical and surgical procedures) and clinical management of specific conditions. The institute could examine cost-effectiveness of existing technologies as well as new ones. The information and guidance would be distributed as a public good to help target resources to improve health. The institute could also provide direction on methodological standards for the field thus helping to improve the quality of evidence. It could also help set a research agenda for CEA and provide a national forum for a host of related issues. The funding and governance of such an institute are critical issues that will need to be addressed. In lieu of an independent institute, expanded funding for an existing government agency, most notably the Agency for Healthcare Research and Quality (AHRQ), would also be desirable.


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Finally, the plan envisions a number of other initiatives, including a coordinated government strategy towards CEA in health care and ideally increased funding for studies at National Institutes of Health (NIH), AHRQ, and Centers for Disease Control and Prevention (CDC). It also foresees further integration of CEA in the private sector at formulary committees and technology assessment agencies.

Expectations Successful execution of the plan will begin with broad recognition that greater use of CEA can help the nation face its challenges in paying for effective health care. Implementation will require time, resources, and above all, political will. Support and action will require the involvement of multiple stakeholders. The plan is offered in anticipation that various parties from public, private and non-profit sectors will step into important roles. Achieving the goals set out in this plan is likely to be a long-term process. The plan involves the establishment of early goals, concrete steps and successes that can lead to further goals and accomplishments. There is, of course, uncertainty surrounding the road ahead. Some panelists expressed concern that the timetable was unrealistically optimistic given the political pressures arrayed against CEA. Others called for a more aggressive schedule for implementation. In the end, the time frame presented for the plan is offered as a guidepost given the time it will take for consensus building and creating an accommodating political environment. We emphasize, though, that the plan provided is a guide and that it allows for events to occur more quickly. Finally, we underscored that the plan advanced here provides a broad framework for the integration of CEA. It offers a vision for the integration of CEA and a series of concrete steps on how to get there. Many details on tactics will need to be filled in. CEA will not solve all of the health care system’s problems. But we believe that it can be a key ingredient. We offer this framework as a start down that road.


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FIGURE 1: A STRATEGIC PLAN TO INTEGRATE CEA IN THE U.S.


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1 OVERVIEW AND OBJECTIVES

1.1 Motivation and context

Cost-effectiveness analysis (CEA) offers a structured, rational, quantitative approach to

help decision makers achieve better value for health resources expended. In principle, CEA

offers a powerful tool to help the nation prioritize its resources for health care more efficiently.

Consensus groups of experts have recommended the technique as an aid to guide resource

allocation decisions in health care (Gold et al. 1996). As health spending in the U.S. approaches

$2 trillion, and as data from many quarters suggest that health care is not being delivered

efficiently, one might have expected the use of CEA to increase accordingly.

Instead, decades after its widespread promotion to the medical community, many

decision makers in the U.S. remain reluctant to use the approach formally. This resistance

contrasts to the experience in many other countries where policy makers have incorporated CEA

into their technology assessment and reimbursement procedures.

1.2 Objectives

Understanding the reasons behind this resistance has been the source of numerous

scholarly papers, books, and conferences (Eisenberg 1998; Neumann 2005; Neumann, Rosen,

and Weinstein 2005; Tunis 2004). The purpose of this project is to build upon that work in two

ways. The first is to explore resource allocation decision-making and the use of CEA from the

perspective of health plans and purchasers. The notion is that despite the extensive work on

concepts and methods of CEA and on barriers to its use (Haddix et al. 1996; Daniels and Sabin


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2002; Drummond and McGuire 2002; Drummond, Stoddart, and Torrance 1997; Gold et al.

1996; Johannesson 1996; Neumann 2005; Nord 1999; Pettiti 2000; Ubel 2000) the voices of

health care managers and the public have not been heard, or at least have not been at the

forefront of discussions. Moreover, the conventional wisdom about attitudes concerning

resource allocation and CEA, which tend to drive policy thinking, is based on weak or

nonexistent data. The goal here was to solicit the views of managers on the front lines of health

care delivery in order to identify contexts where information on value for money is an

appropriate consideration and to gain a greater understanding of why CEA is or is not used in

these instances.

The second goal was to develop a strategic plan for policymakers with their input to

address obstacles and to consider a framework and systems for CEA. The virtue of a strategic

plan is that it provides a roadmap with specific recommendations for moving ahead.

Although experts have advanced many definitions to characterize strategic planning, the

basic components are captured by the description of John Kingdon (Kingdon 1995): “A problem

is recognized, a solution is developed and available in the policy community, a political change

makes it the right time for policy change, and potential constraints are not severe.” In

accordance with this conceptualization, we consider several components for strategic planning,

including: 1) the identification of the problem, 2) the identification of solutions, and 3) the

identification of opportunities for implementation of these solutions.

1.3 Methods

This project was funded by the U.S. Agency for Healthcare Research and Quality

(AHRQ) and the U.S. Assistant Secretary for Planning and Evaluation (ASPE). We began by


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developing a background paper to review the status of CEA in the U.S. (Appendix C). Next we

convened a panel of experts comprised of senior officials at public and private health plans,

including executive officers, medical directors, and pharmacy directors. Appendix A contains

brief biographies of each panelist. Panelists were selected based on their experience in the field,

and with an eye to assembling a diverse group with respect to geography, type of health plan,

and professional background. The role of the Panelists involved reviewing drafts of the

background paper, attending and participating in a two-day meeting convened in Rockville,

Maryland on May 31-June 1, 2006, and reviewing and providing comments on several drafts of

the strategic plan.

The expert panel meeting included a workshop with panel members to explore attitudes

toward use of CEA in priority setting, presentations from leading experts in the field, input from

external stakeholders, and facilitated discussions with the panel about the strategic plan. The

agenda from the Panel meeting is contained in Appendix B.

1.4 Outline of report

This report integrates information from the Panel meeting as well as extensive reviews of

the literature by our interdisciplinary team of investigators. The sections themselves are

organized around an effort to identify obstacles, establish a vision for the future, and consider

concrete steps for achieving the vision. Section 2 reviews the case for CEA and its promise to

help deliver better value for the resources allocated to health care. The third section identifies

barriers to the use of CEA in the U.S., drawing in particular upon views expressed by the expert

panel of health plan representatives convened for this project. Section four describes the plan

and its rationale. Sections 5 through 7 discuss the three components in more detail: building


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public support; increasing CMS’s role; and creating a new institute. Section 8 discusses practical

realities in implementing the plan. The final section discusses expected outcomes.


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2 THE PROMISE OF COST-EFFECTIVENESS ANALYSIS

2.1 The potential value of CEA

The emergence of CEA and related techniques over the past decades signals the growing

appeal of scientific and “rational” approaches to social problems, including health problems

(Neumann 2005). It represents a way to level the playing field and to bring structure and order

and scientific reasoning to an unruly and inequitable health care system. The idea is that,

without such aids, serious errors in judgment, misallocations, distortions and haphazard spending

to improve health are inevitable. It can also allow policy makers to compare existing

alternatives, explore hypothetical strategies, and test the strength of underlying assumptions, all

in an explicit, quantitative, and systematic way (Haddix et al. 1996;Gold et al. 1996).

2.2 Terminology

A note about the terminology used in this report is warranted at the outset. Economic

evaluations of health care interventions can take several forms. Many are “cost-consequences

analyses,” which involve computing and listing components of costs and consequences of

alternative programs, without any attempt to aggregate results into a single metric. An

alternative approach is cost-benefit analysis (CBA) in which all costs and benefits are measured

and compared in monetary terms.

In recent years, cost-effectiveness analysis has emerged as the recommended analytic

technique for conducting economic evaluation of health and medical interventions (Gold et al.

1996). The appeal of this approach is that it allows a convenient means of quantifying both


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economic and health benefits in a single ratio: the cost per effect (C/E) ratio reflects the

increment or difference in the interventions’ costs divided by the difference in their health

effectiveness (Gold et al. 1996). While cost-effectiveness analyses can measure health effects in

disease-specific terms (i.e., costs per number of cancer cases prevented), a growing trend is to

evaluate interventions using a standard metric, such as life-years gained or quality-adjusted life

years gained (QALYs), which permits comparisons across diverse interventions and diseases. In

this report, the term cost-effectiveness analysis generally signifies a formal economic evaluation

of a health care technology, service, or program.

2.3 Views from the expert panel

The expert panel convened for this project expressed strong support for a greater

role for CEA in health policy though they also highlighted many concerns about using

CEA under current circumstances. In this report, we have attempted to convey the

sentiments expressed by the expert panelists, recognizing the challenges inherent in that

task. Where differences were important among panelists, we have tried to call attention

to them.

In general, panelists underscored the need to achieve better value for health care

spending, and endorsed the value of cost-effectiveness analysis to help achieve that goal.

They emphasized the need to frame CEA as a tool for achieving better value for our

health care system, rather than as a means of denying care. In a workshop convened at

the expert panel meeting, panelists, when provided with formal cost-effectiveness

information in a hypothetical decision making exercise, used this data to change their

stated position about resource allocation (See Box 1).


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** BOX 1 **

WORKSHOP WITH EXPERT PANELISTS ON USING COST-EFFECTIVENESS ANALYSIS

At the outset of the expert panel meeting convened for this project, panelists participated in a workshop designed to review methods and practical and ethical issues in the conduct and implementation of CEA. This workshop paralleled workshops conducted with members of the lay public who were found to be able to understand the concept of value for money as represented by CEA, and who, furnished with cost-effectiveness information, were seen to change priorities for Medicare coverage of services in a direction that favored interventions that were more cost-effective. At the conclusion of workshops conducted with members of the public, 75% of participants were either “very” or “somewhat” comfortable using CEA to inform coverage decisions within Medicare (Gold et al. In Press). Expert panel members participating in the same priority setting exercise, when provided additional information about cost-effectiveness, were similarly seen to change their priorities to favor the more cost-effective interventions. In a survey conducted at the conclusion of the workshop, panel members were asked whether they “agreed, ” “disagreed, ” or were “uncertain,” whether cost-effectiveness analysis should be used as an input into coverage decisions for Medicare. All respondents (9/9) “agreed.” The same question, but framed with respect to private insurance, found 7/9 participants in agreement with the statement and 2/9 uncertain.

2.4 Current processes used by health plans and payers

The formal application of cost-effectiveness analysis has found a place in certain quarters

of the health care system in the U.S. Several national initiatives have begun in recent years to

incorporate CEA formally, including the formulation of recommendations by the third U.S.

Preventive Services Task Force (USPSTF) (Saha et al. 2001) and the Guide to Community

Preventive Services (Carande-Kulis et al. 2000). CEA is used selectively by other government

agencies, including CDC and AHRQ (Agency for Healthcare Research and Quality 2001; Corso,

Thacker, and Koplan 2002). The Institute of Medicine recently issued a report calling for


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regulatory impact analyses from federal agencies to use cost-effectiveness analysis (Institute of

Medicine 2006).1

The influence of CEA may also be growing in other areas, including within selected

clinical guidelines. For example, CEAs have shown statin drugs to be relatively cost-effective as

secondary prevention in persons with existing heart disease but considerably less cost-effective

as primary prevention (Goldman et al. 1991). While formal recommendations did not follow

these CEAs strictly, the economic analyses were cited in the guidelines and likely play a role in

targeting therapy (Wallace et al. 2002).

Use of CEA by both private and public health plans and payers is less clear. Panelists

convened for this report underscored the variation in activities surrounding CEA. While all are

engaged in concerted efforts to better manage health care utilization and deliver care more

efficiently, the extent to which formal cost-effectiveness analysis is used varies considerably.

This seems to mirror the situation nationally.

1 President Reagan’s Executive Order 12,291, revised in President Clinton’s Executive

Order 12,866, required federal agencies to prepare a Regulatory Impact Analysis (RIA) for all major regulations, including the conduct of cost-benefit analyses to ensure that ‘benefits of the intended regulations justify their costs…” so that they are “to be designed in the most cost-effective manner” (U.S. Federal Register 1981; U.S. Federal Register 1993). Most of the regulatory impact analyses submitted in response to EO12,866 have addressed environmental and occupational safety rather than health regulations.

The Office of Management and Budget has in recent years called for improving the technical quality of benefit-cost estimates and expanding the use of cost-effectiveness analysis as well as cost-benefit analysis in regulatory analyses (U.S. Federal Register 2003). OMB Circular A-4 (Institute of Medicine 2006) updates the Office of Management and Budget’s (OMB’s) suggestions to Federal regulatory agencies for “best practices” by which to quantify and report benefits and costs of Federal regulatory actions. These standards address when to evaluate alternative regulatory approaches, when to apply available analytic techniques (i.e. CBA, CEA) including specialized analyses (i.e. for unfunded mandates), and what methodological techniques to utilize (i.e. study perspective, time horizon, discounting, measurement of uncertainty). Building on this initiative, a recent report by the Institute of Medicine called for regulatory impact analyses from federal agencies to use cost-effectiveness analysis (Institute of Medicine 2006).


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Some providers in the U.S. have been more explicit about use of CEA, including the

Department of Defense (See Box 2). Several technology assessment processes include

considerations of cost-effectiveness analysis, including recent legislation enacted in the State of

Washington: HB 2575-2005-06 (Washington State Legislature 2007). Many health plans have

begun adopting the Academy of Managed Care Pharmacy’s new evidence-based formulary

guidelines which call for drug manufacturers to submit “dossiers” of clinical and economic

evidence about their products to support the listing of new pharmaceuticals (Neumann 2004).

Almost all pharmaceutical companies as well as larger biotechnology and medical device

companies now have sophisticated health economic units reflecting a widely-held view that their

customers are considering this information when making decisions.

However, other evidence suggests that formal use of cost-effectiveness analysis by health

plans has been resisted. The U.S. Medicare program’s experience with CEA use offers an

example. As the world’s largest single payer of health services, and as one facing fiscal

challenges, the program might be expected to be an enthusiastic consumer of cost-effectiveness

information. Instead, after repeated attempts to incorporate cost-effectiveness formally as a

criterion for covering new medical technologies, Medicare has ultimately eschewed formal use

of this technique. Medicare has not implemented cost-effectiveness analysis even as it has

restructured its processes for covering new technologies in an attempt to make its process more

transparent, consistent and evidence-based (Neumann, Rosen, and Weinstein 2005; U.S. Federal

Register 1998; U.S. Federal Register 1999). Elsewhere, major technology assessment processes

omit cost-effectiveness analysis. An example is the Drug Effectiveness Review Project (DERP),


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** BOX 2 **

EXAMPLES OF ORGANIZATIONS IN THE U.S. USING COST-EFFECTIVENESS ANALYSIS

There is some precedent for organizations using formal cost-effectiveness analysis to inform

health care decisions in the U.S. We provide a few examples from the public and private sectors. Department of Defense

The Department of Defense (DOD)’s Civilian Health and Medical Program of the Uniformed Services (CHAMPUS)/TRICARE, which provides care for military personnel and families, has authority to use CEA through the FY00 National Defense Authorization Act, Section 701 “Pharmacy Benefits Program.” The Act states that selection for inclusion on the uniform formulary of particular pharmaceutical agents in each therapeutic class shall be based on the relative clinical and cost effectiveness of the agents in such class (106th Congress 1999). In judging the relative cost-effectiveness of agents in a class, the program relies on valuation by the Pharmacy and Therapeutics Committee, consisting of physicians and pharmacists with clinical experience. Final adoption depends on majority vote. Committee meetings are scheduled on a quarterly basis and open for public comment. The DoD’s Pharmacoeconomic Center conducts pharmacoeconomic research, offers technical assistance to the P&T committee and educates stakeholders about cost-effective pharmaceutical treatment. (Uniform Formulary Beneficiary Advisory Panel 2006) State of Washington In 2006 the State of Washington enacted a law (HB 2575-2005-06) to establish a health technology clinical committee to consider “in an open and transparent process, evidence regarding the safety, efficacy, and cost-effectiveness” of technologies for coverage determinations. The committee must provide a means for public comment on coverage decisions. It may form ad hoc advisory groups of specialists and/or beneficiaries if guidance on a particular technology would be helpful. Further, a “centralized, internet-based communication tool” must provide notification of review sessions and final determinations and access to the committee’s systematic technology assessment. (Washington State Legislature 2007) Wellpoint Wellpoint, one of the nation’s largest health plans with 34 million members, relies on evidence of: 1) therapeutic impact; 2) cost-effectiveness; and 3) budget impact for The Wellpoint Outcomes Based FormularySM (Wellpoint Pharmacy Management 2007). According to company materials, economic evaluations represent a key source for this data. The plan solicits evidentiary submissions from manufacturers including cost-effectiveness data, and requests decision analytic models with strong internal/external validity, consideration of structural and parameter uncertainty, and flexibility in assessing the Wellpoint population (Sweet 2006).

an alliance of 15 states and 2 private organizations that have pooled resources to synthesize and

judge clinical evidence for drug class reviews. DERP participants have adopted the convention

among many technology assessment organizations to consider clinical evidence on its own


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merits, without respect to costs. Other technology assessment organizations, including the Blue

Cross Blue Shield Technology Evaluation Center (TEC), and Kaiser have a similar policy.

Reviews of managed care practices (Gold 1999; Mathematica Policy Research 2000) do

not mention the explicit use of CEA. Surveys of health plan officials reveal the importance

decision makers place on factors such as FDA approval status, safety, effectiveness, availability

of alternative treatments in covering new health services, and acquisition cost of the technology

in question. Respondents tend not to mention explicit cost-effectiveness analysis as a key input

or mention it as a secondary factor (Daniels and Sabin 2002; Luce, Lyles, and Rentz 1996;

Schoonmaker, Bernhardt, and Holtman 2000; Singer and Bergthold 2001; Sloan, Whetten-

Goldstein, and Wilson 1997; Titlow et al. 2000). Investigators emphasize the reluctance

respondents report in discussing costs or cost-effectiveness with contracted providers or plan

members (Singer and Bergthold 2001).

Health insurance contracts typically define covered services as those that are “medically

reasonable and necessary” (Rosenbaum et al. 1999). However, seldom do definitions of medical

necessity mention cost-effectiveness (Jacobson and Kanna 2001; Sacramento HealthCare

Decisions 2001), nor do health plans exclude services on grounds that they are not cost-effective.

Panelists convened for this study highlighted the fact that the current policy environment

for health plans is focused on evidence-based medicine, cost-sharing, disease management,

consumer-driven care and “pay for performance,” which promise better coordination,

decentralization and incentive-based approaches, rather than on outright use of CEA.


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3 IDENTIFYING THE OBSTACLES

Based on feedback from the expert panel as well as reviews of the literature on

the topic, we classify obstacles to the use of CEA into six categories, which we consider

in turn: 1) lack of cultural acceptance; 2) conflicting or weak incentives to use; 3)

inadequate and/or inappropriate evidence base; 4) regulatory and legal barriers; 5) ethical

concerns; and 6) lack of infrastructure.

3.1 Lack of cultural acceptance

Observers have often cited lack of cultural acceptance as a key component of the

resistance to CEA in the U.S. Reasons have been tied to historical factors and political

traditions, and to attitudes reflective of incentives embedded in the health care system.

The result is that unlike those abroad, American citizens are not seen as sharing a

common stake in the societal allocation of health resources. Americans are also said to

mistrust top-down bureaucratic policies and generally distaste explicit limit-setting

exercises. Panelists highlighted the idea that neither physicians nor payers share a sense

that they have the license or moral authority to consider broader societal goals when

treating patients.

Cost-effectiveness may be especially unpalatable in the U.S.’s for-profit health

care system. Consumers and providers may believe that organizations are not motivated

or inspired by a desire to maximize the value of health care services to members of their

plans. Furthermore, they may believe that the overall health system reflects unwise and


21

inefficient use of resources as a result they are not motivated to forego potential

beneficial care simply because of cost. Panelists noted that health plan managers are

sensitive to criticisms that they are simply trying to reduce costs and are mindful of the

backlash that resulted when managed care attempted more aggressive tactics to rein in

costs. Surveys have found that health plan officials are reluctant to discuss cost-

effectiveness analysis with providers or consumers (Singer and Bergthold 2001).

3.2 Conflicting/weak incentives

A second explanation points to conflicting or weak incentives to make use of

CEA. Unlike the case in many countries, the U.S. lacks a single payer to consider

societal resource allocation decisions. Panelists noted a central legitimacy problem. The

pluralism of the U.S. health care system, characterized by multiple competing health

plans, weakens private organizations’ ability to use CEA. Even if it would lead to greater

gains in overall health, no private payer wants to be the first to openly deny care based on

costs for fear of risking its competitive standing in the marketplace. One panelist noted

the risk of being “put out of business” if their plan used CEA too aggressively. There are

also selection issues that may mitigate against CEA: plans do not covet acclaim as the

best one at covering a service, even if it is cost-effective, because it may attract adverse

risks.

The pluralistic landscape of U.S. healthcare makes it difficult to generate public

discussion of the need to make wise resource allocation decisions -- each player can say

that it is the job of another to restrict services, or that there is no real scarcity (only

waste). The “silo” mentality of parties in the health system mitigates against any entity


22

worrying about societal cost-effectiveness. Pharmacy benefits managers have incentives

to focus on per member per month costs rather than a consideration of total costs in

relation to effectiveness.

Some panelists saw another aspect of the incentive problem as being due to the

expensive search costs and time-consuming nature of conducting cost-effectiveness

analyses. While it benefits plans to have evidence of value, sponsoring research is not in

any single plan’s interest, because it is difficult to keep the information proprietary, and

thus to capture for themselves the full return on the investment. On the other hand, one

panelist who disagreed with this explanation noted that some organizations have held a

view that they do not mind that their research is available to other plans, because the real

advantage lies in how the research is applied.

Consumers, too, have their disincentives. Current insurance function tends to

reduce consumer incentives to utilize health resources in a cost-effective manner since

there is little financial downside for them to receive expensive and/or unnecessary

services. On the provider side, insurance plans such as Medicare do not at present

provide physicians with incentives to use less cost-effective management strategies, and

do not reward providers who deliver care more efficiently.

3.3 Inadequate evidence base

Several panelists emphasized problems with the existing evidence base of cost-

effectiveness information. In general, they echoed many of the concerns raised in the literature

on this topic.


23

One criticism is that existing CEAs too often ignore the working needs of actual

decision makers. To date, there have been difficulties in standardizing the relevance of

CE ratios across settings. Decision makers say they want simpler, more targeted, and

more timely information, more germane to their own costs. In addition, panelists pointed

to the failure of studies to consider not only the cost-effectiveness ratio associated with an

intervention, but the ultimate budgetary impact of using the service in question. Panelists

also noted that cost-effectiveness data are unavailable, particularly at the time of a

technology's diffusion into practice (Greenberg et al. 2004). They emphasized that once

a technology is covered it is difficult to uncover it, no matter how cost-ineffective it is

shown to be. It is therefore important to provide this information up front.

Panelists also highlighted another point raised by many observers over the years,

namely that the motives of cost-effectiveness analysts and/or their sponsors are part of

the problem. CEA is perceived as a tool to increase health expenditures, by those with a

financial gain at stake. Health plan officials worry about hidden biases in pharmaceutical

industry-sponsored cost-effectiveness analyses.

3.4 Regulatory/legal barriers

Another set of obstacles involves regulatory and legal barriers. Several panelists

noted that, at the state level, mandated benefits mitigate against the use of CEA to guide

resource allocation. They questioned whether state regulators would approve contract

provisions that included CEA. Panelists also noted that private plans may feel

constrained from pooling their resources for the evaluation of technologies on the basis of

CEA because of antitrust concerns.


24

Several panelists mentioned potential legal barriers. Though there has been little

actual litigation thus far on CEA, health plans and physicians fear lawsuits if they use

CEA to deny coverage to a new treatment that offers positive health benefits. In terms of

Medicare, many observers have noted that the program may or may not have legal

authority to use CEA, but the program has been effectively thwarted from using CEA in

its coverage decisions (Neumann, Rosen, and Weinstein 2005; Fox 2005; Foote 2002).

3.5 Ethical concerns

Placing limits on health care in any manner raises multiple questions. Panelists

highlighted several concerns about using CEA. In the workshop conducted with the expert

panelists for this report, many of these ethical issues were underscored along with the complexity

of the area. For example, panelists agreed with statements that priority should be given to certain

populations, such as younger people and those in poorer health, regardless of whether the service

in question is cost-effective (Box 3).

These sentiments echo what has been found in some surveys of the public. In prioritizing

spending for health care resources, people do not always choose efficiency as a primary

objective, but rather identify objectives such as: helping people most in need, or helping certain

vulnerable populations such as children, the disabled, or the elderly. One author has documented

a desire to avoid discrimination against people with chronic illness or disability even when

treatments are not cost-effective (Ubel 2000).


25

** BOX 3 **

PANEL VIEWS ON ETHICAL AND NORMATIVE ISSUES ASSOCIATED WITH CEA

Standard CEA is neutral in the account that it takes of certain areas that many feel warrant consideration over and above strict considerations of the “value for money” that studies provide. At the conclusion of the opening workshop on CEA, expert panelists were asked their views (“strongly agree,” “agree,” “disagree,” “strongly disagree”) with reference to: how factors such as age and behavioral decisions should enter into coverage considerations; whether “life-saving” and “health improving” can be reasonably considered on the same scale as equivalent attributes of an intervention; whether the size of benefit an intervention confers should have an impact on coverage decisions; and, whether people who are in poorer versus better health should be given priority for interventions that are equally effective and affordable. Their responses suggest that CE ratios should not be the sole grounds for coverage decisions. Response Table.

Strongly Agree Agree Disagree Strongly Disagree

Priority should be given to younger people

6 3

Illnesses arising from behavioral choices should be the responsibility of the individual

2 6 1

It is unfair to deny a healthcare service on the basis of its small benefit

2 5 2

Priority should be given to those in poorer health

8 1

Life Saving Interventions should always have priority over QOL improving ones

5 4

Physicians have their own concerns. Applying population standards can risk violating

clinicians’ advocacy duties, compromising the trust necessary for good doctor-patient

relationship (Ubel 2000). Physicians’ medical training emphasizes an ethical responsibility to

patients for best available medical care, a responsibility that can conflict with their uncertain role

as gatekeepers of limited resources for patients collectively (Weinstein 2001). Application of

CEA can be seen as violating the special moral importance of health, or as breaching citizens’

inherent rights to health care (Daniels and Sabin 2002).


26

3.6 Lack of infrastructure

A final obstacle pertains to lack of infrastructure. Several panel members

underscored the fact that there is no national forum or organization for discussion or

dissemination of cost-effectiveness studies. Unlike the case in other countries, there is no

single agency, viewed as an independent and trustworthy source, to conduct, review,

house and disseminate analyses. Panelists noted that such an agency could provide a

valuable guide and resource in the U.S.


27

4 THE PLAN AND ITS RATIONALE

4.1 Overview of the plan

The vision for the plan is a more accepted and integrated place for cost-

effectiveness analysis into the American health care system. While the Panelists

recognized the formidable challenges involved in moving forward on CEA, they also

expressed a view that the obstacles highlighted earlier were not intractable. The plan is

offered as a strategy for moving ahead in recognition of the barriers, and of the

uncertainties involved.

In broad terms, panelists agreed with the goal of using CEA to help advance an

efficient delivery of health care to achieve better value. There was also a general sense

that strategic opportunities exist for CEA, despite the formidable challenges.

The plan envisions three pillars to support the vision: increasing CMS’s role in

CEA; creating a new institute to conduct and oversee CEAs; and integrating CEA into

other public and private initiatives.

The plan itself includes three major steps or phases towards integration: building

consensus and support (short-term, 1-2 years); transitioning to CEA (intermediate term,

2-5 years); and integrating CEA (longer-term, 5-10 years). Each phase incorporates a

series of initiatives as outlined in Figure 1.

Phase I: Building consensus and support (1-2 years). Building consensus and

stakeholder support around the need to confront the nation’s health challenges and the


28

potential role of CEA in the process will be crucial. It will be important to educate

people about the potential role and flexibility of CEA and to build consensus on how and

when CEA should be used. Part of the challenge will involve conveying the idea that

CEA is a technique to enhance value and not simply an instrument for cost containment.

That is, though the technique could be used as a mechanism for aiding efforts to curtail

spending growth, CEA doesn’t necessarily limit resources so much as it asks for value

from them. It will be important to proceed in transparent fashion with ample opportunity

for input from diverse groups of stakeholders.

Leadership at the federal and state levels, as well as in the private sector will be

required to provide the vision and to establish the conditions for change. We call on

private foundations, employers, consumers, health plans and professional groups to

participate actively in execution of the plan. We also call for leadership within the

Executive Branch and in Congress.

We recommend a series of activities to engage leaders at all these levels,

including demonstration and research projects designed to explore and demonstrate the

potential value of CEA, and to experiment with approaches for its implementation. We

also advocate convening public forums, conferences and workshops. Many countries that

have adopted CEA undertook public discussions and established national commissions to

create an explicit framework for limit setting.

Phase II. Transitioning to CEA (2-5 years). In the intermediate term, we

envision a series of steps to solidify support for CEA. This includes the development and

implementation of a legislative strategy to lay the groundwork for longer-term


29

integration. The strategy would include ideas for targeting key legislators and staffers,

for building support among a broad coalition of groups including employers, health plans,

patients and health professionals, for enlisting academic champions, and for holding

hearings on the issue. The plan also envisions the dissemination of reports based on the

research and demonstration projects developed in Phase I, and ongoing consensus

building in the form of workshops and conferences.

Phase III: Integrating CEA (5-10 years). In the longer term, the plan envisions

integration of CEA at various levels. We highlight three goals, including increasing

Medicare’s role; creating a new institute; and integrating CEA into other public and

private initiatives.

4.2 Rationale

The expert panel saw benefits and challenges in expanding the use of CEA and

supported a coordinated initiative to accomplish the goal. The premise here, based on the

panel discussions, is that CEA’s advantages in providing formal analysis to help

decision-makers understand the economic and clinical consequences of their decisions

outweigh potential downsides. Another premise is that what is often called conventional

wisdom about the lack of acceptability of CEA in the U.S. has never truly been tested.

Panelists also highlighted the notion that moving the health system towards the use of

CEA is an ongoing process that will not occur all at once but rather will involve a series

of activities.


30

Importantly, the strategic plan is advanced with the notion that cost-effectiveness

information has elements of a public good that is under-produced by private markets and

existing institutions. It is also put forth with a belief that CEA is one input into decisions,

and that it provides tool that can and should be used flexibly. The use of CEA has

sometimes been criticized on grounds that it will harm innovation and that it imposes a

bureaucratic “one-size-fits-all” population-view of medicine. We emphasize that CEA

should not be viewed as antithetical to ongoing efforts to advance the use of incentives

into the health care system but as a tool that can exist alongside such initiatives and even

enhance their design.

The plan recognizes that integrating CEA into health care decisions will involve

greater acknowledgement among diverse stakeholders about the challenges the country

confronts in paying for health care. For the plan to be successful, this will likely require

recognition that there is a common stake in developing policy solutions, and consensus

that CEA can help achieve greater value for spending. Recent research with focus groups

of the public suggests that consensus building and educational efforts can be effective

(Ginsburg, Goold, and Danis 2006; Gold, Franks, Siegelberg et al. In Press; Clinical

Economics Resource Links: Policy Projects 2005).

The rationale for the plan also stems from a belief that public leadership is

essential in order to move forward on CEA. As discussed earlier, a key challenge in the

privately delivered decentralized system is that individual plans lack incentives to use

CEA: even as health plan officials acknowledge that the approach can help achieve

better overall value for spending, they are fearful of being the first to use it and drawing

criticism for limiting health care.


31

Public leadership is also important because the government already pays for half

of all health care delivered in the U.S. Medicare, as the single largest payer, is the most

logical agency to assume a leadership role. Public efforts on CEA can help address these

incentive problems faced by private plans as well as regulatory barriers. Considering the

relative costs and benefits of Medicare services is sensible in any political and economic

environment, but is particularly important in light of the program’s fiscal challenges.

Medicare’s efforts would help the program achieve better value and would also provide a

powerful signal to the rest of the health care system. Importantly, it would build upon a

recent Institute of Medicine (IoM) report, which calls for U.S. Federal regulatory

agencies to use CEA to provide information about which regulatory alternatives provide

the most health gains per unit of resource investment (Institute of Medicine 2006), and an

earlier IoM analysis which emphasizes the potential importance of cost-effectiveness

considerations in Medicare coverage for preventive and other services (Institute of

Medicine 2000).

The plan also affirms the value of a new independent institute to conduct research

and to issue guidelines for the field. Currently, a number of federal agencies play some

role in conducting and disseminating CEAs. For example, AHRQ and the NIH sponsor

internal and external research on the topic. CDC has also applied economic models and

cost-effectiveness analyses on a variety of public health strategies (Centers for Disease

Control and Prevention 1999; Corso, Thacker, and Koplan 2002; U.S.Office of

Technology Assessment 1994). An important initiative that demonstrates the potential

for a greater federal role in the area is Section 1013 of the Medicare Modernization Act,

which calls for AHRQ to conduct research on the “outcomes, comparative clinical


32

effectiveness, and appropriateness of health care, including prescription drugs,” though

notably, the Act omits any mention of cost-effectiveness analysis.

These existing federal activities are important and will undoubtedly continue.

However, they are also constrained in the area of cost-effectiveness analysis, both by

their narrow missions and by political pressures. A new institute would provide a

permanent entity to provide information to public and private payers. An independent

institute would possess a measure of freedom from narrow interests and short-term

political pressures. It could also provide a forum for a host of ethical, legal, and political

issues that surround CEA.

Finally, the plan envisions leadership at other levels, as well, including employers

and non-profit foundations. Employers are increasingly seeking flexibility and

accountability in their coverage and benefit design. They can play an important role with

respect to CEA. Foundations can also play a vital role in helping to fund research and to

set the agenda for change at multiple levels.


33

5 PHASE I: BUILDING CONSENSUS AND SUPPORT

Integrating cost-effectiveness into health policy decisions will likely require a

multi-pronged strategy that works at different levels with opportunities and time for

feedback and adaptation. The Panel calls for a three-phased strategy that begins with a

first phase of building consensus and support to convey to policymakers and the public

the nature of the problem and the use of CEA as a helpful solution. We envision three

sets of activities: identifying leadership; developing projects to study the use of CEA;

and convening stakeholders in town meetings and other activities.

5.1 Identifying Leadership

We recognize the many challenges that leaders will have in engaging the issue of

cost-effectiveness analysis. Some panelists expressed skepticism, for example, about

how realistic it is to expect that CMS will take a leadership role given the political

pressures the program faces. It was felt that, particularly at earlier phases of the effort,

gains would come by slowly building success stories at the state and private sector level.

Nonetheless, that national-level leadership is essential to establish conditions for change,

and our plan begins with a strong call at various levels, including the federal, state, and

private sectors. The plan also envisions leadership at private foundations, which could

fund projects and meetings on the topic. Ideally, leadership will also come from

business, consumer, and professional groups, who could engage the issue with their


34

members, and participate in forums and conferences on the topic. We also call on

leadership within the Executive Branch and in Congress.

5.2 Developing projects to study CEA

In Phase I, the Panel envisions the development of projects to learn about the

settings where cost-effectiveness information is most useful, and documenting this

through case studies. We highlight several examples.

5.2.1 CMS Demonstrations

In the longer term, the strategic plan calls for an increased role for CEA at CMS.

In Phase I, however, we envision demonstration projects in the Medicare program to

highlight potential uses of CEA to help policy makers understand its potential and

pitfalls, and to help achieve consensus about the value of the approach. Medicare’s

demonstration authority provides an ideal vehicle for testing CEA in this fashion.

Moreover, CMS already has experience with demonstration projects to consider the

clinical effects and cost-effectiveness of competing drugs for rheumatoid arthritis and

multiple sclerosis.

5.2.2 Research projects

Implementation of the strategic plan will also benefit from various research

projects which are vital to help move the field forward. We highlight four examples that

emerged from our Panel discussions and from other experts. Ideally, these projects


35

would be funded by appropriate federal agencies (e.g., NIH, AHRQ), and by private

foundations.

Develop worked examples of CEA to guide benefit design. One project would

involve working with a payer to define, implement, and evaluate a program to use CEA

to guide benefit design. For example, researchers could analyze an array of cancer

screening policies examining which approaches were most cost-effective within a

delivery system.

In similar fashion, researchers could examine formulary policies and opportunities for

using CEA to improve them. Formularies with tiered co-payment structures or preferred drug

lists have become increasingly popular, as plans seek to provide financial inducements for

enrollees to select the least expensive drugs, while avoiding the restrictions of entirely closed

formulary systems (Fendrick et al. 2001; Gabel et al. 2002).

In this project researchers would investigate this issue by examining the formulary of a

large health provider to investigate the extent to which preferred drugs lists and tiered formulary

classes reflect evidence of value, as measured in available cost-effectiveness analyses. Ideally,

drugs with favorable cost-effectiveness would receive preferential formulary status (i.e., patients

would have financial incentives to use these drugs over non-preferred drugs). Instead, observers

complain that plans often base patient contributions on drugs’ acquisition cost and in fact do not

consider value in formulary placement decisions (Kleinke 2000;Fendrick et al. 2001). However,

there has been little empirical evidence on whether formulary policies actually reflect evidence

of value (Neumann et al. 2006).


36

Simulation: how much savings are possible with CEA-guided allocation?

Although economic efficiency is only one criterion for allocating resources to alternative

public health interventions, if total expenditures on public health remain fixed, diversion

of resources from more cost-effective interventions to less cost-effective interventions

results in the statistical loss of life or a statistical decrease in the quality of life.

Researchers have attempted to model and quantify this loss in various sectors – e.g.,

injury prevention, medicine, and environmental protection – by estimating the number of

lives that would be saved if an economically optimal allocation of resources were

adopted (Tengs and Graham 1996). This type of evaluation requires quantification of the

present resource allocation across interventions so that its benefits can be compared with

a more efficient allocation.

If one could identify costs, health benefits, and levels of implementation for alternative

public health interventions, one could use linear programming techniques to determine the

optimal allocation of health resources within specified sectors and across sectors. The solution

to the linear program is an optimized “investment portfolio” of interventions. For each

intervention, the corresponding decision variable indicates the optimal level of implementation.

In general, the programs that offer the most favorable (i.e., lowest) cost-effectiveness ratio will

have higher levels of implementation. By comparing the health benefits associated with the

solution to the linear program to the health benefits calculated for the current allocation of

resources, one would estimate the extent to which health could be improved by adjusting these

allocations. The cost-effectiveness analyses used in this work would be singled out for high

quality and generalizability.


37

A randomized controlled trial to examine the impact of CEA on physician

behavior. A third project would involve a randomized controlled trial to examine the

impact of the provision of cost-effectiveness information on physician behavior. The

idea is to test how the presence of CE information affects practice patterns, as well as

costs and outcomes of care.

Certain types of educational information would be disseminated to one group of

physicians (e.g., one group receives a package that contains information on standard clinical

guidelines but where the clinical guidelines cite cost-effectiveness analyses). The other group

would receive standard information where the CEAs are not mentioned. The hypothesis is that

the provision of information will help physicians target treatment in more efficient ways with

improvement or no change in overall health outcomes. Variations on this theme are also

possible. For example, a study could provide selected cost-effectiveness information to groups

who differ in terms of the incentives they face as providers (e.g., whether paid on a capitated or

fee-for-service basis).

Surveys of consumer/physician attitudes. When asked in surveys, many health

plan officials state that cost-effectiveness does not play a role in decision making, or that

it is a minor, secondary consideration after clinical factors (Luce, Lyles, and Rentz 1996;

Sloan, Whetten-Goldstein, and Wilson 1997; Titlow et al. 2000; Schoonmaker,

Bernhardt, and Holtman 2000)). Investigators emphasize the reluctance respondents

report in wanting to discuss costs or cost-effectiveness with contracted providers or plan

members (Singer and Bergthold 2001). Surveys of decision makers corroborate these

attitudes, confirming a lack of expertise and a misunderstanding of economic concepts as


38

key problems for decision makers in the U.S. and abroad (Zellmer 1995; Sloan, Whetten-

Goldstein, and Wilson 1997; Duthie et al. 1999; Stoykova et al. 2000; Grizzle, Motheral,

and Olson 2000; Anell and Svarvar 2000; Ubel et al. 2003). Familiarizing people with

the evidence might result in more acceptance of CEA, consistent with ongoing attempts

to provide more transparency in health plans in general.

This research project would involve a series of targeted focus groups and surveys to

explore perceptions and attitudes on the part of payers, physicians, patients and the public about

cost-effectiveness analysis. This work would build upon existing research on the topic

(Ginsburg, Goold, and Danis 2006; Clinical Economics Resource Links: Policy Projects 2005).

For example, in one set of surveys researchers would compare physicians’ and health plan

medical directors’ perceptions about relative cost-effectiveness of interventions with published

estimates. They would also examine how treatment and coverage choices vary with different

forms of economic information, and general attitudes about rationing and cost-effectiveness

ratios. A number of other projects would likely be worthwhile to explore, including: surveys on

the usefulness of cost-effectiveness ratios alongside other metrics; the acceptability of CEA for

prevention versus treatment; and interest in the use of CEA to compare options within the same

disease (as opposed to using CEA to guide resource allocation decisions across diseases). The

integrated strategy would also involve measurement of attitudes at baseline and over time to

monitor public opinion.

5.2.3 White paper on precedents

The plan also envisions a white paper on the experience of other payers in the U.S. and

abroad in using CEA. As noted in section 2, some organizations have been incorporating CEA


39

into their decision processes. States and private plans have served as laboratories of

experimentation.

Panelists felt that a paper on the specific successes and challenges these organizations

have confronted would help support the CEA agenda. In particular, showcasing successes that

have grown organically, particularly at state and regional levels, will have considerable

advantages, and counter perceptions that integrating CEA is a top-down plan foisted on the

public.

The white paper could also capture lessons from reimbursement authorities abroad who

use CEA to inform such decisions. While different values and cultures make drawing parallels

challenging, U.S. policy makers can learn some lessons from these experiences – both drawbacks

and advantages. In Australia, for example, some observers have argued that use of CEA has

provided a structured process of evaluating strength of evidence, stating assumptions, and

forcing a discussion of the service’s value, all of which brought insight that was as informative in

its way as the final CE estimates themselves (Mitchell 2002).

Policy makers involved in integrating CEA have also emphasized that advancing the use

of CEA is not easy. An example is the National Institute of Health and Clinical Excellence

(NICE), an agency in England and Wales that issues guidance to the National Health Service on

the clinical and cost-effectiveness of individual health technologies (including drugs, medical

devices, diagnostic techniques, and medical and surgical procedures) and the clinical

management of specific conditions. NICE has weathered criticism on numerous grounds: that it

has harmed innovation; that it is overly responsive to political pressures; that the basis for

decisions are not clear; and that it imposes a bureaucratic “one size fits all” population-view of

medicine (Dent and Sadler 2002; Lipman 2001; Smith 2000; Walker 2001). Moreover,


40

observers note that CEA is not a panacea for health systems that adopt it: tensions among

efficiency, equity, and costs persist (Rawlins 2004) as do questions about the methodology and

the extent to which the data is actually used (PausJenssen, Singer, and Detsky 2003). However,

the experience has also shown the value of CEA in helping to determine the consequences of

directing resources to particular patient subgroups or strategies (Sculpher, Drummond, and

O'Brien 2001). Furthermore, these efforts have emphasized the importance of transparency and

public input, including in the case of NICE a Citizens’ Council to provide guidance on some

decisions, and the need for flexibility for special considerations for certain populations.

5.3 Convening stakeholders

In Phase I, we also envision a series of activities to convene stakeholders about

the use of CEA, as the Panel strongly felt a national discussion on the topic was

necessary. Observers in the field note that the kind of broad public acceptance of limits

that occurred in places such as Norway, Sweden, the Netherlands, New Zealand and other

countries took place after the establishment of national commissions in the 1980s and

1990s to discuss priorities and choices and to create an explicit framework for

considering resource allocation decisions. While these commissions elicited controversy,

they were also greeted by public discussions and broad-based support of the need for a

limit-setting process. Discussion centered on definitions of fair process, need for

transparency, community involvement and mechanisms for encouraging deliberation in

the broader democratic process. Other considerations included the appropriate role of

experts, the optimal level of openness, and a workable appeals process.

Moreover, recent research on attitudes towards CEA suggests that such change

might be possible in the U.S. and that the American public may be more willing than


41

health authorities believe to rely on explicit techniques for rationing. Studies by Gold et

al. (Gold et al. In Press) suggest that members of the public recognize the value of CEA

and may be comfortable using such information to inform Medicare decisions.

We envision forums, conferences and workshops with key stakeholders. The

meetings could address many issues: conveying the value of CEA in non-scientific

fashion; portraying CEA as a way to empower clinicians and patients to optimize value in

treatment decisions; using CEA in a way that preserves freedoms (e.g., for physicians to

prescribe), and in a way that does not compromise ethical principles; using CEA while

remaining sensitive to particular populations (e.g., disabled); highlighting CEA as a tool

to guide benefit design and incentive-based systems, and to expand access rather than to

deny treatment.

Key audiences will include: the public, consumers, physicians, employers,

manufacturers and public and private policy makers. The forums should include the

participation of citizens and beneficiary groups as well as of groups representing the

disabled and older Americans, and employers and businesses.


42

6 PHASE II: TRANSITIONING TO CEA

The Panel envisions a second phase, which involves activities that comprise a

transition period to CEA. The components include development of a legislative strategy,

reports on the projects developed in phase I, and ongoing consensus building.

6.1 Develop and implement legislative strategy

The Panel foresees the development of a legislative strategy as integral to the

plan’s ultimate success. In particular, increasing CMS’s role in CEA and creating a new

institute will likely require Congressional action. The legislative strategy should consider

ways to target committee members, and plans for building support among a broad

coalition of stakeholder groups, including business groups, advocacy groups, citizens

groups, health plans, and professional groups.

6.2 Report on Projects

The transition phase also envisions reports on the research and demonstration

projects developed in Phase I as a way of building momentum. The results would be

disseminated to policy audiences, the medical community, and the media.

6.3 Ongoing consensus building

The plan also calls for ongoing consensus building, including conferences on

issues related to CEA, including judicial receptivity, ethical considerations and the use of

CEA in the private sector.


43

Judicial receptivity. To date, courts do not seem to have ruled explicitly on the use of

CEA in health care, nor have professional standards incorporated cost (Jacobson and Kanna

2001). However, there are some reasons to believe that courts may not view CEA unfavorably.

Nothing legally prevents private health insurers from writing contracts that specify

covered services as those that are deemed “medically necessary and cost-effective” though

patients might challenge its use if they were not informed about how this might influence clinical

decisions (Jacobson and Kanna 2001). Some legal scholars suggest that courts would defer to

the government’s position on the matter, as long as policies were not handled in an arbitrary or

capricious manner (Jacobson and Kanna 2001).

Courts increasingly defer to the market in many aspects of litigation and in some

cases have pushed to use CEA. There are also plausible reasons to believe that health

plans could withstand legal challenges to its use, as they have withstood challenges to

other cost containment initiatives (Jacobson and Kanna 2001). Possibly, employers who

self-insure may be more inclined to use CEA because of their ERISA preemption.

Moreover, courts have generally been more receptive to government application of CEA

and cost-benefit analysis (CBA) and even encouraged it (Jacobson and Kanna 2001).

Jacobson and Kanna (2001) argue that government agencies generally have wide latitude

to use analytic tools such as cost-effectiveness analysis in their decision making -- that

courts generally defer to regulatory agency experience, though decisions must be well-

reasoned, and not “arbitrary, capricious, an abuse of discretion, or otherwise not in

accordance of the law.” Even when courts find regulatory decisions arbitrary, they

generally have remanded them to agencies for further consideration, leaving decision-


44

making power to the agencies (though on occasion courts have questioned the

methodology used) (Jacobson and Kanna 2001).

It will be important to stimulate more scholarly research in the field and provide a

forum for discussions in the area. Judicial receptivity to CEA will hinge in part on the

acceptance of CEA among physicians, but the medical community’s acceptance of CEA

will in turn depend on the courts. The stimulation of research for the legal literature

could translate eventually into legal strategy. This would include conferences on health

and law, particularly on the empirical issues surrounding CEA and the law.

A related area is the receptivity of CEA among state health insurance

commissions. While courts adjudicate the interpretation of contract, the state insurance

commission regulates the contract terms that can be sold within the state and may

explicitly require that certain services be included in contract or preclude the use of

certain exclusions.

Ethical considerations. A key area to develop are objectives and processes that

participants see as “fair.” As highlighted earlier in Section 3.5, when asked about prioritizing

spending for health care resources, policy makers and the public do not want just the pursuit of

efficiency that CEA promises but a set of other goals that incorporate equity considerations and

focus on vulnerable populations, such as children, the disabled, or the elderly.

Because use of cost-effectiveness analysis in specific decisions will lead to the denial of

some medical care (e.g., by denying coverage for some technologies that treat particular

illnesses), and because the reasoning underlying such decisions is likely to be highly technical, it


45

will be critical that the process itself be viewed as fair. We envision the ongoing consensus

building efforts to address these issues and to provide forums for stakeholders.


46

7 PHASE III: INTEGRATING CEA

In the longer term (5-10 years), the Panel foresees the integration of CEA,

including an increase in the role of CEA at CMS, the establishment of a new institute,

and the integration of CEA in other public and private initiatives.

7.1 Increasing CMS use of CEA

Nothing in federal statute explicitly bars Medicare from using CEA. CMS could, in

principle, incorporate CEA into its coverage and payment decisions for technologies directly by

interpreting Medicare’s statutory authority to cover “reasonable and necessary” services as

license to use CEA. Such a step would almost certainly require formal rulemaking procedures

(i.e., publishing regulations in the Federal Register) because it changes longstanding policy not

to consider cost-effectiveness (Neumann, Rosen, and Weinstein 2005). In practice, however,

this course has proven untenable to date (Foote 2002). Diverse groups -- including

pharmaceutical and medical device companies, medical professional societies, and patient

advocacy groups -- have successfully opposed this step in the past, charging that it would ration

needed care to the elderly.

Congress could legislate CMS’s authority to use CEA, for example, by specifying in

statute the criteria that Medicare should use in covering new technologies (Gillick 2004). When

adding new benefits to the Medicare program (e.g., the Medicare Modernization Act (MMA)

added cardiovascular screening tests and diabetes screening), Congress could also mandate that

CMS determine the most cost-effective strategy for implementing the service. The goal of

building support in Phase I is moving towards developing interest in Congress to act.


47

CMS has moved ahead with other, less direct, initiatives designed to obtain better value

for money for the program. This is reflected in numerous and ongoing reforms to monitor

quality of care provided, and to change incentives so that better performing providers receive

higher payment (Medicare Payment Advisory Commission 2006). It is also reflected in the fact

that CMS is ever more carefully scrutinizing and parsing clinical evidence as it develops

coverage and payment policies (Neumann et al. 2005a). When CMS covers new medical

technologies, it does so with conditions on coverage tied to the clinical characteristics of patient

sub-groups or to aspects of hospitals that are consistent with efficiently delivered care (e.g., high

volume facilities).

Furthermore, CMS has in quieter fashion, undertaken a number of projects that make use

of cost-effectiveness information to inform coverage and payment policy, if not to deny services

outright. These include various internal pilot studies and demonstration projects. An example is

a pilot study to determine a price for a new immunochemical assay that would yield the same

average cost-effectiveness as the older guiac test. Another is a demonstration project to consider

the clinical effects and cost-effectiveness of competing drugs for rheumatoid arthritis and

multiple sclerosis. Notably, the demonstration project is using researchers in the U.K., who have

worked on previous NICE reports.

In addition, in selected cases, CMS has also participated in clinical trials of new

procedures (e.g., lung volume reduction surgery; daily hemodialysis) that explicitly include cost-

effectiveness analysis (National Heart, Lung, and Blood Institute 2003). Finally, CMS

contractors do employ a kind of CEA through least costly alternative authority in program

manuals, which has been used for selected drugs (e.g., filgrastim versus pegfilgrastim).


48

Medicare could also explore the potential to use CEA in other initiatives. For example,

Medicare’s initiative on “coverage with evidence development” involves providing limited or

conditional coverage of a technology pending a demonstration of its effectiveness. CMS might

use this initiative to investigate the cost-effectiveness of the technology. An alternative would

go further by calling on manufacturers to bear some of the risks associated with new

technologies even after Medicare grants coverage beyond the trial stage of development. In

particular, CMS could consider arrangements with drug or device manufacturers whereby

Medicare covers a technology but holds manufacturers at risk if expectations about its

effectiveness do not develop. This arrangement is now being tested for multiple sclerosis drugs

in the United Kingdom (Chapman et al. 2003).

Even in cases where the data on cost-effectiveness are already well understood,

CMS could use reimbursement policy to encourage adoption of interventions yielding the

best returns. For example, coverage decisions could be associated with payment rates

whereby CMS provides higher payment or more generous DRG assignment for more

cost-effective technologies. In the future, coverage could also be linked to Medicare’s

Pay for Performance initiative, whereby CMS creates incentives for physicians and

hospitals to provide more effective (and cost-effective) technologies (Medicare Payment

Advisory Commission 2006). Such incentives could be extended to health care recipients

by linking their co-payments to a technology’s cost-effectiveness. Indeed, CMS has in

some circumstances essentially linked coverage levels and cost-effectiveness. For

example, in covering left-ventricular assist devices, CMS set the price below market

rates, the equivalent of implicitly identifying an acceptable cost-effectiveness threshold

and then setting the technology’s price to a level that corresponds to that ratio.


49

7.2 Expanding CEA infrastructure / Creating a new institute

The idea of an entity to produce or evaluate cost-effectiveness is a longstanding one

(Kassirer and Angell 1994; Reinhardt 1997; Reinhardt 2004). Its role would be to conduct and

disseminate CEAs, to issue methodological guidelines, and to provide a forum for issues related

to CEA.

One option would involve expanding the role of the Agency for Healthcare Research and

Quality (AHRQ) in this area (Neumann and Cohen 2007). As the lead federal agency for health

services research, the Agency for Healthcare Research and Quality (AHRQ) is a natural

candidate to serve as the organization conducting cost-effectiveness research. In addition,

AHRQ has in the past funded many projects to examine the costs and outcomes of various health

and medical services, and at times has funded methodological work on methods of CEA (Siegel,

2003). AHRQ has also funded specific cost-effectiveness analyses in areas, such as lung volume

reduction surgery, liver transplantation, and heart disease (AHRQ 2003).

A downside to the idea of AHRQ taking a leading role in cost-effectiveness research is

that it might attract political opposition and potentially detract from the important activities in its

mission. History has shown that the AHRQ can attract strong opposition, which can threaten its

funding base, when it is perceived as recommending against certain health care services (Deyo,

1997).

The discussion at the Panel meeting centered mostly on the creation of a new,

independent institute with the rationale that the entity would be best able to carry out the mission

and best insulated from forces that would threaten its independence. However, the prevailing


50

sentiment seemed to be that creation of a capability and a steady funding base for more cost-

effectiveness analyses would be helpful regardless of its placement in or out of government.

One option is to model the institute after the National Institute of Health and Clinical

Excellence (NICE). Like NICE, the Institute could review existing studies, conduct selected

analyses itself, and provide advice to Medicare and other payers. It could also help set standards

for the field, help to monitor and improve the quality of the evidence, and provide a forum for

discussions on a host of issues surrounding CEA. A healthy marketplace for other groups to

produce information could endure – the recent action by Consumer Reports to compare the price

and effectiveness of prescription drugs is but one example (Consumers Union 2004). The

Institute could serve as a public and “central repository” of cost-effectiveness studies, as one

panelist suggests.

Governance and funding for such an entity is a critical question that requires more

deliberation (e.g., whether the Director and Board are appointed by the Congress or Executive

Branch) (Wilensky 2006). Panel members stressed the need for an Institute to be as objective

and independent as possible, and as free from political influence.

Various funding arrangements are possible, including public funding. Another possibility

is a new quasi public/private Institute of Medicine-like entity to provide advice on cost-

effectiveness. Possibly, several independent institutes could be created to conduct and

disseminate such research. The information and advice could be distributed as a public good to

help target resources to improve health. Medicare – and its private contractors – would be free to

accept or reject recommendations. The non-binding nature of the recommendations is important:

decision makers themselves would decide how much weight to give cost-effectiveness evidence,

and how much to other factors. Uwe Reinhardt (Reinhardt 2004), for example, has proposed that


51

funding come from a small surcharge levied by the federal government on the nation’s annual

spending on prescription drugs. The alternative is funding by Congress, which has advantages,

though the annual appropriations would inevitably be linked to political pressures.

The Institute could play an important role in improving the quality and credibility of cost-

effectiveness information. The Institute could advise on methodological issues; data collection;

development of improvement plans with targets and tools for measuring outcomes;

implementation and testing of interventions; determination of when targets have been met; and

process for acting on what is learned and the ensuing steps. The Institute could have a Citizen’s

Council, to help ensure public input into its activities.

The Institute could create revised technical guidelines for conducting and

reporting on CEAs. The U.S. Panel on Cost-Effectiveness, which convened from 1993-

95 and reported its recommendations in 1996, represented a large-scale effort to define

the state of the art (Gold et al. 1996). While it is difficult to measure its precise impact,

signs suggest that it had a major influence on the field in terms of the number of times its

papers have been cited, and the changes in certain practices that resulted (Neumann et al.

2005). A great deal of activity has resulted in 10 years and the field would benefit from a

fresh look. A revised effort could focus on both technical and reporting aspects. In terms

of technical aspects, a new effort could include: integrating CEA with systematic

reviews; the collection of economics alongside clinical trials; measuring productivity;

modeling real world populations; incorporating uncertainty; and addressing ethical

considerations. Reporting of CEAs could examine: the role of journal editors; web-based

access to data and models; and ways to reduce bias in analyses.


52

7.3 Integrating CEA into other public and private initiatives

Finally, the plan envisions a number of other public and private initiatives to integrate

CEA. Other government agencies, including NIH, AHRQ, and CDC have ongoing activities in

CEA. Presumably all of these will continue at some level and could benefit from government-

wide coordination.

On the private side, some plans (e.g., Humana) are experimenting with value-based

benefit designs. Others have proposed lowering co-payments for cost-effective interventions, or

separating coverage for primary versus secondary prevention based on CEA (Fendrick et al.

2001). CEA might also be integrated into various incentive-based approaches including pay-for-

performance initiatives.


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8 EXPECTATIONS

Achieving greater acceptance of CEA will require time, resources, and leadership.

To forge any kind of consensus and action on cost-effectiveness in this environment,

leadership will be needed at local, state, and federal levels to frame the debate and to

push for changes. Moreover, the recommendations here will require funding, though it is

important to keep in mind that the amount of money is small relative to total spending on

health. Precisely who will fund and undertake the activities spelled out is a critical issue.

The plan is offered in anticipation that various parties from public, private and non-profit

sectors will step into important roles.

Achieving the goals set out in this plan is likely to be a long-term process. There

is, of course, uncertainty about the road ahead. It will be challenging to move policy

makers and the public in the direction called for. Some panelists expressed concern that

the timetable was unrealistic given the political pressures arrayed against CEA. Others

called for a more aggressive schedule. However, we believe that the time frame

presented for the plan is realistic given the time it will take for consensus building and

creating an accommodating political environment. We emphasize, though, that the time

plan provided is a guide and that it allows for events to occur more quickly.

Changing public attitudes may be the most formidable challenge of all. A

prevailing view is that Americans will not accept limits in their use of health care. But

society’s notion of limits has changed when the cost of not addressing them becomes

excessive. As health costs grow at unsustainable rates, we will find ways to impose

needed limits in this area as well.


54

We believe that implementation of the plan will begin to address the obstacles to

CEA enumerated in this report. The various components will help pave the way for

cultural acceptance. Increasing CMS’s role and creating a new institute promise to help

address the incentive problem and regulatory barriers, and lead to better quality of the

evidence. The new institute will provide a forum for discussing ethical, legal and other

issues surrounding CEA.

Successful execution of the plan will begin with broad recognition that greater use of

CEA can help the nation face its challenges in paying for effective health care. In

addition to time and resources, implementing the plan will require political will. Many

details will need to be filled in. CEA will not solve all of the health care system’s

problems. But we believe that it can be a key ingredient. We offer this framework as a

start down that road.


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APPENDIX A: Panelists


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BIOGRAPHIES Panel Chair Schumarry H. Chao, MD, MBA President, SHC & Associates Dr. Schumarry H. Chao, President of SHC & Associates consulting firm, is the only physician in the United States with successful leadership, strategic, and operational experience on "all sides of the healthcare industry" insurer, delivery system management, employer, pharmaceutical, and healthcare information technology. Dr. Chao received her Bachelor of Science and Masters of Business Administration degrees from the University of Southern California and her Doctor of Medicine from the University of California Medical School, San Francisco. She is board certified in Emergency Medicine. Her academic appointments include Clinical Professor of Emergency Medicine and Family Medicine as well as Adjunct Professor of Pharmaco-economics at University of Southern California.

Chair Title Affiliation Location Schumarry Chao, MD MBA

President SHC & Associates Santa Monica, CA

Panelist Title Affiliation Location Naomi Aronson, PhD

Executive Director BCBS Technology Evaluation Center

Chicago, IL

Rhonda Driver, RPh Clinical Pharmacist Dept of Social Services

Jefferson City, MO

Robert Epstein, MD, MS

Chief Medical Officer

Medco Health Solutions, Inc.

Franklin Lakes, NJ

Michael Fine, MD Senior Medical Director

Health Net of California

Huntington Beach, CA

William Fleming, PharmD

Vice President of Pharmacy and Clinical Integration

Humana Louisville, KY

Pam Hymel, MD, MPH

Medical Director Cisco Systems, Inc. San Jose, CA

Mark Richerson, CDR, MSC, USN

Director Department of Defense Pharmacoeconomic Center

Fort Sam Houston, TX

Mark Rubino, RPh Chief Pharmacy Officer

Aetna Hartford, CT


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Panelists Naomi Aronson, PhD Executive Director, BHBC Technology Evaluation Center

Dr. Aronson is the Executive Director of the Blue Cross and Blue Shield Association Technology Evaluation Center (TEC). She has overseen TEC's development as a nationally recognized technology assessment program and an Evidence-based Practice Center (EPC) of the Agency for Healthcare Research and Quality (AHRQ). Dr. Aronson has directed over 300 technology assessments and 10 evidence reports for AHRQ.

Rhonda A. Driver, RPh Clinical Pharmacist, Missouri Division of Medical Services Rhonda Driver currently is the clinical pharmacy consultant for the Missouri Division of Medical Services, Medicaid Pharmacy Program. A native of Central Illinois, Rhonda earned her pharmacy degree from St. Louis College of Pharmacy and currently resides in Jefferson City, Missouri. Her role as clinical pharmacist includes being primary back-up to the Director of Pharmacy for the day-to-day administrative activities of the Pharmacy Program. As the Division’s primary source of clinical expertise, Rhonda is responsible for the creation and maintenance of the program’s clinical editing tools; including developing prior authorization and clinical edits, performing evidence-based therapeutic class reviews, and evaluating clinical patient profiles to encourage appropriate medication utilization and identify medical necessity. Rhonda has practiced pharmacy in both hospital and retail settings, and brings retail pharmacy management experience to the program. She is responsible for presentation at all advisory group meetings. She has been with the Missouri Medicaid Pharmacy Program since 2002. Robert S. Epstein, MD, MS Sr. Vice President, Medical & Analytical Affairs and Chief Medical Officer, Medco Health Solutions, Inc. Dr. Robert S. Epstein joined Medco in 1995 and has served as Medco’s Senior Vice President of Medical & Analytical Affairs and Chief Medical Officer since 1997. In this capacity, he is responsible for formulary development, clinical guidelines, drug information services and accreditation oversight. He is also responsible for analysis and reporting for Medco’s clients. Dr. Epstein was trained as an epidemiologist, and worked in public health and academia before joining the private sector. He has published more than 50 peer reviewed medical articles and book chapters, and serves as a reviewer for several influential medical journals. Michael Fine, MD Senior Medical Director, Health Net of California Dr. Michael Fine is a graduate of the Massachusetts Institute of Technology and University of Rochester School of Medicine and Dentistry. He is board certified in Internal Medicine and one


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of the first group of physicians to receive added qualifications in Geriatric Medicine. Before becoming involved in managed care, Dr. Fine spent fifteen years as a practicing Geriatrician and a clinical faculty member at the University of California, Irvine, where he led for more than ten years the clinical geriatrics training program for residents and medical students. In addition to his teaching, research, and clinical activities in geriatric medicine, Dr. Fine served as the medical director for numerous skilled nursing facilities and continuing care retirement communities in Orange County, California. His ten years of experience in managed care includes work with both Commercial and Medicare HMO as well as PPO products. Dr. Fine joined Health Net six years ago as the medical director for Medicare products where he was involved in all aspects of Health Net’s Seniority Plus product, one of the largest Medicare Advantage plans in the nation. Presently, he is Senior Medical Director at Health Net, California in charge of central medical management, including prior authorizations, telephonic concurrent review, medical review unit, and appeals and grievances, for California commercial and Medicare products. William K. Fleming, PharmD Vice President of Pharmacy & Clinical Integration, Humana Dr. Fleming received his BS Pharmacy from the University of Kentucky College of Pharmacy, where he went on to receive his Doctor of Pharmacy (PharmD). He also holds a BS in Biology from Transylvania University. Dr. Fleming has lectured on topics ranging from pharmacy industry trends and drug trends to the clinical effects of drugs, presenting to such organizations as various pharmacy trade associations, associations of health underwriters, actuarial societies, and multiple broker/employer symposia. He is an active member of several professional associations, including the Academy of Managed Care Pharmacy. Recently, Dr. Fleming testified to the United States Senate Finance Committee concerning Medicare Part D. Dr. Fleming has developed and launched innovative benefit designs that drive the idea of choice, transparency, and independence into the decision-making process of the consumer. Through this work, he has become an inventor of three patent-pendings. He has led the development and launch of outreach communication/education programs that give the consumer information so they are engaged in the decision-making process. The Humana ePharmacy portal received nearly 10 million hits in 2005 for this type of information. Pamela A. Hymel, MD, MPH, FACOEM Senior Corporate Director, Cisco Systems Dr. Pamela Hymel is currently Senior Corporate Director, Integrated Health and Medical Director for Cisco Systems. In her current position she is responsible for managing health benefits and is designing a global health and productivity program for Cisco employees. Prior to joining Cisco she worked for a year as Senior VP of Sedgwick CMS and completed 16 years of employment with Hughes Electronics where she last served as vice-president of Human Resources, Medical Services and HR Systems. Her responsibilities included employee benefits, medical services, disability management, workers’ compensation, the Employee Assistance Program, and development of Fidelity employee-related services and Human Resources systems.


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Born in New Orleans, Louisiana, Dr. Hymel received a BS degree in biology from the University of California at Irvine, and a Masters of Public Health degree from Tulane University, and an MD degree from the Louisiana State University Medical School. She is board certified in both internal medicine and occupational medicine and is a Fellow of the American College of Occupational and Environmental Medicine (ACOEM). Dr. Hymel is on the Board of Directors for both ACOEM and the National Business Group on Health (NBGH). She serves on a number of committees for both organizations with a major area of focus on health and productivity. She recently worked with the IOM on their report on Integrating Employee Health: A Model Program for NASA. She led Hughes to win both an ACOEM Corporate Health Achievement Award and C. Everett Koop Award Honorable Mention. She has spoken extensively on disability management, health management and productivity and contributed to numerous articles. Her expertise and benchmark programs have been cited in numerous publications on integrated health management. Mark A. Richerson, MSC, USN, CDR Director, Department of Defense Pharmacoeconomic Center CAPT (Sel) Richerson is currently the Director of the DoD Pharmacoeconomic Center in San Antonio, Texas. The Center is responsible for providing clinical and analytical support to the DoD Pharmacy and Therapeutics Committee as well as customer support for users of the retail network, mail order, and direct care pharmacy points of service. He received his Doctor of Pharmacy from the University of the Pacific in 1986 and a Master of Science in Pharmacy Practice Administration from The Ohio State University in 1994. His post graduate training experiences include completion of a pharmacy practice residency at the OSU Medical Center and fellowship training in pharmacoeconomics and antimicrobial management. CDR Richerson is Board Certified in Pharmacotherapy. During his 19-plus-year Navy career, he has served in a variety of clinical, administrative, and pharmacy leadership positions.

Mark J. Rubino, RPh, MHA Chief Pharmacy Officer, Aetna

Mark J. Rubino, R.Ph., M.H.A., has more than 25 years of experience as a practicing pharmacist and healthcare executive. He is currently Chief Pharmacy Officer for Aetna Pharmacy Management (APM) where he is responsible for supporting Aetna’s strategic plan, particularly as it relates to clinical program development and implementation. Previously, Mr. Rubino held senior positions at Merck-Medco and Massachusetts Blue Cross/Blue Shield. Mr. Rubino graduated with distinction from the University of Connecticut with a B.S. in Pharmacy and recently received a Masters in Health Care Administration from Seton Hall University.


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He is a licensed pharmacist in the states of Connecticut, Massachusetts and New York and a member of the Board of Directors of the Academy of Managed Care Pharmacy. He is also a member of the Editorial Board of Decision Maker News in Managed Care, as well as a member of the American Pharmaceutical Association. Mark has been actively involved as a coach for his children’s sports teams, a volunteer for Habitat for Humanity and UNICO International.


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APPENDIX B: Agenda of Expert Panel Meeting


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May 31 & June 1, 2006 Day 1 – Introductions and presentations Closed Session (Expert Panel Members Only)

7:30 AM Breakfast 8:30 AM Welcome and introductions (chair, lead staff, AHRQ, ASPE) 8:45 AM

Discussion of the panel’s charge, agenda, and background paper (Presented by Peter Neumann, ScD, Director, Center for the Evaluation of Value and Risk, Tufts-NEMC)

9:15 AM Workshop

(Led by Marthe Gold, MD, MPH, Professor, City University of New York Medical School and Stirling Bryan, PhD, Professor, University of Birmingham)

12:15 Noon Lunch Open Session (Open to Public) 1:00 PM Uses of and Barriers to CEA:

• Marjorie Ginsburg, MPH, Executive Director, Sacramento Health Care Decisions – Consumer attitudes about CEA

• Peter Jacobson, JD, MPH, Professor, University of Michigan School of Public Health – Legal & regulatory issues surrounding CEA

• Steven Pearson, MD, MSc, FRCP Associate Professor, Harvard Medical School – The relevance of UK’s NICE for the US

• Question/Answer session

2:30 PM Break 2:45 PM Payer Experiences:

• Penny Mohr, MA, Health Economist, Centers for Medicare & Medicaid Services

• Brent O’Connell, MD, MHSA, Medical Director, Highmark • Sharon Levine, MD, Associate Executive Director, The Permanente

Medical Group • Q & A for Panelists


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(continued) 4:15 PM

Break

4:30 PM Opportunity for Stakeholder Input

5:30 PM Adjourn Closed (Expert Panel Members Only)

6:30 PM Dinner – The Grille, Marriott Gaithersburg Washingtonian Center

Day 2 – The Strategic Plan Closed Session (Expert Panel Members Only)

7:30 AM Breakfast

8:30 AM Synthesis of Day One 9:30 AM The Strategic Plan

• Methodology • Infrastructure • Public and Private Acceptability

(Led by Norman Daniels, PhD, Professor, Harvard School of Public Health and Karen Quigley, MPH, Instructor, Harvard School of Public Health)

12:30 PM Lunch 1:00 PM Adjourn


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APPENDIX C: Background Paper


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INTEGRATING COST-EFFECTIVENESS

ANALYSIS INTO HEALTH POLICY DECISIONS

Peter Neumann, ScD. Joshua Cohen, Ph.D. Jennifer Palmer, M.S.

Center for the Evaluation of Value and Risk in Health Institute for Clinical Research and Health Policy Studies

Tufts-New England Medical Center

May 4, 2006


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TABLE OF CONTENTS 1. OVERVIEW AND OBJECTIVES.......................................................................................... 73 2. STATUS OF CEA USE IN THE U.S...................................................................................... 74

2.1 Resource allocation processes used by health plans in the U.S. ......................................... 74 2.2 The limited use of formal CEA........................................................................................... 74 2.3 Explaining the limited use of CEA ..................................................................................... 77

3. MOVING FORWARD ............................................................................................................ 86 3.1 Can CEA help health care decision makers? ...................................................................... 86 3.3 Options for the future.......................................................................................................... 87 3.4 Creating a fair, transparent, and participatory process ....................................................... 89 3.5 Improving an infrastructure for cost-effectiveness information ........................................ 90

4. THE PANEL MEETING......................................................................................................... 92 REFERENCES ............................................................................................................................. 94


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1. OVERVIEW AND OBJECTIVES

This project involves an exploration of resource allocation decision-making processes

from the perspective of health plans and purchasers, and the development of a strategic plan to

address obstacles and consider a framework and systems for using cost-effectiveness analysis

(CEA) in these processes.

In recent years, cost-effectiveness analysis has been recommended by some consensus

groups as a recommended analytic technique for conducting economic evaluation of health and

medical interventions (Gold et al., 1996). The appeal of this approach is that it allows a

convenient means of quantifying both the economic implications and health benefits of an

intervention in a single ratio. In particular, cost-effectiveness analyses evaluate the health

benefits and economic costs of an “alternative” intervention relative to its absence, or in

comparison to another “baseline” intervention. The cost per effect (C/E) ratio represents the

incremental economic cost of the alternative intervention divided by its incremental health

effectiveness (Gold et al, 1996).

Many countries have incorporated CEA into their technology assessment and

reimbursement procedures (Taylor 2004). In the U.S., however, formal use of CEA has been

more limited. This background paper discusses the status of CEA in the U.S. and a framework

for integrating CEA in decision-making processes in the future. First, we review the resource

allocation decisions made within health plans and the state of cost-effectiveness analysis within

these decisions. Next, we consider options for integrating CEA. In the final section, we cover

the strategic planning process that will develop.

Formatted: Bullets and Numbering


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2. STATUS OF CEA USE IN THE U.S.

2.1 Resource allocation processes used by health plans in the U.S.

Health plans have long used various techniques to allocate resources efficiently to

improve patient care. They have employed utilization review policies and disease management

programs. They have implemented “evidence-based” policies to avoid paying for ineffective

care and to ensure that resources are targeted efficiently (Garber 2001). To curtail rising drug

costs and to target resources efficiently, they have employed a host of policies, including

charging higher co-payments for using expensive drugs, requiring prior approval before

physicians can prescribe certain medications, calling physicians who prescribe more than

recommended doses, and profiling physicians to monitor high cost prescribers.

2.2 The limited use of formal CEA

The degree to which formal CEA is actually used by health plans has been debated. To

be sure, there are various signs that the technique is gaining favor in some quarters. The number

of cost-effectiveness analyses published in the peer-reviewed literature has risen steadily

(Neumann et al., 2005). Many health plans have begun adopting the Academy of Managed Care

Pharmacy’s new evidence-based formulary guidelines which call for drug manufacturers to

submit “dossiers” of clinical and economic evidence about their products to support the listing of

new pharmaceuticals (Neumann et al., 2004a). The influence of CEA may also be growing in

other areas, including within selected clinical guidelines. For example, CEAs have shown statin

drugs to be relatively cost-effective as secondary prevention in persons with existing heart





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disease but considerably less cost-effective as primary prevention (Goldman et al., 1991). While

formal recommendations did not follow these CEAs strictly, the economic analyses were cited in

the guidelines and likely play a role in targeting therapy (Wallace et al., 2002). Several national

initiatives now consider CEA formally, including the recent recommendations of the third U.S.

Preventive Services Task Force (USPSTF) (Saha et al., 2001). The Institute of Medicine

recently issued a report calling for regulatory impact analyses from federal agencies to use cost-

effectiveness analysis (IOM 2006).

However, other evidence suggests that formal use of cost-effectiveness analysis by health

plans appears limited. The U.S. Medicare program’s experience with CEA offers an example.

As the world’s largest single payer of health services, and as one facing fiscal challenges, the

program might be expected to be an enthusiastic consumer of cost-effectiveness information.

Instead, after repeated attempts to incorporate cost-effectiveness formally as a criterion for

covering new medical technologies, Medicare has eschewed formal use of this technique

(Neumann 2004b). Medicare has not implemented cost-effectiveness analysis even as it has

restructured its entire apparatus for covering new technologies in an attempt to make its process

more transparent, consistent and evidence-based (U.S. Federal Register 1998; U.S. Federal

Register 1999; Neumann 2005a).

Neither scholarly overviews about managed care practices (Gold 1999) nor expansive

press accounts about managed care plan policies (Kowalczyk 2002) mention explicit use of

CEA. Similarly, reviews of the practices of pharmaceutical benefits managers (PBMs), the

entities that administer and manage pharmaceutical benefits for health plans, HMOs, and

employers, do not even bring up explicit use of CEA (Mathematica 2000). Surveys of health

plan officials reveal the importance decision makers place on factors such as FDA approval


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status, safety, effectiveness, availability of alternative treatments in covering new health services,

and acquisition cost of the technology in question. However, respondents tend not to mention

explicit cost-effectiveness analysis as a key input or mention it as a secondary factor (e.g., Luce

et al., 1996; Sloan et al., 1997; Titlow et al., 2000; Schoonmaker et al., 2000). Investigators

emphasize the reluctance respondents report in wanting to discuss costs or cost-effectiveness

with contracted providers or plan members (Singer and Bergthold, 2001).

Investigations into how managed care officials make coverage decisions under budget

constraints find little use of comparative cost-effectiveness analyses, despite intense competition

among plans (Daniels and Sabin, 2002). Even among respondents who mention CEA as an

important component, analyses have not always translated into explicit policy (e.g. Singer et al.,

1999).

Health insurance contracts typically define covered services as those that are “medically

reasonable and necessary” (Rosenbaum et al., 1999). However, seldom do definitions of medical

necessity mention cost-effectiveness (Jacobson and Kanna, 2001; Sacramento Health Care

Decisions, 2001). One large review of medical necessity language used in plans found that

existing definitions of medical necessity fail to provide guidance to those who wish to make

evidence-based decisions or make explicit tradeoffs (Singer and Bergthold, 2001).

In excluding a service for coverage, health plans routinely appeal to the medical necessity clause,

but rarely do they exclude services on grounds that they are not cost-effective. Plans also

exclude services based on broad categories stated in private insurance contracts as ineligible for

reimbursement – such as cosmetic services or unproven therapies -- but again these exclusions

are based on medical rather than cost-effectiveness criteria (Garber 2001).


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2.3 Explaining the limited use of CEA

Several theories have emerged to explain the limited use of CEA in the U.S. Broadly

they fall into several categories: 1) mistrust of analyses; 2) legal and regulatory constraints; 3)

systemic constraints; and 4) distaste for explicit rationing. Another theory is that it is used but

quietly, under the radar. We consider each in turn.

Mistrust of analyses. One explanation points to a lack of trust in the methods. Valid

comparisons of cost-effectiveness ratios require that the numerators and denominators be

reported in similar terms and be obtained using comparable methods (Gold et al, 1996).

Researchers have long known though that methods used differ across studies and that adherence

to recommended protocols is often, even generally, lacking (Udvarhelyi 1992; Nord 1993;

Neumann 1997; Gerard 1999; Neumann 2000). Published studies differ in how they have

conceptualized and estimated costs and health benefits, and differ with respect to other features,

such as how uncertainty is characterized. Many published CEAs lack a clear description of

methods. Evaluations of the same interventions using different methods can lead to very

different results (Brown 1993; Pignone 2002).

The discrepancies and lack of rigor have contributed to a lingering sense that cost-effectiveness

methodology is not ready for prime time (Kassirer, 1994; Evans, 1995; Rennie, 2000). The

larger movement towards evidence-based medicine seems if anything to have intensified these

concerns, strengthening faith in randomized clinical trials, and reinforcing the notion that CEAs,

and the assumptions and models underlying them, are malleable (Drummond, 2001).

But methodological discrepancies alone do not seem to provide a full explanation.

Despite incongruities across studies, broad consensus has long existed over the components and


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protocols that should comprise well-conducted and reported CEAs (Drummond 1987).

Standards for the field have been widely published (Weinstein 1996). Peer-reviewed journals

have adopted guidelines to improve methodological quality (Drummond 1996).

A related problem pertains to a perceived lack of relevance. Some observers point to the

disconnect between the abstract, academic ideal of CEAs and the working needs of actual

decision makers, particularly those in managed care plans (Prosser 2000). They complain that

the CE ratio itself is unhelpful, if not irrelevant, to decision makers who worry day-to-day about

short-term financial shortfalls and enrollee turnover rather than the long-term horizon and

societal perspective called for by academics (Berger 1999).

Some critics argue that traditional CEA is too narrow and its assumptions highly

unrealistic. Promised savings are illusory (Langley 2000). Payers are concerned about

affordability, which depends on the overall volume of patients, which is typically ignored in

analyses (Drummond 2002). A plan could go into financial difficulty by adopting too many

cost-effective interventions (Drummond 2002). Moreover, the CE ratio in one setting or health

care system may not be relevant to another. Analysts may ask the wrong questions, focusing

narrowly on drugs or individual procedures rather than broader strategies like quality initiatives

or disease management programs. Studies neglect practical issues related to the implementation

of the service in question. When asked specifically about cost-effectiveness information,

decision makers say they want simpler, more targeted, and more timely information, more

germane to their own decisions or guidelines (Steiner 1996; Sloan 1997).

Furthermore, CEAs may not capture public preferences for spending limited resources

(Ubel 2000). Critics argue generally that applying broad standards to large groups rather than to

individuals is at odds with good medical practice (Rosenbaum 1999). It risks violating


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clinicians’ advocacy duties, destroying the trust necessary for good doctor-patient relationships

(Ubel 2000).

People may want to achieve other goals in setting priorities rather than maximize overall

QALYs. They may want to give preference to interventions that help a few people gain a lot of

health, or give priority to life-saving treatments for children, or help severely ill people or people

most in need (Hadorn, 1991; Gold et al, 1996; Ubel 2000). Physicians and the public seem to

desire equity and fairness in a general sense, rather than efficiency per se (Ubel 1998a; Ubel

1998b; Ubel 2000; Perneger 2002; Daniels 2005). They also want to avoid discrimination

against people with chronic illness or disability even when treatments are not cost-effective

(Ubel 2000 p. 76).

Another possible explanation questions not the relevance of CEA, but the motives of

investigators and/or their sponsors. On the one hand, CEA is seen as a smokescreen for cost-

cutting efforts. Physicians view CEA as an accounting or cost-management tool, or as “code”

for rationing (Prosser 2000; Ubel 2000). Clinicians suspect health plan managers of using CEA

to improve the bottom line (Ubel 2000; Jacobson 2001; Asch 2002).

The mistrust also radiates from another direction: CEA is perceived as a tool to increase

health expenditures, by those with a financial gain at stake. This seems to be a general

phenomenon: authors of CEAs regardless of their source of funding tend to conclude that

additional expenditures are warranted for the service under investigation (Azimi 1998; Neumann

2000). Subsequently, critics have focused their criticisms on CEAs sponsored by drug

companies, complaining that the analyses reflect the hidden biases of their industry sponsors

(Kassirer 1994; Evans 1995; Rennie 2001).


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Almost all large drug companies and many smaller ones have established health

economics or outcomes divisions in recent years to conduct and sponsor CEAs (DiMasi, 2001).

The practice likely reflects both a response to health plan demands and a proactive attempt by

companies to market their products on the basis of economic advantages (Neumann 1998).

Whatever the impetus, the trend has cast suspicion on the field. Many surveys of decision

makers reveal concerns about “biased” CEAs attributable to industry financing (Sloan, 1997;

Motheral, 2000). Researchers have indeed found that industry-funded CEAs do tend to report

more favorable results on their own products than non-industry-sponsored ones (Azimi, 1998;

Friedberg, 1999), which may simply reflect the fact that drug companies only fund studies on

products likely to show cost-effectiveness, or selectively bring to market those drugs that provide

good value (Gagnon, 2000). The more sinister explanation is that it reflects sponsors’ influence

on investigators to make favorable assumptions or withhold “negative” results from publication.

However, a question lingers about the heightened scrutiny towards CEAs as compared to

clinical research. After all, publication bias is a well-documented problem in the medical

literature (Begg 1994; Freemantle 1997), and researchers have shown a relationship between

industry-sponsorship of clinical trials and the nature of evidence reported (Rochon 1994; Stelfox

1998; Koepp 1999). Even so, journals have not banned industry-affiliated clinical trials from

their pages – as the New England Journal of Medicine has for CEAs (Kassirer 1994) -- nor have

surveys of decision makers detected the same levels of concerns about clinical research as for

CEAs (Luce et al, 1996).

The answer may lie in some physicians’ unfamiliarity with economic evaluation, and in

the perception that there is greater potential for manipulating findings. In commenting on the

NEJM policy towards CEAs, Kassirer and Angell (1994) demonstrate this problem in stating:


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We recognize that bias can compromise even original scientific studies, but we believe that the opportunities for introducing bias into economic studies are far greater, given the discretionary nature of model building, and data selection in the analysis. In addition, unlike the effectiveness side of the equation, which is based on biological phenomena, the cost side is highly artificial. Drug costs, in particular, can be quite arbitrary.

Still, mistrust of motives by itself seems an insufficient explanation. Why haven’t

consumers of CEAs developed the expertise to review studies themselves? Why haven’t they

funded or conducted their own CEAs, as they have in other countries?

Legal and regulatory barriers. Legal and regulatory barriers may also help to explain

why policy makers in the U.S. have not fully accessed CEA. That is, government programs may

be prevented from using CEA. Private plans may fear lawsuits if they use it to deny coverage to

a new treatment that offers positive health benefits.

On the other hand, nothing in federal statute explicitly bars Medicare from using CEA. When

Medicare proposed in 1989 that it would use cost-effectiveness as a criterion in covering new

technologies, it signaled its belief that its ability to do so stemmed from its statutory authority to

cover “reasonable and necessary” services (U.S. Federal Register 1989). While courts have not

ruled on this authority, per se, legal scholars suggest that courts would defer to the government’s

position on the matter, as long as policies were not handled in an arbitrary or capricious manner

(Jacobson 2001). Similarly, nothing legally prevents private health insurers from writing

contracts that specify covered services as those that are deemed “medically necessary and cost-

effective” though patients might challenge its use if they were not informed about how this might

influence clinical decisions (Jacobson 2001).

Moreover, plans’ lack of CEA use may be attributable to fears about what juries might do

(Singer et al, 1999). Health plans may fear “smoking guns,” like the internal memos providing a


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cost-effectiveness rationale for not installing certain safety devices on automobiles used in court

against Ford and GM (Jacobson 2001). There are also plausible reasons to believe that health

plans could withstand legal challenges to its use, as they have withstood challenges to other cost

containment initiatives (Jacobson 2001). Courts have often been disinclined to obstruct markets

in organizing and delivering health care and have generally been deferential to managed care

(Jacobson 1999). Moreover, courts have generally been more receptive to government

application of CEA and cost-benefit analysis (CBA) and even encouraged it (Jacobson 2001).

Jacobson and Kanna (2001) argue that government agencies generally have wide latitude to use

analytic tools such as cost-effectiveness analysis in their decision making -- that courts generally

defer to regulatory agency experience, though decisions must be well-reasoned, and not

“arbitrary, capricious, an abuse of discretion, or otherwise not in accordance of the law.” Even

when courts find regulatory decisions arbitrary, they generally have remanded them to agencies

for further consideration, leaving decision-making power to the agencies (though on occasion

courts have questioned the methodology used) (Jacobson and Kanna, 2001).

Moreover, the executive branch has been a strong proponent of CBA and CEA. President

Reagan’s Executive Order 12,291, revised in President Clinton’s Executive Order 12,866,

requires federal agencies to prepare a Regulatory Impact Analysis (RIA) for all major

regulations, including the conduct of cost-benefit analyses to ensure that ‘benefits of the intended

regulations justify their costs…” so that they are “to be designed in the most cost-effective

manner” (U.S. Federal Register, 1981; U.S. Federal Register, 19932). The Office of

2 Most of the regulatory impact analyses submitted in response to EO12,866 have addressed environmental and occupational safety regulations, rather than health (e.g., Medicare) regulations, per se. Similarly, while some federal statutes over the years have also included mandates to balance costs and benefits, or to consider risk-risk tradeoffs, or evaluate the cost-effectiveness of different regulatory alternatives, they have generally pertained to environmental regulations (e.g., the Safe Drinking Water Act Amendments of 1996, the Small Business Enforcement and Fairness Act of 1996; and the Unfunded Mandates Reform Act of 1995 (Hahn, 2000)).


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Management and Budget has called for improving the technical quality of benefit-cost estimates

and expanding the use of cost-effectiveness analysis as well as cost-benefit analysis in regulatory

analyses (U.S. Federal Register 2003), and as noted a report by the Institute of Medicine recently

issued a report calling for regulatory impact analyses from federal agencies to use cost-

effectiveness analysis (IOM 2006).

Systemic constraints. The pluralism of the U.S. health care system, which is

characterized by multiple competing health plans, may undercut organizations’ ability to use

CEA. Unlike in other countries, there is no single payer who would consider societal resource

allocation decisions. It is much more difficult in the U.S.’s mixed (and fragmented) system to

generate public discussion of the need to make resource allocation decisions that take

opportunity costs into account -- each player can say that it is the job of another, or that there is

no real scarcity (only waste). The lack of a regulatory stance means no player wants to be the

first to ration more explicitly. In contrast, for example, New Zealand undertook a large public

discussion over several years about the need for priority and limit setting. Some obstacles in the

US are thus deeply structural.

Those who write about barriers to CEA often mention or imply a political component --

that what private and public health officials and politicians fear above all is negative publicity

(Prosser 2000), which may erode market share or jeopardize an election, and that the U.S.

political system is characterized by interest groups wielding enormous influence.

Cost-effectiveness may be especially unpalatable in the U.S.’s for-profit health care

system. Consumers and providers often seem to believe that these economically-driven,

sometimes publicly-traded organizations are not motivated or inspired by a desire to maximize

the value of health care services to members of their plans. Furthermore, they may believe that


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the overall health system reflects unwise and inefficient use of resources; as a result they are not

motivated to forego potential beneficial care simply because of cost. People have criticized

managed care plans, because they tried to limit patient choice of provider and treatment based on

economic considerations; they may view CEA as a formal, explicit methodology to achieve the

same end.

Distaste for explicit rationing. Another explanation holds that at its root resistance to

CEA is grounded, not in methodological or institutional barriers, but in Americans’ deep-seated

distaste for limits. Eddy argues that people recoil from the explicit nature of the exercise itself –

that it forces us to think at a conscious level about things we would much rather leave at a

subconscious private level (Eddy 1992a).

One survey found that Americans’ acute sensitivity on this issue compared to Europeans’

and Canadians’ differ: Americans are more interested in medical discoveries and more

concerned about being able to obtain the most advanced tests, drugs, and medical procedures

(Kim 2001).

On the other hand, it is also possible that consumers in the U.S. are, in fact, able to

understand CEA and recognize its value. Recent pilot studies by Gold et al. (2006) suggest that

members of the public recognize the value of CEA and may be comfortable using such

information to inform Medicare decisions. It is possible that the American public is more willing

than health authorities believe to rely on explicit techniques for rationing.

Some observers have also pointed out that broad public acceptance of limits took place in

Sweden, Canada, New Zealand and other countries only after 2-3 generations of national health

insurance, which created a widespread understanding about the need to share limited resources

under politically negotiated budget constraints (Daniels and Sabin, 2002). They also tended to


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follow formal efforts -- including the establishment of national commissions and citizens’

councils -- to discuss priorities and choices, and to create an explicit framework for limit setting.

It is possible that the U.S. is in the early stages of its own social learning curve.

CEA is used but quietly. Why would analysts continue publishing studies if the

information was not being put to use? Why would government and private sector support such

analyses? One reason is that CEA is used but quietly. CEA may actually enjoy influence in the

U.S., not as an explicit instrument for prioritizing health services, but as a subtle lever on policy

discourses. Over the years CEA has challenged prevailing wisdom and brought clarity to health

care debates – underscoring, for example, that prevention programs usually do not produce cost

savings (Russell 1986) and that high-tech, cost-increasing interventions can sometimes provide

very good value for money (Weinstein 1999). Most health plans and formulary managers have

an interest in CEAs, and most medical products companies now have sophisticated health

economic units reflecting a widely-held view that their customers are considering this

information when making decisions. As noted, many health plans have begun adopting the

Academy of Managed Care Pharmacy’s new evidence-based formulary guidelines, which call for

drug manufacturers to submit “dossiers” of clinical and economic evidence about their products

to support the listing of new pharmaceuticals (Neumann 2004b).


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3. MOVING FORWARD

3.1 Can CEA help health care decision makers?

A key question is whether and precisely how CEA can help health care decision makers.

While concerns about CEA -- e.g. that the data are not timely or not reliable, or that they raise

liability issues – are often mentioned, the actual views of decision makers, and the extent to

which they might use CEA and in what contexts, are not well understood.

Some Lessons from Abroad

It is instructive to consider the relevance of other nations’ experience in using CEA. On

the one hand, we recognize that different values and cultures make drawing parallels

challenging. Cross-national surveys reveal greater support overseas for government health

programs and less concern overseas about having access to the latest technologies (Blendon

1990; Kim 2001). The willingness to use CEA as an explicit policy tool in many countries

reflects these proclivities.

Still, U.S. policy makers might learn some lessons from these experiences – both

drawbacks and advantages. The National Institute for Health and Clinical Excellence in the U.K.

has been criticized on numerous grounds: that it has harmed innovation; that it is overly

responsive to political pressures; that the basis for decisions are not clear; and that it imposes a

bureaucratic “one size fits all” population-view of medicine (Smith 2000; Lipman 2001; Walker

2001; Dent 2002). Moreover, observers note that CEA is not a panacea for health systems that

adopt it: tensions among efficiency, equity, and costs persist (Rawlins 2004a), as do questions

about the methodology and the extent to which the data are actually used (PausJenssen 2003).





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Furthermore, explicit considerations of cost-effectiveness may or may not save money.

Considering cost-effectiveness also requires resources for implementation. Evidence costs

money. It also requires a new bureaucracy. And even with resources, an agency armed with

CEA can only do so much. Only a fraction of services are ever subject to rigorous evaluation.

Nonetheless, policy makers in other countries have claimed that CEA has helped determine the

consequences of directing resources to particular patient subgroups or strategies (Sculpher et al.,

2001). It has provided a structured process of evaluating strength of evidence, stating

assumptions, and forcing a discussion of the service’s value, all of which brought insight that

was as informative in its way as the final CE estimates themselves (Mitchell, 2002).

3.3 Options for the future

Direct incorporation of CEA. One option for health payers involves incorporating CEA

into coverage and payment decisions for technologies directly. In theory, payers from CMS

(Centers for Medicare & Medicaid Services) to private health insurers might adopt explicit

criteria to use cost-effectiveness analysis. As noted, nothing in federal statute explicitly bars

Medicare from using CEA. Moreover, nothing prevents private health insurers from writing

contracts that specify covered services as those that are deemed “medically necessary and cost-

effective.” In practice, these routes have not been achieved to date in the U.S.

Incentives to use CEA. Another option would involve using incentives to encourage the

development and use of cost-effective technologies. One alternative would extend upon

Medicare’s existing policy for “coverage with evidence development.” The idea is to offer

conditional coverage for a technology while requiring that more information be gathered about



88

its effectiveness (Kolata 2004). For example, in some cases (e.g. cancer drugs) Medicare has

covered technologies but required that beneficiaries receiving them be enrolled in randomized

clinical trials; in other cases (e.g., implantable cardioverter defibrillators), CMS has covered a

device but required manufacturers to pay for patient registries in order to collect additional

information about their effectiveness. Under an extension of this policy, CMS would provide

limited coverage of a technology pending a demonstration of its cost-effectiveness.

An alternative would go further by calling on manufacturers to bear some of the risks

associated with new technologies even after the Medicare program grants coverage beyond the

trial stage of development. In particular, CMS could consider arrangements with drug or device

manufacturers whereby Medicare covers a technology but holds manufacturers at risk if

expectations about its effectiveness do not develop. This arrangement is now being tested for

multiple sclerosis drugs in the United Kingdom (Chapman 2003).

Even in cases where the data on cost-effectiveness are already well understood, CMS

could use reimbursement policy to encourage adoption of interventions yielding the best returns.

For example, coverage decisions could be associated with payment rates whereby CMS provides

higher payment or more generous DRG assignment for more effective technologies. In the

future, coverage could also be linked to Medicare’s Pay for Performance initiative, whereby

CMS creates incentives for physicians and hospitals to provide more effective (and cost-

effective) technologies. Such incentives could be extended to health care recipients by linking

their co-payments to a technology’s cost-effectiveness. Indeed, CMS has in some circumstances

essentially linked coverage levels and cost-effectiveness. For example, in covering left-

ventricular assist devices, CMS set the price below market rates, the equivalent of implicitly


89

identifying an acceptable cost-effectiveness threshold and then setting the technology’s price to a

level that corresponds to that ratio.

Possible government actions. As noted, CMS could in principle interpret Medicare’s

statutory authority to cover “reasonable and necessary” services as license to use CEA, though

such a step would almost certainly require formal rulemaking procedures (i.e. publishing

regulations in the Federal Register) because it changes longstanding policy not to consider cost-

effectiveness. In practice, however, this course has not proven feasible to date (Foote 2002;

Neumann 2004a).

Another avenue would involve Congressional action. Congress could legislate, for

example, the criteria (including CEA) that Medicare should use in covering new technologies.

When adding new benefits to the Medicare program (e.g. the Medicare Modernization Act

(MMA) added cardiovascular screening tests and diabetes screening), Congress could mandate

that CMS determine the most cost-effective strategy for implementing the service.

3.4 Creating a fair, transparent, and participatory process

A key consideration for making CEA more helpful pertains to the importance of

procedural issues surrounding the application of CEA. Observers have written about the

importance of fair process, especially when citizens cannot agree on the underlying distributive

principles, or even about what constitutes a fair outcome. How to successfully apply CEA is in

part a procedural question – establishing the conditions for deliberation and oversight of priority

setting in health care (Daniels & Sabin, 2002).



90

Grounds for health plan coverage decisions are today not routinely made public. Appeals

processes vary considerably. A view may prevail among government and corporate leaders that

publicity for CEA does not work in the U.S. because of fear of litigation and media exposure and

fear that the costs of openness outweigh the benefits.

The counter argument is that it has never really been tried and that there is little evidence

to show that disseminating reasons for decisions has actually made organizations more

vulnerable to bad press or litigation (Daniels & Sabin, 2002). The possibility exists that

openness would actually provide the best protections against such charges. Some legal analysts

believe that courts would defer to the stated practice of health plans as long as appropriate

process was followed (Jacobson 2001). It is plausible that public trust would go up not down if

consumers were involved in designing the process, and if the process were more transparent.

3.5 Improving an infrastructure for cost-effectiveness information

Who would produce or evaluate cost-effectiveness information in the U.S. is a

longstanding question (Kassirer 1994; Reinhardt 1997; Reinhardt 2004). CMS itself could be a

possible candidate, but history illustrates the difficulties it faces. Other public institutions have

different missions and their own political constraints. Another alternative altogether is a new

Institute of Medicine-like entity to provide advice on cost-effectiveness. The experience of

NICE in the U.K. may demonstrate the potential for a new organization with a specific mandate

on the issue. Alternatively, several independent institutes could be created to conduct and

disseminate such research (Reinhardt 2004).

The information and advice could be distributed as a public good to help target resources

to improve health. Medicare – and its private contractors – would be free to accept or reject


91

recommendations. The non-binding nature of the recommendations would be important:

decision makers themselves would decide how much weight to give cost-effectiveness evidence

and how much to other factors. Moreover, a healthy marketplace for other groups to produce

information could endure – the recent action by Consumer Reports to compare the price and

effectiveness of prescription drugs is but one example (Consumers Union 2004).


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4. THE PANEL MEETING Broadly speaking, the strategic planning process in this meeting will involve exploring

current elements of decision making processes (including the use of CEA), identifying contexts

where information on value for money is an appropriate consideration, and gaining a greater

understanding of why CEA is or is not used in these instances. The goal will be to develop a

strategic plan for ways to use CEA to greater advantage, drawing on Panel members and

stakeholders as part of the solution.

Although there have been many definitions advanced to characterize strategic planning,

the basic components are captured by the description of John Kingdon (1995). In that work,

Kingdon develops the concept of streams of policy development that come together at critical

times to make new policy initiatives feasible. “A problem is recognized, a solution is developed

and available in the policy community, a political change makes it the right time for policy

change, and potential constraints are not severe.” That definition identifies several components

for strategic planning, including: 1) the identification of the problem, 2) the identification of

solutions, and 3) the identification of opportunities for implementation of these solutions.

In many policy debates, identifying the problem and communicating that problem to

interested parties (i.e. the first component of strategic planning) is a key to catalyzing action. For

example, in the debate over social security reform, much of the debate revolves around whether

social security is in crisis at all. Creating a consensus that there is a problem is critical. In the

case of energy policy, the president has used the recent rise in gasoline prices as an opportunity

to claim that there is a need for change.



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In the case of cost-effectiveness analysis, a consideration involves how representatives of

health plans think about resource allocation decisions and the need for action. While virtually all

parties may agree that rising health care costs pose a challenge, there may be hesitation over the

idea that systematic decisions about the allocation of health care resources would improve

overall the health outcomes that can be achieved using these resources.

In accordance with Kingdon’s steps, we anticipate that the discussion surrounding this

topic area will first focus on the need to establish conditions for change. We will investigate

tactics decision makers do use and could use to accomplish resource allocation within their

systems. Opportunities for implementation may include legislation, the creation of new

institutions, and other strategies. A key area to explore is the establishment of processes that

participants see as “fair.” In the case of cost-effectiveness analysis, specific decisions will lead

to the denial of some medical care (e.g. by denying coverage for some technologies). Because

the reasoning underlying such decisions is likely to be highly technical, it will be critical that the

process itself be viewed as fair.


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