Why Aren’t Health Care Prices Ever on The Table?

Journalist-turned investment banker-turned auto bailout czar Steven Rattner provocatively calls for “not quite” death panels in an op-ed in today’s New York Times. Noting a quarter of all Medicare spending comes in the last year of life, he writes:

No one wants to lose an aging parent. And with price out of the equation (emphasis added), it’s natural for patients and their families to try every treatment, regardless of expense or efficacy. But that imposes an enormous societal cost that few other nations have been willing to bear. Many countries whose health care systems are regularly extolled — including Canada, Australia and New Zealand — have systems for rationing care.
Take Britain, which provides universal coverage with spending at proportionately almost half of American levels. Its National Institute for Health and Clinical Excellence (NICE) uses a complex quality-adjusted life year (QALY) system to put an explicit value (up to about $48,000 per year) on a treatment’s ability to extend life.
At the least, the Independent Payment Advisory Board should be allowed to offer changes in services and costs. We may shrink from such stomach-wrenching choices, but they are inescapable.

Here’s the problem with the NICE/QALY model. It accepts the price that providers set on end-of-life care. It says, here’s the cost; here’s the benefit; and if the cost-per-life-year gained is above a particular level, we won’t pay anything (actually it’s the National Health Service in Great Britain that won’t pay based on analysis of cost and benefits provided by NICE). If the average length of time to death from diagnosis with a terminal disease like stage four cancer is 10 months, and the drug extends the average life to a year, those extra two months cost $120,000 or $720,000 per QALY (and that doesn’t even adjust for the lower quality-of-life of that final year from adding a drug that probably has debilitating side effects). That’s 15 times the British standard of cost-effectiveness.

Here’s another way to tackle the problem. Instead of having a binary option of either not allowing Medicare to pay for the drug or paying $10,000 a month, why not simply set the price that Medicare will pay at its actual value? In this case, it would be 1/15th of $10,000 or $667 a month. If the drug company continues to insist on charging more, then people will have to pay the difference out-of-pocket.

It’s called reference pricing, an idea initially propounded by Steven D. Pearson, president of the Institute for Clinical and Economic Review in Boston and a former advisor to CMS and Peter Bach of Memorial Sloan-Kettering Cancer. Some may object that this will cause rationing by price since poorer patients will suffer the brunt its effects. To a certain extent, they are right. But at least the poor and middle-class will go to their graves knowing they didn’t miss much since Medicare will have sent them a clear signal based on careful science that what they couldn’t afford really wasn’t worth very much.

Others may object by saying, ah, but these new drugs actually work extremely well in a handful of patients. They often live for years and it was this small group’s experience on the drug that drove the overall survival rate to two months. As soon as we figure out how to target them by using sophisticated biomarkers (the latest cancer drugs are being approved with such screening tests), we can limit the drug’s use to those that truly benefit. Great! The cost per QALY should come down dramatically. As long as Medicare doesn’t pay for its off-label use (patients with the same condition who don’t meet the appropriate biomarker profile), the cost to the system should be much more affordable. If that cost was still above the reference price (because even with targeting, the latest therapies are not magic bullet cures, but still life extenders), at least the out-of-pocket for patients (and the cost to Medicare) will be much, much lower.