Efficiency Frontier

• Our first mechanism for decisions over how to efficiently allocate scarce resources.

• Allows us to identify the set of potentially cost-effective treatments.

• Strategies off the frontier cannot provide the same health benefits at equal or lower cost.

Opportunity Costs

• Under a constrained budget we’d have to divert resources from other worthy activities (e.g., education services, income assistance programs, other medical treatments) to cover a treatment that achieves, at best, the same health outcome.

• If we select a strategy off the frontier, there is an opportunity cost and a potential loss in social welfare.

Explicit Thresholds (\lambda)

• The World Health Organization’ Choosing Interventions that are Cost-Effective (WHO-CHOICE) recommends a threshold of less than three times the national annual gross domestic product (GDP) per capita.

  • Poland legislated in 2012 a cost-effectiveness threshold of three times per capita GDP.

  • Thailand uses a 0.8x per capita GDP as its threshold.

  • Slovakia uses a threshold of 25-40x the average monthly salary (per QALY gained).

Explicit Thresholds (\lambda)

Patient Heterogeneity

• Returns to treatment may vary by relevent patient subgroups.

• “Heterogeneity” refers to the extent to which between-patient variability can be explained by patients’ characteristics.

Patient Heterogeneity

• Clinically-relevant heterogeneity suggests identification of subgroups for whom separate cost-effectiveness analyses should be undertaken.

• Such analyses may inform alternative decisions regarding the service provision to each subgroup, or contribute to a weighted analysis of the aggregate group

Availability and Access to Wegovy

Criticisms of Explicit Determinations

• The willingness-to-pay threshold (\lambda) is not universally agreed upon and can vary significantly between countries and over time.

• Often “all or nothing,” or at least targeted at certain clinical subpopulations.

• A treatment strategy that fails to meet an explicit threshold test may actually be cost-effective to adopt if we impose some patient-level cost-sharing.

  • Example: Patient pays some non-zero percentage of the cost of semaglutide.

Short Answer

• No for most federally-financed programs (e.g., Medicare, Medicaid)
• Yes for some clinical society recommendations and pricing recommendations.

Why No?

• Coverage determinations based on QALYs banned from use in Medicare (Affordable Care Act)
• Protecting Health Care for All Patients Act would prohibit all federal health programs (e.g., VA, Medicaid, Marketplaces) from using QALYs to make coverage or reimbursement decisions.
  • Passed by House in February 2024

Context: Banning QALYs

• In 2017, the Department of Veterans Affairs began integrating CEA into its drug pricing & formulary negotiations (e.g., PCSK9 inihibitors).

• The 2022 Inflation Reduction Act authorizes Medicare to negotiate the price of certain drugs (more on this Friday!)

  • Explicitly bars Medicare from using QALYs (or other similar measures) to help negotiate a value-based price.

Why Ban QALYs?

• The bans reflect concerns that QALYs could be used to ration care. (Plus intense lobbying from Pharma … )

• Patients with multiple comorbid conditions have lower quality of life and thus an extension of life by reducing the burden of any disease would not generate as many QALYs.

• QALYs are fundamentally a measure of the health gains of treatments, not a measure of the value of people (Cohen, Neumann, Ollendorf 2023).

Why Ban QALYs?

• An ICER makes comparisons across treatment strategies, not people.

• QALY alternatives (DALYs, equal-value life year gained, health-years-in-total) exist.

• My view: debate is really about the use of explicit thresholds, not the outcome measure used.

Why Yes? Clinical Recommendations

• “Choosing Wisely” campaign targeted so-called “low-value” services.

• The American College of Cardiology and the American Heart Association use cost-effectiveness analyses to inform clinical guidelines.

Choosing Wisely

Choosing Wisely

Clinical Guidelines: PCSK9 Inhibitors

Clinical Guidelines: PCSK9 Inhibitors

Why Yes? Value-Based Pricing

• The Institute for Clinical and Economic Review (ICER) is a non-profit organization that evaluates the cost-effectiveness of new drugs and therapies.
  • Reports are used by payers to inform coverage decisions.
  • Reports are also used by manufacturers to inform pricing decisions.

Value-Based Pricing: PCSK9 Inhibitors

• Sanofi and Regeneron lowered the price of their PCSK9, Praluent, to benchmark it closer to ICER’s VBP.
• In return, Express Scripts, one of the largest pharmacy benefit managers in the U.S., agreed to provide Praluent with exclusive formulary placement (more on this when we discuss implicit mechanisms!)

Value-Based Pricing: Gene Therapy

• Zolgensma (gene therapy for spinal muscular atrophy) is an example where the value-based price informed the drug maker’s pricing decision.

Value-Based Pricing: Gene Therapy

Coverage Determinations in the U.S.

Review: Moral Hazard

• “Moral hazard” refers to additional health care utilization incurred when people are insured from the additional costs of that care.
• Generous insurance coverage may incentivize the use of low-value care (Pauly)

What implicit mechanisms are used in the US?

• Prior authorization and step therapy
• Drug formularies
• Provider networks
• Cost sharing

Prior Authorization: Concept

• Payer requires documentation that patient is a good candidate for a therapy.
• In theory, allows for a priori identifcation of patients who would receive high vs. low benefit from treatment.
  • Restrict access to treatment to only those who would have high benefit value.

Prior Authorization: Reality

• Requires extensive effort and administrative cost.
  • 2nd highest administrative burden beyond billing (Casalino et al. 2009)
  • Requires an average of 20.4 person-hours per physician per week for practices (Casalino et al. 2009)
  • 34% of physicians report having at least one staff member who works exlusively on prior authorization requests (AMA 2017; Brot-Goldberg et al. 2023)

Prior Authorization: Reality

PA as a Blunt Instrument

Prior Authorization: Policy Landscape

• January 2024: CMS Interoperability and Prior Authorization final rule
• Impacts many federally-financed health coverage programs.
• Payers must send prior auth decisions within 72 hours for urgent requests and seven days for standard requests.
• Mandates and incentivizes improved interoperability and electronic prior authorizations.

Step Therapy: Concept

• Tiered treatment pathways.
• Patients must try and fail one or more lower cost (and even over-the-counter) medications before they will provide coverage for a more expensive drug.

Step Therapy

Formulary Exclusions: Concept

• Pharmacy Benefits Managers negotiate and construct formularies for health plans.
• Drugs may be excluded from formularies as mechanism to control costs and/or direct patients to lower-cost equivalent drugs.

Formulary Exclusions: Concept

Formulary Exclusions: History

• Started in 2011, when CVS Caremark excluded some drugs from its standard formulary for 2012.
• Initially, focus was on drugs with generic equivalents or drug classes with close (lower-cost) substitutes in terms of clinical outcomes.

Formulary Exclusions: Reality

Recent trends are towards exclusion of higher cost drugs where patient access is important.

Formulary Exclusions: Reality

Massive growth in exclusion of drugs to treat multiple sclerosis, mental health disorders, Parkinson’s disease, epilepsy, etc.

Provider Networks: Concept

• Exclude high-cost, low quality physicians from provider network.

Provider Networks: Concept

Provider Networks: Reality

Provider Networks: Reality

Patient Responsibility for Medical Costs

Criticisms of Explicit Determinations

• A blunt tool, with equity/access implications.

• Often “all or nothing,” or at least targeted at certain clinical subpopulations.

• You can think of these mechanisms as considering only coverage at 0% or 100% coinsurance.

Criticisms of Explicit Determinations

• Could a treatment strategy that fails to meet an explicit threshold test be social welfare improving if we impose some patient-level cost-sharing, rather than deny outright?

• Example: Rather than not cover at all, insurance requires paatient to pay some non-zero percentage of the cost of semaglutide.

“Optimal” Co-Insuarance

• Find the coinsurance value where the implicit ICER is equal to \lambda.
• There is a social welfare gain to covering Semaglutide (vs. not covering at all).
• By requiring some coinsurance, we can (potentially!) better target uptake to those patients who would yield the highest health benefit.

Criticisms of Implicit Mechanisms

• A blunt tool, used indiscriminately.
• Example: many health plans have uniform patient responsibility requirements.
  • Should patients face the same copayment/coinsurance for insulin as other more discretionary drugs?

Criticisms of Implicit Mechanisms

• Evidence is clear that so called “demand-side” tools (co-payments, deductibles, utilization management, etc.) reduce both unnecessary and necessary care.

• Not clear whether AI (e.g., to streamline prior auth) will help or hurt here.

Value-Based Insurance Design: Concept

• Waive cost-sharing for services that are not “preference sensitive.”
• What does a non-preference sensitive drug look like on our CEA plane?

Value-Based Insurance Design: Reality

Formal healthcare sector

Costs: Medical costs borne by “third-party payers” & paid for out-of-pocket by patients
Benefits: Health impact to patient & if relevant, family/unpaid caregiver

Societal perspective

Represents the wider “public interest” & inter-sector distribution of resources that are important to consider

• Includes patient transportation/travel, non-medical out-of-pocket costs, and time/productivity costs
• May include family/informal caregiver costs related to transport/travel, non-medical out-of-pocket costs, time/productivity costs
  

Perspectives and “Churn”

• “Churn” in US health insurance creates a massive wedge between health payer perspective and patient/societal perspective.

• This provides a strong case for intervention to ensure that investments in health are covered comprehensively, and earlier in the life course

  • USPSTF A&B requirement under ACA.

Semaglutide and the ACA Marketplaces

Semaglutide and the ACA Marketplaces

Novo and Lilly have shown numerous studies conveying the message that their treatments would prevent people from developing complications like diabetes and heart disease and save costs in the long run.

Semaglutide and Medicare

Semaglutide and Medicare

• Weight loss medications are one of few areas Medicare has a definitive “no.”
• Adding weight loss to Medicare Part D (drug benefit) could result in program costs that amount to 10-20% of existing Part D expenditures.
  • This would mean higher Rx coverage premiums for seniors.

Implicitly or explicitly, CEA incorporates social value judgements about equity.

• Decisions over relevant policy options and comparisons.
• Which costs and effects to measure.
• How to aggregate costs and effects for different populations.

Incorporating Equity into Health Economic Evaluations

Traditional CEAs consider two dimensions:

1. Costs
2. Effects

Incorporating Equity into Health Economic Evaluations

We now want to add a third:

Key Points

• Our decisions over the “optimal” policy may differ once we factor in social values of equity.
• The distribution of health benefits, and the distribution of opportunity costs, are important.
• The forgone health benefits that could have been generated through the next-best alternative may be unequally distributed.

Net Health Benefit

• To incorporate equity, we need to reduce a (now) three-dimensional concept (health, costs, equity) into two.
• We’ll do this by mapping health and cost outcomes into the net health benefit of a therapy.

Net Health Benefit

\text{Net Health Benefit} (NHB) = \text{Health} - \text{Cost} / \lambda

• Recall that \lambda is the maximum cost-effectiveness threshold for adoption. Scale: ($ / Health)
• By dividing costs by \lambda, we convert $s to the health scale.

Net Health Benefit

• If NMB is positive, health gains from treatment exceed the (health-valued) costs.
• If NHB is negative, (health-valued) costs exceed the gains from treatment.

Which would you adopt?

Which would you adopt?

Which would you adopt?