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Look Past Price For Health Care Value

Frank R. Lichtenberg
Investor's Business Daily
November 12, 2008

President-elect Obama is inheriting a financial sector in need of serious overhaul, along with a $700 billion bailout that will constrain federal budget priorities for years to come. That's the good news.

The bad news is that there's a much larger fiscal challenge on the horizon: reforming the U.S.' $2 trillion health care sector, including federal entitlements—such as Medicare—that represent trillions of dollars in unfunded liabilities.

Presidential candidates Barack Obama and John McCain had very different visions for health care reform. But they did both agree that America isn't always getting good value for its health care spending.

Consequently, both called for government to do more study on which treatments offer the most cost-effective outcomes—called comparative effectiveness research—to help patients and doctors make better health care choices.

The challenge, however, is not just to compare price tags for newer and older treatments. Medical innovations—new drugs, devices and diagnostics—are often more expensive than older versions, but they may also embody better science. And this new know-how may help Americans who might otherwise become disabled from illness or injury stay in the work force longer.

If policymakers aren't careful, cutting back on some expensive drugs or procedures could backfire and lead to sicker patients and higher costs somewhere else.

For instance, in a new study for the Manhattan Institute, I looked at how access to one type of medical innovation—newer prescription drugs—may have affected disability rates in the U.S. working-age population during the period 1995-2004.

During that decade, a rapidly increasing fraction of Americans received federal disability support payments through two programs, Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI). Overall, the number of Americans classified as disabled through these programs rose 30%.

Using data on all Medicaid prescriptions in 30 classes of medicines that account for the vast majority of drugs used by patients, along with information on when the active ingredient in each medicine was approved by the FDA, I was able to measure the average drug "vintage" in each year for 49 out of 50 states.

(For instance, Zocor's active ingredient, simvastatin, was approved in 1991, making 1991 the drug's vintage. The average age of all drugs in a state can then be used to establish a statewide drug vintage.)

Other studies looking at disability rates have shown they can vary widely based on three main criteria: the health status of the applicant; general labor-market conditions; and the generosity of the disability programs. (The more generous the program, the more likely people are to apply for it.)

My study found that a state's average drug vintage was also an important factor in determining the size of disability rolls. In a nutshell, states in which the average vintage of Medicaid prescriptions increased the most experienced smaller increases in disability.

For instance, in the five states where drug vintage increased the most—California, Idaho, Rhode Island, Connecticut and Maryland—disability increased by 800 recipients per 100,000 working-age people from 1995-2004.

In the five states where drug vintage increased the least—Oklahoma, Alabama, Texas, Louisiana and West Virginia—disability increased by 1,400 recipients per 100,000 working-age people, or 57% more. My study controlled for other factors such as changes in average age, education, wage rates, and behavioral risk factors such as obesity and smoking.

If patients and doctors hadn't had access to these newer vintage medicines since 1995, I estimate that the disability rolls would have increased by an additional 30%. This translates into 418,000 more disabled Americans getting an additional $4.5 billion in support from Social Security.

Other factors were at play as well. Drug vintage increased more slowly in states where AIDS/HIV infection rates declined more slowly than average. In a small subset of states, it's possible that spending on AIDS/HIV treatment—though highly cost effective—is leaving less money available for newer medicines to treat other ailments. Policymakers in these states may want to focus additional funding on HIV prevention to reduce AIDS incidence rates, since prevention is much less expensive than treatment.

The next president will have to make some difficult decisions on how to best reduce health care costs while still getting the most value possible out of every health care dollar. Some treatments—although expensive—may make the difference between keeping working-age Americans productive and shifting them into safety net programs with their own costs.

Perhaps the best way to reduce health expenditure growth is to find ways to prevent people from developing chronic diseases. But when Americans do get sick, finding real values in health care won't be as simple as checking the price tag.

Lichtenberg is a professor at the Columbia University Graduate School of Business and a research associate of the National Bureau of Economic Research.

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