Less expensive, lower-quality innovations abound in every economic sector—except medicine
The rabbi’s eulogy for Sheldon Kravitz solved a minor mystery for my father: what was behind the odd shape of the juice cups he had been drinking from after morning services for the last few years? Adding a bit of levity while praising his thrift and resourcefulness, the rabbi told of how Sheldon purchased, for pennies on the dollar, hundreds of urine specimen cups from Job Lot, that legendary collection of pushcarts in lower Manhattan carrying surplus goods—leftovers, overproduced or discontinued products, unclaimed cargo. At the risk of perpetuating a pernicious cultural stereotype, for men of my father’s generation like Sheldon, raised during the Great Depression, bargain hunting was a contact sport and Job Lot was a beloved arena. My father, too, would respond to the extreme bargains there with ecstatic automatisms of purchasing behavior and come home with all manner of consumer refuse, including, and to my profound dismay, sneakers that bore (at best) a superficial resemblance to the suede Pumas worn and endorsed by my basketball idol, the incomparably smooth Walt “Clyde” Frazier. My father would insist that such items were “just as good” as the name brands. But we, of course, knew what “just as good” really meant.
In fairness to my father and his friends, from a utilitarian perspective (decidedly not the perspective of pre-adolescents), maximizing the overall good of the family involves economic trade-offs. Money saved from something “just as good” can be reallocated toward items that bring greater benefit than the value sacrificed. Indeed, these types of cost-versus-quality trade-offs are ubiquitous in our economy, and are especially useful when resources are tightly constrained. Those following the long march to health-care reform know that one of the few things beyond argument is that the old approach is unsustainable and threatens to bankrupt the country. Perhaps a little belt tightening and bargain hunting of this sort might make our health-care dollars stretch farther.
The Cost-effectiveness Plane
To help maximize the overall benefits in health care under a utilitarian framework and conditions of constrained resources, health economists use an analytic tool called cost-effectiveness analysis (CEA) that quantifies the added expenditure necessary to obtain a unit of health benefit (typically measured in quality-adjusted life years or QALYs, pronounced “kwallies”). The most common application of CEA is to examine the value of medical innovations compared to the standard of care routinely available, since new technologies are an important cause of the increase in health-care costs.
If the “unit cost” for a QALY of benefit (that is, the cost-effectiveness ratio) is less than some threshold (conventionally $50,000 or $100,000 per QALY), then adoption of the innovation is deemed “incrementally cost-effective,” since the benefit obtained compares favorably to that obtainable at similar cost using accepted medical technologies (such as dialysis, which has a cost-effectiveness ratio variously estimated at between $50,000 and $80,000 per QALY). Above the ratio, they are deemed not to be cost-effective. That is, the (relatively small) incremental benefits of the intervention do not justify the (relatively large) incremental costs.
Comparisons between alternative approaches in cost-effectiveness analyses can usefully be depicted on a cost-effectiveness plane, shown in the figure opposite. Most studied medical innovations fall into the northeast quadrant of this plane; that is, they increase both costs and health benefits. Within this quadrant, the acceptability threshold would be represented by a line of constant slope, indicating the “willingness to pay” (WTP) for a QALY, separating nominally cost-effective therapies from cost-ineffective therapies.
Of course, if all innovation in health care fell into this northeast quadrant, innovation could only increase the costs of care. That is, even so-called cost- effective health-care innovations would always cost more money than the alternatives they replaced. This is often a point of confusion, sometimes purposeful, as when our political leaders claim that “preventative medicine” is highly cost-effective and would therefore save money. In fact, while most recommended preventative services are cost-effective (meaning the value of their benefits in terms of QALYs gained justifies the costs in terms of dollars spent), only very rarely are preventative services actually cost-saving, even when all the “downstream” avoided medical expenses are folded into the analysis. Indeed, new “cost-effective” innovations are one of the principal reasons that health-care costs continue to soar.
In fact, only innovations that fall south of the equator in the cost- effectiveness plane are actually cost-saving. When those innovations are also superior to the alternative, or standard of care, they are considered “dominant” (that is, cost decreasing and quality improving); adoption of these southeast quadrant innovations should not be controversial. However, as health-care costs continue to rise, cost-saving innovations may be increasingly attractive even when they do not improve care, particularly in a weak economy. While some innovations in the southwest quadrant would clearly be unattractive because they are substantially worse than the available standard of care or offer only trivial cost savings, what about innovations that offer substantial cost saving and are genuinely almost as good as the standard? In a 2004 article in Medical Decision Making, fellow researchers and I described innovation that is greatly cost saving but only slightly quality reducing as “decrementally” cost- effective. In such cases, the savings could potentially increase the overall good despite the sacrificed benefit. Indeed, if “much cheaper, almost as good” products are attractive in other economic sectors because they permit the reallocation of saved resources to items of more value than the benefits sacrificed, why not in medical care as well?
Men generally fix their affections more on what they are possessed of, than on what they never enjoyed: For this reason, it would be greater cruelty to dispossess a man of any thing than not to give it [to] him.—David Hume, A Treatise on Human Nature
Theoretically, perfectly rational economic agents seeking to maximize their welfare would be similarly willing to relinquish QALYs obtained from some routinely available standard-of-care for a new “much cheaper, almost as good” therapy, if the savings could be reallocated to an item of equal or higher value than what was sacrificed. Put another way, the selling price (often referred to as willingness to accept, or WTA) and the buying price (willing to pay, WTP) of a QALY should be similar, and the societal threshold for accepting or rejecting a technology should be symmetric and pass through the origin of the cost-effectiveness plane as a straight line. However, as David Hume anticipated, a reproducible observation is that consumers’ willingness to accept monetary compensation to forgo something they have is typically greater, and often much greater, than their stated willingness to pay for the same benefit. Several explanations exist, including the so-called “endowment effect,” the psychological principle that people value items that they already have simply because they already have them.
A 2002 review of 20 studies by the late Bernie O’Brien and his colleagues at McMaster University found that the ratio of individuals’ WTA to WTP was always greater than 1 and ranged from 1.9 to 6.4 for two scenarios specifically related to health care. They suggested that rather than a symmetric accept-reject threshold on the cost-effectiveness plane, societal thresholds should reflect the WTA-WTP gap seen in individual preferences, which would be captured by a downward “kink” (subsequently known as “Bernie’s kink”) in the threshold as it passed through the origin, indicating that a QALY’s selling price in the southwest would always be higher than a QALY’s buying price in the northeast.
Thus, there may be an inherent cognitive bias against relinquishing the gains of health-care interventions that have already been accepted, and the cost savings from decrementally cost-effective innovation may need to be substantially greater than conventionally used thresholds suggest.
Whereas all this fancy theory plus a token can get you on the subway, might there be practical applications of “decrementally” cost-effective innovation? To explore this, working with colleagues at the Tufts Center for the Evaluation of Value and Risk (who maintain a comprehensive database of cost-utility studies), we enlisted Aaron Nelson, then a medical student, to help us sort through more than 2,000 cost-utility comparisons for any potential examples that might be decrementally cost-effective. We found that about three-quarters of published comparisons described new technologies or treatment strategies that increase both costs and benefits, and that most of these (about 65 to 80 percent) were cost-effective by conventional criteria (depending on which conventional threshold was used, $50,000 or $100,000 per QALY gained). Less often, published analyses described innovations that are either dominant or dominated (about 10 percent and 15 percent of the time, respectively), but only very rarely were innovations both cost- and quality-decreasing. Indeed, fewer than 2 percent of all comparisons were classified in the cost- and quality-decreasing “southwest quadrant”, and only 9 (involving 8 innovations) were found to be decrementally cost-effective (0.4 percent of the total)—that is, they saved at least $100,000 for each QALY relinquished.
Examples of these cost-saving interventions include using the catheter-based percutaneous coronary intervention in place of bypass surgery for multivessel coronary disease, which on average saves about $5,000 while sacrificing a half day of perfect health (for a cost-savings of more than $3 million for every QALY lost) and using repetitive transcranial magnetic stimulation instead of electroconvulsive therapy for drug-resistant major depression, which avoids the need for general anaesthesia and saves on average over $11,000 but sacrifices about a week of perfect health (for a ratio of more than $500,000 for every QALY lost). Nearly all the remaining innovations involved the tailored withholding of standard therapy, including watchful waiting for selected patients with inguinal hernia, withholding mediastinoscopy for selected patients with lung cancer, and abbreviated physiotherapy or psychotherapy for patients with neck pain or deliberate self-harm, respectively. Finally, the cost-saving innovations included the sterilization and reuse of dialysate, the chemical bath used in dialysis to draw fluids and toxins out of the bloodstream—a degree of thrift even the late Sheldon Kravitz would have to admire.
That decrementally cost-effective innovations are so rarely described in the health-care literature suggests that medicine is distinct from most other markets, in which cost-decreasing, quality-reducing products are continuously being introduced—think IKEA, Walmart and the Tata car. Several reasons may explain this “medical exceptionalism.” First, there is fundamentally a lack of incentives both for physicians to control costs, especially under a fee-for-service regime, and for patients to demand less expensive treatment when insurance shields them from the direct costs of care. Second, medical “bargains” frequently come with health risks, and trading health for money strikes some as vulgar, regardless of ratio. The inherent ethical unease that decrementally cost-effective innovations can elicit poses a serious public relations and marketing challenge.
However, consumers have been comfortable with many decrementally cost-effective options outside of health care that pose similar health risks. For example, automobile manufacturers produce many vehicles that lack certain safety features (for example, side-impact airbags), because some consumers are willing to forgo those options to reduce the purchase price. Why not in health care?
Lowering Health Costs: Buy Less Stuff
Even by the standards of political rhetoric, it strains credulity when politicians suggest that the declared goals of health-care reform—increasing access, improving quality and controlling costs—are somehow mutually reinforcing. I’m no Peter Orszag, the über-wonk overseeing President Obama’s Office of Management and Budget, but if my father taught me anything it was that saving money rarely involves buying more and better stuff. Plain talk about ways to cut costs are buried in rhetoric about rooting out inefficiencies and various prevarications about savings from investing in (that is, spending on) more preventative medicine, health information technology, and comparative effectiveness research about what therapies work best for which patients. While these goals may all be worthwhile, and there is much of little or no value in the current system (including the immense amount of money spent to maintain our Byzantine for-profit insurance system), ultimately we simply do not have the resources to give away an expensive commodity like health care in quantities that people want, subject to no budgetary constraints.
It is beyond dispute that some mechanisms for the controlled distribution of these expensive goods and services are required. In most markets, prices play this role, and many feel that the fundamental problem in health care is that many consumers are shielded from the costs of their care. A system based largely on prices (that is, price rationing) may control costs better than our current system, but it would of course mean that those with the most money have first dibs on scarce health-care resources, and there might be little left over for those without means. (There are other reasons too why most consumers can’t be expected to comparison shop for emergency coronary angioplasty or for charged-particle radiosurgery for their glioblastoma the same way they might for gasoline, underwear and cling peaches). It is a fantasy to believe that price rationing alone can provide an acceptable mechanism for the controlled distribution of medical services, and some other means are thus also needed. Perhaps we should take it as a sign of the robustness of our democracy that this rather technical issue of the proper mix and variety of price and non-price rationing has somehow managed to plunge our national conversation about health-care reform into a Jerry Springer–style shouting match, except without the civility.
But regardless of the mix, expanding coverage to the uninsured, caring for our aging baby boomers, and accommodating new, effective technologies—while still feeding, clothing, housing, and educating ourselves, and catching an occasional movie—will require our system of distribution of health services to be more cost- sensitive, and will almost certainly mean the adoption of some decrementally cost-effective strategies for saving money. For example, Canadian-style delays for expensive diagnostic or surgical procedures certainly pose real, albeit small, medical risks, and would fall into this southwest category. Getting insured Americans to accept such new risks may be difficult, but slightly quality-reducing (that is, risk-increasing) cost-saving strategies have already been widely adopted within the American system, even if not studied or widely acknowledged. The gradual increase in the “hassle factor” in accessing medical care is one covert way that the industry has found to limit the distribution of services. More overt examples of rationing already adopted include aggressively shortening hospital stays and limiting formulary options (which sometimes require patients to change from a medicine they have been tolerating well to another in the same class). Despite the fact that doctors regularly (although sometimes disingenuously) deploy patter informing patients that the hospital is a dangerous place to stay and that the formulary medication is “just as good” as the one they’ve been taking, these strategies are certainly associated with small but real risks. Even a preadolescent quickly learns the true meaning of “just as good”; perhaps a more mature citizenry can also come to appreciate some of the upside of having “just as good” alternatives.
- Orszag, P. R., and P. Ellis. 2007. The challenge of rising health care costs—a view from the Congressional Budget Office. New England Journal of Medicine 357:1793–1795.
- Cohen, J. T., P. J. Neumann and M. C. Weinstein. 2008. Does preventive care save money? Health economics and the presidential candidates. New England Journal of Medicine 358:661–663.
- Kent, D. M., A. M. Fendrick, and K. M. Langa. 2004. New and dis-improved: On the evaluation and use of less effective, less expensive medical interventions. Medical Decision Making 24:281–286.
- O’Brien, B. J., K. Gertsen, A. R. Willan and L. A. Faulkner. 2002. Is there a kink in consumers’ threshold value for cost-effectiveness in health care? Health Economics 11:175–180.
- Nelson, A. L., J. T. Cohen, D. Greenberg and D. M. Kent. 2009. “Much Cheaper, Almost as Good”: Decrementally Cost Effective Medical Innovation, Annals of Internal Medicine 151:662–667.