Executive Summary

This document reports on the Conference “Medical Innovation in the Changing Healthcare Marketplace,” held June 14–15, 2001, Washington, D.C., at the National Academy of Sciences.

THE AIM OF THE CONFERENCE

The overarching question addressed by the conference was:

In an environment of renewed concern about rising health care costs, where can public policy stimulate or remove disincentives to the development, adoption and diffusion of high-value innovation in diagnostics, therapeutics, and devices?

This question was addressed both at the macro level and at the diseasespecific level. Two contrasting diseases were discussed at the conference— cardiovascular disease and metastatic melanoma. For cardiovascular disease, there have been major advances in acute care, drugs, devices, and preventive measures over the last half-century, and these have resulted in significantly reduced morbidity and mortality. In contrast, for metastatic melanoma, there has, to date, been very limited therapeutic progress and the impact on morbidity and mortality has been slight.

The conference presentations addressed four main themes—characteristics of medical innovation, costs and benefits of medical innovation, cost-effectiveness studies and innovation development, and barriers to medical



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Medical Innovation in the Changing Healthcare Marketplace: Conference Summary Executive Summary This document reports on the Conference “Medical Innovation in the Changing Healthcare Marketplace,” held June 14–15, 2001, Washington, D.C., at the National Academy of Sciences. THE AIM OF THE CONFERENCE The overarching question addressed by the conference was: In an environment of renewed concern about rising health care costs, where can public policy stimulate or remove disincentives to the development, adoption and diffusion of high-value innovation in diagnostics, therapeutics, and devices? This question was addressed both at the macro level and at the diseasespecific level. Two contrasting diseases were discussed at the conference— cardiovascular disease and metastatic melanoma. For cardiovascular disease, there have been major advances in acute care, drugs, devices, and preventive measures over the last half-century, and these have resulted in significantly reduced morbidity and mortality. In contrast, for metastatic melanoma, there has, to date, been very limited therapeutic progress and the impact on morbidity and mortality has been slight. The conference presentations addressed four main themes—characteristics of medical innovation, costs and benefits of medical innovation, cost-effectiveness studies and innovation development, and barriers to medical

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Medical Innovation in the Changing Healthcare Marketplace: Conference Summary innovation. The key points made by conference speakers with regard to these themes are summarized in the next four sections. THE CHARACTERISTICS OF MEDICAL INNOVATION Conference speakers made two important observations about the characteristics of medical innovation. First, innovation in diagnostics, therapeutics and devices are important but are not the whole story. Corresponding innovations in the health care delivery system have not taken place and are badly needed if the full benefits of innovations in diagnostics, therapeutics and devices are to be achieved. The broad range of these innovations since World War II has led to an enormous growth in the complexity of health care. However, the health care delivery system has not evolved to accommodate this complexity. Sophisticated delivery systems are lacking. There has been inadequate investment in information processing systems, and there has been insufficient emphasis on teamwork in care delivery. The inadequate investment in information processing systems led one speaker at the conference to say that there is a need for the federal government to take a leadership role in fostering a health care information infrastructure. The second important observation was that innovation in implanted devices and drugs follow quite different paradigms. The former are much more likely to undergo improvements leading to significant cost-effectiveness improvements over time. For example, improvements in the technology of implantable cardioverter defibrillators (ICDs) and the way they are deployed have reduced the average cost of a life-year saved from about $50,000 in the mid-1980s to less than $20,000 in the early 1990s (Stanton et al., 2000). As a result of such improvements, early cost-effectiveness studies for devices are likely to present worst-case scenarios and could lead to premature abandonment. THE COSTS AND BENEFITS OF MEDICAL INNOVATION With health care costs once again increasing faster than general inflation, attention has focused on medical innovation being a driver of health care costs. According to researchers at the Centers For Medicare and Medicaid Services (CMS),6 medical innovation has been the primary driver of health care costs over the second half of the 20th century. It has accounted for about half the real growth in health care spending over the period 1950–2000, with the other half being attributable to factors such as the 6   Formerly, the Health Care Financing Administration (HCFA).

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Medical Innovation in the Changing Healthcare Marketplace: Conference Summary aging population, increasing disposable income, and expanding insurance coverage. Aggregate pharmaceutical costs have increased much faster than overall health care costs in recent years. Examination of the drivers of aggregate pharmaceutical costs shows that increased use of existing drugs is a more important driver than the use of new drugs, while unit price increases of existing drugs have been very similar to increases in the overall Consumer Price Index for all goods and services. In 2000, pharmaceutical spending was 13.6 percent higher than in 1999. Of this increase, 3.9 percentage points can be attributed to unit price increases of existing products, 7.5 percentage points to increases in the utilization of existing products, and the remaining 2.2 percentage points to the use of new drugs (IMS Health, 2001). Other recent year-on-year increases have shown a similar pattern. Increasing use of existing drugs is the result of the treatment of more patients and the application of new science (Dubois et al., 2000). More people are being treated because the population is aging and there is a narrowing of the gap between prevalence rates and treatment rates for many diseases. Further, science is identifying new ways of using existing drugs. Increased use of prescription pharmaceuticals also reflects in part a greater understanding of their value offsetting other health care costs (Lichtenberg, 1996, 2001) and improving workplace productivity (Kessler et al., 2001). The debate about health care largely focuses on its costs as though its benefits have little or no value, which is far from the case. One speaker estimated the social benefit of medical research by placing a value on aggregate improvements in longevity. To do this he first estimated the average amount an American would pay to add an extra year to his/her life. Using data on what workers are paid in occupations with differing risks of jobrelated death, the speaker estimated the value of an additional life-year to be about $150,000, a figure that varies with age. Using these age-dependent values of an additional life-year he estimated that increased life expectancy over the period 1970-1990 is valued at roughly $57 trillion or about $2.8 trillion per year (Viscusi, 1993; Tolley et al., 1994; Cutler et al., 1998; Cutler and Richardson, 1999; Lasker Foundation, 2000; Topel and Murphy, Forthcoming). Expressed another way, over the period 1970– 1990, improvements in life expectancy have contributed about as much to overall welfare as have improvements in material wealth. Another speaker showed that the returns on investment in medical technology for cardiovascular disease applications are very significant. For someone 45 years old, half of the 9-year increase in life expectancy over the period 1950-2000 is a result of reduced cardiovascular disease mortality. The speaker attributed roughly two thirds of the cardiovascular benefits (3 extra years) to improvements in medical treatment and roughly one third

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Medical Innovation in the Changing Healthcare Marketplace: Conference Summary (11/2 extra years) to behavioral changes. Based on the average cost of medical treatment for cardiovascular disease and the cost of providing behavioral advice, and assuming that an extra year of life is valued at $100,000, the speaker demonstrated that the return on medical care is very high, about 4:1, and the return on behavioral changes is much higher, about 30:1. In the context of escalating costs associated with innovation, one speaker concluded that new technologies (most of which tend to be expensive—for example, Left Ventricular Assist Devices for heart failure) and the aging of the U.S. population are going to drive up the costs of cardiovascular care. He doubted whether new technologies would improve efficiency on the grounds that the U.S. system is too fragmented to take advantage of money-saving innovations. Again, in the context of escalating costs associated with innovation, the lack of CMS reimbursement may significantly curtail the development of promising therapeutic agents. For example, high dosage Interleukin-2 (IL-2) is the only effective treatment for metastatic melanoma, but only for a small subset of patients. Criteria for predicting this responsive subset are currently lacking. High dosage IL-2 is a very costly in-patient therapy with CMS only reimbursing a fraction of the total cost. Some major centers do not offer this therapy, even for those who are able to pay for the treatment. The lack of full reimbursement, allied to the unpredictable outcome of the treatment, has curtailed research efforts to improve the therapy. COST-EFFECTIVENESS STUDIES AND INNOVATION DEVELOPMENT Cost-effectiveness studies for a new medical technology are often crucial to the development of that innovation. Three case histories were presented at the conference—tissue plasminogen activator (t-PA) and implantable cardioverter defribrillators (ICDs)—where cost-effectiveness studies encouraged diffusion and one—intravascular ultrasound (IVUS)—where cost-effectiveness studies discouraged diffusion. Two trials in Europe found that the mortality rates for administering t-PA or streptokinase after a heart attack were identical. At the time, t-PA cost about $2,200 per treatment, while streptokinase cost about $300. Subsequently, the market share of t-PA in the United States began to slide. This led Genentech to fund a very large U.S. trial (GUSTO-1) that found that t-PA had a better mortality rate than streptokinase. Later analysis of the trial data (Mark et al., 1995) showed that t-PA provided an extra life year at a cost of $33,000. Recombinant thrombolytics (t-PA and others) now account for 96 percent of the U.S. market.

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Medical Innovation in the Changing Healthcare Marketplace: Conference Summary One of the early barriers to the adoption of ICDs was the lack of cost-effectiveness studies. Eventually, randomized controlled trials (RCTs) were carried out comparing the use of ICDs with the best available drug. The results (Connolly et al., 2000) showed that patients given ICDs had a 28 percent lower chance of dying from all causes. This was convincing evidence that ICDs enabled patients to live longer. IVUS was developed by academic cardiologists in the late 1980s and was approved by the FDA in the early 1990s. IVUS is currently used as a diagnostic and research tool. Cost-effectiveness data (Berry et al., 2000) showed that broad use of IVUS in angioplasty was not justified. Development and widespread use of the technology have, as a result, been limited In contrast to the above technologies, many technologies are poorly assessed for cost-effectiveness prior to use. For the diagnosis of melanoma, examples discussed at the conference were digital imaging, epiluminescence microscopy, and qualitative image analysis. This lack of objective assessment is ascribed to the passivity of payers of health care services. At the same time, physicians and patients have been aggressive about demanding the latest technology, while Congress and the courts are reluctant to control access to new medical technologies. Against this background, two speakers believed that payers should take a more active role in clinical trial design and fund key trials. In this regard, Medicare has recently started to pay for the routine costs of care in clinical trials, but so far has paid for only two trials. BARRIERS TO THE DEPLOYMENT OF HIGH-VALUE INNOVATION The conference discussed a wide range of barriers to the deployment of high-value innovation at the technical level, at the public policy level, and in the broader political context. In considering barriers to innovation, it should be noted that not all stakeholders see each barrier in the same light. For example, regulations may be seen by some as inhibiting the deployment of technology and by others as providing important safeguards. Technical level barriers that were discussed included inadequate understanding of the biology of cancer, poorly predictive pre-clinical models for cancer therapies,7 inadequate effort devoted to cost-effectiveness analyses, and a shortage of patients willing to participate in clinical trails. Public policy barriers were discussed at some length at the conference. The following are the key barriers that were identified: 7   It should be noted that many other major diseases, such as heart disease, stroke, and depression, also have poor pre-clinical models.

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Medical Innovation in the Changing Healthcare Marketplace: Conference Summary Reimbursement policies not friendly to innovation. The IOM Roundtable on Health Care Quality (Chassin et al., 1998) documented the extensive underuse and overuse of medical technologies. This suggests that the right incentives for the diffusion of quality care may not be in place. Furthermore, two speakers pointed out that fee-for-service payment methods, originally designed for short-term acute care, reward individual acts by individual people. They do not support well-integrated delivery capabilities increasingly necessary to treat a wide range of chronic conditions. Inability of federal agencies to cope in the face of a significant increase in the amount and a broadening in the scope of medical innovation. A factor that could have an important bearing on the FDA’s ability to cope will be the post-September 2002 arrangements for paying user fees for New Drug Applications. Excessive regulation inhibiting change and costly to implement. For example, CMS has 130,000 pages of rules, regulations, and guidelines. Kaiser Permanente has estimated that between 5 and 7.5 percent of total annual revenues are devoted to meeting local, state, and national regulatory requirements. Public policy changes, a major uncertainty for venture capitalists. Although venture investors are able to evaluate technology and development risks, it is more difficult to anticipate the impact of public policy changes that may extend the period of development and increase its cost (for example, by regulation) or reduce returns on investment (for example, by price controls). Older public policies may no longer provide the right incentives. The Orphan Drug Act of 1983 and the Waxman-Hatch Act of 1984 were enacted in the early days of the biotechnology industry, and the incentives written into these two laws may not now be economically relevant. Rules for managing conflicts of interest may end up inhibiting innovation. One speaker said that concerns about conflicts of interest had become pervasive, particularly in academic medical centers. The speaker believed that attempts to legislate honesty and integrity would not work. Moreover, he feared such rules might inhibit innovation. Several conference speakers pointed to the potential negative impacts on medical innovation of some broader political and economic trends: Congressional reluctance to address health care issues. Congress has understandably become reactive to health care issues because the issues are complex, political capital is difficult to gain from health care legislation, and congressional opinion is fragmented on health care issues. Areas where congressional leadership would be important include establishing incen-

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Medical Innovation in the Changing Healthcare Marketplace: Conference Summary tives for the delivery of quality care and fostering investment in information technology in the health care delivery system. Increasing scrutiny of health care prices could influence return on capital. Politicians, employers, insurers, and providers are reluctant to make choices on behalf of consumers/patients about their health care. By default, consumers will have to make more of the choices (Robinson, 2001), balancing quality of care choices against out-of-pocket expenses. Moreover, almost certainly they will have to assume more of the cost burden, leading to further scrutiny of health care costs. The resulting downward pressure on prices could reduce investors’ return on investment. On the other hand, better-informed consumers may demand more services, resulting in an expansion of the market. Lack of responsiveness to equity issues might reduce public support for federal funding of medical research. Too large a proportion of the population without insurance coverage or too large a proportion of the insured lacking prescription insured coverage could undermine political support for high levels of NIH funding. REFERENCES Berry, E., S. Kelly, J. Hutton, H. S. J. Lindsay, J. M. Blaxill, J. A. Evans, J. Connelly, J. Tisch, G. C. Walker, U. M. Sivananthan, and M. A. Smith. 2000. Intravascular ultrasoundguided interventions in coronary artery disease: a systematic literature review, with decision analytic modeling, of outcomes and cost-effectiveness. Health Technology Vol. 4: No. 35. Chassin, Mark R., Robert W. Galvin, and the National Roundtable on Health Care Quality. 1998. The urgent need to improve health care quality. JAMA 280(11):1000-1005. Connolly, S. J., A. P. Hallstrom, R. Cappato, E. B. Schron, K.H. Kuck, D. P. Zipes, H. L. Greene, S. Boczor, M. Domanski, D. Follmann, M. Gent, and R. S. Roberts. 2000. Meta-analysis of the implantable cardioverter defibrillator secondary prevention trials. European Heart Journal 21:2071-2078. Cutler David M., Mark McClellan, Joseph P. Newhouse, and Dahlia Remler. 1998. Are medical prices falling? Quarterly Journal of Economics, 113(4):991-1024 Cutler David M. and Elizabeth Richardson. 1999. Your money and your life: The value of health and what affects it. In Alan Garber, ed., Frontiers in Health Policy Research, Volume 2, pp. 99-132. Dubois, Robert W., Anita J. Chawla, Cheryl A. Neslusan, Mark W. Smith, and Sally Wade. 2000. Explaining drug spending trends: Does perception match reality? Health Affairs 19(2):231-239. Kessler, R.C., P.E. Greenberg, K.D. Mickelson, L.M. Meneades, and P.S Wang. 2001. The effects of chronic medical conditions on work loss and work cutback. Journal of Occupational and Environmental Medicine. 43(Suppl. 3):218-225. IMS Health. 2001. Pharmaceutical Pricing Update. Vol. 8. No. 4. (June 2001). Plymouth Meeting, Pa . Lasker Foundation. 2000. Exceptional Returns: The Economic Value of America’s Investment in Medical Research. New York, N.Y.

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Medical Innovation in the Changing Healthcare Marketplace: Conference Summary Lichtenberg, Frank R. 1996. Do (more and better) drugs keep people out of the hospital? American Economic Review (May):384-388. Lichtenberg, Frank R. 2001. Are the benefits of newer drugs worth their cost? Evidence from the 1996 MEPS. Health Affairs 20(5):241-251. Mark, Daniel B., Mark A. Hlatky, Robert M. Califf, C. David Naylor, Kerry L. Lee, Paul W. Armstrong, Gabriel Barbash, Harvey White, Maarten L. Simoons, Charlotte L. Nelson, Nancy Clapp-Channing, J. David Knight, Frank E. Harrell, John Simes, and Eric J. Topol. 1995. Cost effectiveness of thrombolytic therapy with tissue plasminogen activator as compared with streptokinase for acute myocardial infarction. New Eng J. of Med. 332(21):1418-1424. Robinson, James C. 2001. The End of Managed Care. JAMA 285(20):2622-2628. Tolley, George, Donald Kenkel, and Robert Fabian, (eds). 1994. Valuing Health for Policy: An Economic Approach. Chicago: The University of Chicago Press. Topel, Robert H., and Kevin M. Murphy. Forthcoming. The Economic Value of Medical Knowledge. In: Exceptional Returns, Robert H. Topel and Kevin M. Murphy, eds. Chicago: University of Chicago Press. Viscusi, W. Kip. 1993. The value of risks to life and health. Journal of Economic Literature, 31(4):1912-1946. Washington Post editorial. June 9, 2001. Back to health care costs.