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Part V} Implications for Innovators

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1 ~ Managed Care and Pharmaceutical Innovation Frederick W. Telling The many strong managed health care systems that emerged in the United States during the 1980s, along with federal policy changes that af- fect the economics of the pharmaceutical industry, are having a significant impact on industry strategies for innovation. This paper describes typical new practices and three important effects of those practices on industry operations: (1) current gatekeeping methods have altered pharmaceutical use by health care providers; (2) such controls diminish a research-based company's potential sales revenue to support innovation; and (3) the chang- ing health care environment is altering pharmaceutical research strategies and will affect the spectrum and characteristics of dings available in the future. These practices also lead to new policy issues relating to the grow- ing emphasis on outcomes research and to the increasing restrictions on the dissemination of information about drugs- issues that the United States must address if its pharmaceutical industry is to remain competitive. Three recurrent themes are central to these matters. 1. Medical innovation is expensive. Pharmaceutical innovation appears to be the most costly and uncertain of all efforts to develop new medical technologies. Recent studies based on a cohort of products that were first tested in humans between 1970 and 1982 have shown that research and development (R&D) for each innovative new ding (new chemical entity) 201

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202 FREDERICK W. TELLING brought to the U.S. market takes 12 years and costs, on average, $231 million (in 1987 dollars; DiMasi et al., 1991~. Evidence indicates that the costs associated with more recent R&D are substantially higher. The eco- nomic burden of paying for this innovation, along with the benefits of the technology, now rests squarely on countries whose health care systems are receptive to technology. 2. Third parties are intervening in health care decisions. Third-party payers in both the public and private sectors of the United States are mov- ing toward the interventionist policies of health care regulators in Europe (Burstall, 1991~. In the case of pharmaceuticals, the controls imposed by payers produce both economic and bureaucratic disincentives to innovation. Such controls are mediated through a diverse variety of mechanisms, which are described more fully below. Unlike Europe, however, where govern- ment is the payer of care and the promoter of industrial strength, most payers in the United States have no direct responsibility for the success of the industries that produce these products. 3. Cost is becoming a dominant factor in the decisions of third-party payers and appears to be replacing patient benefit as the principal factor for determining whether an innovative technology is adopted and used. Although third-party payers rightly emphasize the importance of data on both health and economic outcomes to justify the acceptance of a technolo- gy, generally, they have not shared the responsibility for evaluative re- search to generate such data. MANAGED CARE PRACTICES, GATEKEEPING, AND HEALTH CARE DELIVERY Earlier chapters in this volume describe the evolution of U.S. health care policy and its economic consequences. Projections of 1992 health care expenditures in this country, well fueled on both the demand and supply sides, are $817 billion, or 14 percent of the gross national product (GNP; U.S. Department of Commerce, 1992~. Most of this expense is paid by government and by private employer-funded benefit plans. However, cov- erage and reimbursement across the spectrum of health services vary wide- ly. In 1990, patients paid about 5 percent of hospital care directly out of their own pockets; they paid about 19 percent of physician costs and 74 percent of prescription drug expenses (NCPA/Fiscal Associates, 1990~. Despite the relatively small portion 5 percent of total U.S. health care costs rep- resented by pharmaceuticals (HCFA, Office of the Actuary, 1992) and the limited reimbursement of pharmaceutical charges by institutional payers, the pervasive concerns of such payers about health care costs have nonethe- less affected pharmaceutical usage (Grabowski, 1991~.

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MANAGED CARE AND PHARMACEUTICAL INNOVATION Widening Constraints on Health Care Services 203 Earlier in this volume, Soper and Ferriss, Wagner, and Welch and Fish- er describe the evolution of public and private benefit plans from essentially passive payers to active purchasers of health care. In this new role, payers explicitly seek to constrain both the price and the intensity (volume) of health care services. Health maintenance organizations (HMOs), which integrate the delivery and financing of comprehensive health services, have been the main innovators in devising the cost-control methodologies that have come to be called managed care. The diffusion of the concepts of managed care from HMOs, which cover about 15 percent of the population, to traditional indemnity plans has occurred rapidly and without major fan- fare or debate. These techniques now promise to pervade all U.S. health benefit plans within this decade. The objective of managed care is to discourage unnecessary and inap- propriate medical services without jeopardizing necessary, high-quality care. In a broad sense, managed care employs various techniques and degrees of third-party influence to affect the patient's choice of health care provider and the pricing, type, and volume of the provider's goods and services. As a result, it has acquired the label of gatekeeper. Managed care represents a fundamental structural shift to a health care delivery system in which the judgments of third-party payers are interposed in traditional physician-pa- tient decision making. Pressures on Drug Costs The cost-containment tools of managed care generally comprise cover- age design and administration, payment limits, and selective contracting with providers of health care services and goods. To evaluate the potential applicability of such techniques to pharmaceutical selection and usage, it is important to understand the economic structure of the U.S. pharmaceutical market and the American approach to pharmaceutical cost containment as lucidly described by Grabowski (1991~. Enactment of the Drug Price Com- petition and Patent Term Restoration Act in 1984 facilitated the transfer of inventors' intellectual property by establishing a regulatory framework to expedite the marketing of generic copies of a drug. Frequently, generic copies are ready for marketing on the expiration date of the innovator's patent (plus the time extension, if any, provided by the terms of the act). The principal economic consequence of this policy is to oblige the innova- tor to attempt to recoup all of the costs of research, development, and market diffusion of the new product during the considerably shortened peri- od of patent exclusivity; this period must be used as well to provide ade- quate returns to shareholders and to invest in future products. Wholesale

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204 FREDERICK W. TELLING prices of generic copies can be much lower than that of the original product because generics are brought to market generally with development invest- ments of less than $1 million (less than 0.5 percent of the innovator's cost) and few, if any, market diffusion expenses (because the innovator's knowl- edge contribution has already been transferred). The price differentials between patented, single-source pharmaceuticals and their generic counterparts have created a two-tiered market for pharma- ceuticals whose patents have expired. Not surprisingly, substantial market shares have shifted to generics, in both institutional settings, where the influence of third-party payers dominates, and in outpatient dispensing, where generics provide attractive profit margins to the retail pharmacy (Masson and Steiner, 1985; Bloom et al., 1986~. The shift is so dramatic that sales of the innovator's product have been found to decrease by 50 percent within 2 years of the introduction of the generic competitor (Grabowski and Ver- non, 1990~. The attractive price differentials provided by generics are an obvious target for managed care policies related to pharmaceutical acceptance and usage. Among the drug substitution techniques that have been adopted extensively by public and private payers are limited formularies that typi- cally favor generics and impose barriers to the inclusion of single-source pharmaceuticals; mandatory substitution of a generic when a branded phar- maceutical is prescribed; therapeutic substitution of a different but thera- peutically similar drug when a single-source pharmaceutical is prescribed; and step-care protocols that typically require the trial of one or more less expensive medications before a more expensive, single-source drug may be used. By their nature these practices favor the use of old therapies rather than new innovative drugs and may harm the quality of patient care (Oster et al., 1987~. A variety of ancillary techniques are frequently applied to reinforce these policies for pharmaceutical cost containment in managed care set- tings. They include minimization of the value of differential benefits in patient subgroups, exclusion of non-approved uses, incorporation of drug reimbursement in prospectively fixed payments for physician and hospital services, direct drug purchasing using competitive bidding, pharmacy capi- tation payments, drug utilization review, and, more recently, inhibition of physicians access to new product information from traditional sources. The Unknown Effects of Managed Care Unfortunately, as yet only limited information is available about the effects of managed care gatekeeping on health outcomes, health care inno- vation, and health care costs. Where the focus of managed care is solely on the short-term control of drug costs and subsequent benefit payments, the

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MANAGED CARE AND PHARMACEUTICAL INNOVATION 205 result may be diminished quality of care, increases in the total cost of care (e.g., because of the use of less effective medications or procedures), or both. For example, Soumerai and colleagues (1991) recently reported a twofold increase in nursing home admission rates in a New Hampshire Medicaid population following the imposition of a limit on outpatient dis- pensing of drugs. When the limit was removed, drug use and admission rates returned to their prelimit levels, but most of the patients admitted during the period of the restriction remained in nursing homes. The cost of the presumed excess institutionalization was estimated to far exceed the savings ascribed to the limit on prescribing. In another instance, Sisk and coworkers (1991) have described the detrimental effects of a restrictive Medicare policy on drug treatment of anemia in dialysis patients. The development of sound policies for pharmaceutical use obviously demands a great deal of medical and economic information that often is not available. Managed care firms may have both the data and the incentive to help fill these information voids. An interesting example of such a study appeared early in 1990; based on 1987 data, it was designed as a compre- hensive empirical comparison of prescription drug use in managed care plans and traditional benefit plans. The study found that HMO enrollees had a substantially higher rate of prescription drug use than those in tradi- tional benefit plans. About 14 percent of the claims in the traditional plan were for generic products, whereas the average for generic claims across the HMOs was about 35 percent. Moreover, there were significant, unex- plained variations in prescription drug use among the HMOs, suggesting the persistence of varying physician practice patterns under managed care (Weiner et al., 19911. MANAGED CARE GATEKEEPING: EFFECTS ON THE PHARMACEUTICAL INDUSTRY AND PHARMACEUTICAL INNOVATION Pressure on Resources for R&D The changes in the U.S. pharmaceutical marketplace that are described above and by Grabowski (1991) have profound economic consequences for the research-based pharmaceutical firm The shortened commercial life span of single-source pharmaceutical products reduces the cash flow avail- able to the firm to fund the increasingly expensive ongoing R&D needed to replenish its constantly eroding product portfolio. And even this growing investment in R&D is not being translated into a correspondingly larger number of new drugs. Much of the added investment is directed toward meeting increased regulatory requirements that prolong the drug develop- ment cycle.

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206 FREDERICK W. TELLING Payer strategies for containment of pharmaceutical costs powerfully amplify these economic effects and make it even more difficult for a firm to achieve a satisfactory return on its investment. For older, branded drugs, the strategies accelerate the decline in their market share; for new, innova- tive drugs, they both diminish pricing flexibility and impede the diffusion and use of new products. For example, a study of Medicaid formulary practice has revealed delays of as long as 4 years in the acceptance of new products for reimbursement; such delays further shorten the commercial life of the product. Therapeutic substitution and step-care protocols present additional barriers to the diffusion of new pharmaceuticals and reduce the economic return to the innovator. Pressure for Products with Well-Defined Costs and Benefits New practices of third-party payers have contributed to the develop- ment of a broader conceptualization of outcomes research that is, health and economic outcomes research that systematically assesses the impact of an intervention on such measures as cost, quality of life, functional status, and patient satisfaction. Although the measurement of health outcomes has been carried out in the past, combining it with economic outcomes, in which the consequences of health care interventions are compared with their costs, is a more recent practice. Such research can be expected to increase our understanding of the effectiveness of alternative interventions, bring about better decision making by physicians and patients, and, more controversial- ly, lead to the development of practice standards to guide physicians and aid payers in optimizing the use of resources. The growing importance of economic analysis of pharmaceuticals is reflected by the more than 680 articles published on the subject in 1990, a 25-fold increase since 1966, and a new journal, PharmacoEconomics, beginning publication in 1992 (Eisenberg, 1992~. For pharmaceutical companies, the implications of the new focus on outcomes research are quite clear. More elaborate and costly clinical stud- ies must be carried out to provide the persuasive case needed for the new drug to be accepted by gatekeepers who at the same time will be putting pressure on the prices of innovative drugs. Such studies typically require a minimum of many years, thousands of patients, and tens of millions of dollars. Those innovators who can introduce valuable new modalities that are also cost saving will have significant potential for success. However, firms offering products that increase costs will need to demonstrate a more favorable health outcome before the product is considered for use and reim- bursement. In addition, pharmaceutical cost-containment strategies have important second-order economic effects that influence the R&D strategies of the

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MANAGED CARE AND PHARMACEUTICAL INNOVATION 207 innovator. As discussed later, these barriers to the entry and use of a new drug in the marketplace drive the innovator toward more exploratory, and therefore higher risk, research projects in the quest for breakthrough inno- vations. Pressure to Limit the Transfer of Information on Drugs Once an innovative new product reaches the market, increasing pres- sures restrict the diffusion of information about its benefits. The Food and Drug Administration's (FDA) recent restrictions on industry's support of scientific symposia and physicians' involvement in disseminating new knowledge are a case in point. Some managed care systems that do not permit the dissemination of industry-sponsored information are troubling not only be- cause of the adversarial relationship of innovators and users that such mea- sures suggest but also because of their potentially negative impact on pa tient care. The practices of Kaiser Permanente, the nation's largest HMO system with more than 6 million enrolled members, illustrate how the diffusion and use of new drugs can be limited. In addition to implementing therapeutic substitution and step-care protocols common to many managed care sys tems, Kaiser management recently began to severely limit contact of the HMO' s physicians with pharmaceutical sales representatives. Practices that restrict the type of product information that can be communicated, that limit the access of sales representatives to facilities, that counter the scientific information provided by companies and prohibit the communication of sci- entific information about nonformulary products, and that do not allow phy- sicians to attend industry symposia present additional barriers to the diffu- sion of new pharmaceuticals into the market. In no instance has there been an assessment of the effects of such practices; nevertheless, other managed care systems are adopting similar restrictive policies. Increased Economic Risk for Pharmaceutical Innovation A substantial body of empirical evidence from economic studies of the pharmaceutical industry is entirely consistent with the expected effects of the market forces just described. Particularly striking is Grabowski and Vernon's (1990) finding that fewer than one-third of the innovative new pharmaceuticals (new chemical entities) introduced into the U.S. market in the 1970s had a positive return on the average R&D investment (including the cost of capital). Furthermore, during the 1980s, as more foreign-based pharmaceutical companies have produced world-class products, U.S.-based companies have experienced declines in their U.S. market share for the economically most important innovative new drugs, compared with the shares

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208 FREDERICK W. TELLING they maintained for such drugs in the 1970s (Althuis, 1992~. Global eco- nomic pressure on the industry is also fostering closer relationships based on the scientific and competitive expertise of individual firms. U.S. firms supported the costs of licensing many of the top innovative new drugs in the 1980s and executed the clinical studies required to bring them to the U.S. market. Also tightening the squeeze on economic return is the dramatic increase in the industry's R&D expenditures from $2 billion in 1980 to $9.2 billion in 1991 (PMA, 1991), in the face of a more competitive environment and obvious financial distress in the case of some firms. Notable also is the rapidly increasing share earmarked for clinical R&D (phases 1, 2, and 3~: 17 percent of R&D expenditures in 1979 but 27 percent in 1989 (PMA, 1991~. Partly in response to these trends, an increasing amount of clinical research by U.S. companies is moving overseas where large multicenter trials are often easier and less costly to conduct (Gelijns, 19909. The economics of pharmaceutical innovation are likely to become in- creasingly strained as the techniques of managed care become more strin- gent and are applied more broadly. The implications of this trend for the future of the industry may well be prefigured by the consolidation that has A 1 . ~ 1 . . . . already occurred both explicitly, In the form of the mergers of world-class firms, which have been seen at unparalleled levels over the past 5 years, and implicitly, through the now widespread practice of two or more firms "co-marketing" newly approved pharmaceutical products. Other aspects of industry's response to the changing economic environment are becoming apparent as well. First, as discussed in the next section, research-based firms are taking a number of steps to adapt their R&D programs to the realities of the new pharmaceutical marketplace. Second. the industry is I, facing new policy issues that must be addressed soon if the United States is to remain the world leader in pharmaceutical innovation. These issues are discussed later in this paper. PHARMACEUTICAL RESEARCH STRATEGIES FOR A CHANGING HEALTH CARE ENVIRONMENT The Promising Technology Base Before turning to the research strategies that appear to be industry's responses to the new market factors, it is important to recognize that con- temporary pharmaceutical R&D is being influenced by profound develop- ments in science and technology. Advances in the understanding of biology at the molecular level and in the power of scientific instrumentation, cou- pled with enhanced computer capabilities, have empowered researchers in their search for new drugs. The most important consequence of this em- powerment has been the research scientist's growing ability to understand

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MANAGED CARE AND PHARMACEUTICAL INNOVATION 209 physiological and pathological processes in molecular terms and to synthe- size receptors and create biological models of disease phenomena. An additional bonus for researchers is the assistance of computers in thinking through sophisticated concepts by employing complex theoretical analyses that were simply impossible to carry out even a decade ago. As a result, the empirical approaches of past decades have been largely displaced by more rational approaches to drug design. Contemporary drug research focuses on understanding the biology of disease and intervening in the sequence of specific biological events that characterize a disease in order to treat it. Experimental drugs are now designed, or efficiently screened (tested in large numbers), or both, to capitalize on their ability to interact with bioreceptors that have high probabilities of being therapeutically relevant. This change in research focus is well illustrated by the explicit mecha- nistic characterization of the new drugs that started to emerge in sizable numbers in the 1980s: for example, angiotensin-converting enzyme (ACE) inhibitors, calcium-channel blockers, histamine H-2 receptor antagonists, and so forth. Scientists' improved understanding of disease mechanisms and processes is opening up new drug discovery approaches to attack dis- eases and conditions-such as osteoporosis, Alzheimer's disease, memory loss, migraine, and depression that in earlier decades could not be system- atically addressed through pharmaceutical research. The l990s are likely to see a blossoming of three major trends in phar- maceutical innovation, the products of which began to emerge in sizable numbers in the 1980s. First, one can expect an even more diverse set of new small-molecule drugs that modulate disease by an understood mecha- nism-for example, serotonin re-uptake blockers, aldose reductase inhibi- tors, and immune stimulators. Second, the new biotechnology, which makes possible the synthesis of complex proteins, will offer a broader array of such complex large-molecule drugs. Both of these approaches will be used to produce an increasing proportion of drugs to treat chronic or metabolic diseases, to develop treatments for long-term complications of disease, and to offer significant steps toward medications for the prevention of disease. Third, the utility of both large- and small-molecule drugs will be amplified by promising improvements in drug delivery technology for the sustained release of drugs, for the absorption of protein drugs, and for drugs attached to lyposomes, which are designed to deliver the drug to a specific site and thereby reduce side effects. In sum, the research-based pharmaceutical industry now has in place the technical capability with which to tackle the more intractable diseases and therapeutic needs that up to now have not been amenable to drug inter- vention. If this proves to be the case, it is a timely development indeed, since the new market of the l990s and beyond may only be accessible to new pharmaceuticals that serve unmet needs. Additionally, such innovation

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236 FRANK G. MOODY In general, the outcomes of randomized trials usually reveal a lack of superiority of one surgical therapy combined with another or with a nonsur- gical option. There are many reasons for this-for example, the diversity of the disease being treated and its varying manifestations in different sub- jects. It is also difficult to control the conditions of the trial and ensure that only the variable of interest is being measured; the need to conduct the trial at multiple sites and to use different surgeons in order to recruit an adequate number of patients over a reasonable period of time can introduce a great deal of variability. Portasystemic shunting for the prevention of esophageal hemorrhage from portal hypertension is an example of the complexity involved in ap- plying controlled trials to surgical treatment (Resnick et al., 1974~. The idea certainly had merit: preventing variceal hemorrhage would greatly reduce the morbidity of this serious complication of portal hypertension. But what was learned in the trial was that, although a portasystemic shunt significantly reduced the risk of esophageal hemorrhage, it increased the rate of death from liver failure. Furthermore, some patients who probably would never have bled from their varices died of liver failure as a conse- quence of the procedure (Rikkers, 1982~. Subsequent advances in therapy, however, sometimes render former studies of little contemporary relevance, and this proved to be the case here (Rikkers, 1990~. Variceal scleral thera- py has recently emerged as a less invasive, more effective way to control bleeding of esophageal varices in most patients, and liver transplantation has replaced portasystemic shunting for patients with a failing liver, even among alcoholic patients. Social concerns, however, have constrained the application of this expensive, organ-limited procedure among alcoholic pa- tients (Cello et al., 1987; Kumar et al., 19901. _ ARE THE COSTS AND BENEFITS OF NEW SURGICAL PROCEDURES CALCULABLE? The incremental cost of introducing a new surgical procedure is gradu- ally assuming critical importance. For example, if third-party payers will compensate hospitals or physicians only for well-established therapies, it is unlikely that new treatments, even if less costly or more effective, will be utilized. Current Procedural Terminology (CPT) codes establish what pro- cedures payers, private as well as public, will cover. The shift from the "usual and customary" compensation base to a "relative value" fee schedule may also serve to determine which operations are done. In addition, if payers only cover operations that have proven efficacy and safety in the hands of the doer, a tightly controlled system will evolve that may be better for the individual patient but that will significantly constrain a surgeon from exercising his or her judgment. A system of this kind would require a

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SURGICAL TECHNIQUES AND THE CHANGING ECONOMY 237 large body of normative experience and detailed validation of outcome cri- teria as a reference. Furthermore, it assumes that the patient populations being treated are homogeneous, which is far from the truth in most complex diseases. One potential outcome of such a system might be that therapeutic decisions based on and limited to fee schedules would have a dampening effect on surgical innovation, because the decision would fail to recognize procedures that have not been proved effective. The new order of health care cost management must find a way to allow well-trained surgeons to provide services to those who need them with a minimum of bureaucratic interference. It appears that the introduc- tion of the prospective payment system, of utilization review and second opinions, and even of managed care has not significantly influenced the types of operations that are performed or the kinds of patients who undergo them. What surgeons do for their patients is governed by the usual process of graduate surgical education, postgraduate courses, journals, and profes- sional meetings. Schemes that are designed to limit the application of surgical options at the point of service are not likely to be effective. They can only slow down the application of treatment at the time it is needed, not prevent its use if it is the best or only option. The denial of surgical service because of lack of access based on finan- cial considerations is another concern. Refusing payment for the perfor- mance of a gastric restrictive procedure for chronic morbid obesity is a case in point. In spite of the availability of two safe, reasonably effective opera- tions for this debilitating disease the vertical-banded gastroplasty and the small-pouch Roux limb gastric bypass-public and private insurers have markedly restricted the benefits of these operations by refusing to cover them. The recent consensus conference sponsored by the National Insti- tutes of Health attested to the unique benefits of these procedures and may correct this injustice to those with a genetic predisposition for morbid obe- sity (National Institutes of Health, 1991~. Decisions about which treatments should be offered to patients must be made by those professionals who understand the patient and his or her illness and life situation. Such important, highly individualized decisions cannot easily or even appropriately be made by a committee, either locally or in Washington. The issues of appropriateness of care and level of con- trol of therapeutic decision making are complicated by the nation's third- party reimbursement system. If the patient was more directly involved in purchasing surgical services, the patient-surgeon procedural contract could be a bilateral negotiation, but such is not the case. Payers have an increas- ing interest in controlling the treatment options offered to their patients. This is a positive trend if the exclusive point of service is selected on the basis of established proficiency rather than on costs alone.

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238 FRANK G. MOODY THE COST-EFFECTIVENESS OF INNOVATION Unfortunately, the individualized doctor-patient relationship has not pre- vented, and may be a factor in, the increases that have occurred in the cost of medical care over the past two decades. Physicians have always been the purveyors of health services for their patients, and only recently have they become sensitive to the limitations of the system they broker. The incre- mental rise in health expenditures parallels the opportunities for precision in diagnosis and treatment Innovative technology has brought medicine to the point of being able to treat afflictions that previously were thought to be uncorrectable. It is unfortunate that the lack of money, whether in the form of federal or state budgets, the profit margins of industry, personal financial resources, or a percentage of the gross national product, should be the major rate-limiting step to further improvements in health care. The U.S. health care system is simply too expensive and not uniformly accessible to all who live in this country. Total expenditures for health care in 1992 are estimat- ed to be in excess of $700 billion; if used wisely, these funds should be enough to deliver a high level of health care to all U.S. residents. Although money is not the only important variable in a health care system, it is at the center of current discussions. Thus, the question of costs and their relationship to innovative therapies must be considered. Will new procedures that are effective and applicable to large numbers of patients increase or reduce the cost of treating a specific disease? It is difficult to assess the aggregate cost of a therapy for the country at large because of marked regional differences in charges for hospitalization and services. Let us compare the costs of a minimally invasive procedure-translu- minal angioplasty and an operative approach- coronary bypass to those of a common serious disease, myocardial infarction (Wittels et al., 19909. An angioplasty and its follow-up over 5 years cost approximately $27,000, compared with $32,500 for coronary bypass surgery. The absolute numbers are not important except to acknowledge that such studies can be done; what these studies do not reveal, however, is the cost to society if the disease had been left untreated. Each procedure has shown efficacy in selected patients; thus it is likely that such studies will be done with the modern tools of cost analysis. The cost savings as a result of an earlier death are likely to favor nontreatment-a frightening thought as health care researchers attempt to develop cost-effectiveness algorithms. Perhaps a better way to assess the benefits of costly therapies is to compare the cost of a therapy that is definitive in curing a disease with another that supports the management of a chronic disease. Such studies of the treatment of end- stage renal disease have been done and have even reached the halls of Congress. Congressman Fortney "Pete" Stark of California's 9th District and chair of the House of Representatives Subcommittee on Health recently stated that "each successful (renal) transplant saved Medicare $19,656 per

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SURGICALTECHNIQUES AND THE CHANGING ECONOMY 239 year per patient.''] Again, the numbers are not important; what is important is that data derived from clinico-economic studies have reached key deci- sion makers in Congress. Cost-benefit analysis should be targeted toward the benefits that will be gained from continued improvement in definitive therapy and the potential benefits to be derived from the knowledge acquired through research and development. The treatment of end-stage diseases will always be expensive (Garner and Dardis, 1987~; thus, it was thought that prevention of costly disease processes would be the only hope for decreasing the rate of increase in health expenditures in the years ahead. Recent studies, however, have suggested that prevention may not necessarily lead to cost-reducing effects (Russell, 1986~. THE CASE OF GALLSTONES To address more specifically the issue of cost containment and surgical intervention, this section considers the dramatic changes that are occurring in the treatment of gallstones, a common, easily quantifiable disease (Roslyn and DenBesten, 1990~. It is estimated that more than 20 million people in the United States have gallstones. In addition, a million new cases are identified each year. Several unique features of gallstones should be borne in mind. First, if the stones stay within the lumen of the gallbladder, the patient usually does not know that they are there. Indeed, approximately half of the people with gallstones are asymptomatic; only 15 percent will suffer a potentially life-threatening complication. The most common com- plaint is that of severe right-sided upper abdominal pain, a symptom called biliary colic. Once a patient with gallstones has biliary colic, he or she is likely to have subsequent episodes, which denote the passage of stones from the gallbladder. Such patients are then at risk of developing the severe complications of acute cholecystitis, cholangitis, and gallstone pancreatitis. Until a few years ago, the only definitive treatment of symptomatic gallstones was removal of the gallbladder through an incision in the abdo- men, a procedure called a cholecystectomy (McSherry, 1989~. An improved understanding of the pathogenesis of cholesterol gallstones, the most com- mon stones seen in Western countries, has led to several alternatives to this type of surgery: (1) oral dissolution, (2) direct dissolution, (3) lithotripsy, and (4) lithotomy. Simultaneously with improved understanding of the 1 In a letter dated September 13, 1991, Congressman Stark writes: "I'm not sure where I made the comment on the savings to Medicare of successful transplants, but it sounds right for the pre-EPO [erythropoietin] period. The figure is obviously higher now, by about $4,000, and will be rising further as the composite rate is gradually adjusted for inflation." Quoted with permission.

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240 FRANK G. MOODY origins of gallstones have come dramatic advances in the ability to image and access the gallbladder and the biliary tree. Ultrasound, computer-as- sisted scanning, percutaneous transhepatic cholangiography, and endoscop- ic retrograde cholangiography have offered new approaches to the treatment of gallstones and their sequelae. Treatment options for symptomatic gallstones now range from simply taking two pills a day to removal of the gallbladder. Because therapies that leave the gallbladder in place have a recurrence rate of 20 to 50 percent, it could be argued that the gallbladder should he removf~.~1 in n11 n~ti~.ntc who are symptomatic. ~ ' ~ 1 its risks of death (0.2-l.0 percent) and of postoperative complications and pain. Moreover, the cost of hospitalization (5-7 days) is about $5,000 and is followed by a relatively long period of recovery (2-3 weeks). As one might expect, physicians and patients found the alternatives to surgery at- tractive when they were introduced several years ago; on the other hand, general surgeons were not particularly pleased, given that the alternative treatments represented a potential loss of income by decreasing the volume of one of the most common procedures they performed. This description should provide sufficient background to understand ~ ~ ~ ~ ~ r ~ ~ ^ -~ A ~ V ~ fur uperauve removal or the gamer Is not without what has happened to these newer, less Invasive therapies and how their use involves interplay with the medical profession, the research establishment (the National Institutes of Health and industry), regulatory bodies (the Food and Drug Administration and other public agencies), and third-party payers, public and private. Oral dissolution, the least invasive of the various thera- pies, is also the most limited in its therapeutic efficacy (Fromm, 1986~. Ursodeoxycholic acid (ursodiol), the bile salt used for this purpose, is al- most without side effects but it only dissolves small stones, preferably those that are single, noncalcified, and floating, characteristics that suggest a high concentration of cholesterol. Larger, noncalcified stones can be fragmented by extracorporeal shock wave lithotripsy, a procedure that focuses the ener- gy of sound waves generated outside the body on a gallstone or stones (Sackmann et al., 1988~. Residual fragments that the body does not pass spontaneously are dissolved with ursodiol. Oral dissolution, with or without lithotripsy, is time-consuming and requires the ingestion of ursodiol for several months or, in some cases, years. This type of therapy is ineffective in noncompliant patients and unpopular in a health delivery system that is concerned with costs and immediate results. Lithotripsy for gallstones, although initially promising, has not fulfilled the expectations of patients, physicians, and the regulating bodies concerned with efficacy and cost of the technology. Some lithotrip- ters cost more than $1.5 million to purchase and install. Trials of this innovative therapy have been initiated but are currently incomplete. It appears that at one year retention of residual fragments even with bile salt

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SURGICAL TECHNIQUES AND THE CHANGING ECONOMY 241 therapy is such that this form of therapy must be considered relatively cost- ineffective. Nevertheless, there may be a subpopulation of patients with gallstones that could be cured either by lithotripsy alone or by a combina- tion of lithotripsy and oral dissolution. Direct dissolution of gallstones by the instillation of methyl tert-butyl ether, a liquid at body temperature, is also a relatively effective treatment (Thistle et al., 1989~. Among its advantages are that it requires no general anesthesia and only a brief stay in the hospital; it also has the potential to treat a larger stone burden than can be treated by oral dissolution with or without lithotripsy. The technique, however, is time-consuming, tedious, invasive (although minimally so), and potentially toxic. THE SYNERGISM OF NEW TECHNOLOGY The enthusiasm for developing alternatives to cholecystectomy has been dramatically tempered by a recent surgical innovation, laparoscopic chole- cystectomy, which involves the removal of the gallbladder through small puncture wounds made at appropriate sites in the upper abdomen. The technique requires tubular entry ports for a camera and the operative instru- ments; the procedure is then performed by visualizing the operative manip- ulations on a television screen. This approach has rapidly replaced open cholecystectomy for the treatment of symptomatic gallstones, and its devel- opment has greatly reduced interest in alternatives to cholecystectomy (Reddick and Olsen, 19891. An analysis of the interplay between these competing innovative thera- pies reveals several unique characteristics of the current health care scene. For example, surgeons adopted and perfected the laparoscopic approach to cholecystectomy so rapidly that the device industry found itself incapable of satisfying demand for the devices. The public learned of the potential of the procedure through the media before most surgeons were aware that a cholecystectomy could be done in this less invasive way. Yet within months, surgeons were learning the technique and utilizing it in their practices. Its popularity derives from its shorter hospital stay (only overnight) and a much shorter period of recovery compared with open cholecystectomy; in addi- tion, the small incisions required in the procedure are much less painful and disfiguring. Thousands of laparoscopic cholecystectomies have been per- formed since the first use of the procedure in 1987. Its rapid displacement of open cholecystectomy is somewhat surprising, because it requires gener- al anesthesia, takes longer to perform, has a higher rate of bile duct injury, and results in comparable mortality (Peters et al., 1991~. Possibly its high rate of adoption in everyday surgical practice derives from the relative lack of success of the alternatives when tested in formal clinical trials. Another factor may be the frustration of general surgeons who were forced to sit on

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242 FRANK G. MOODY the sidelines during the evaluation, often by nonsurgeons, of these poten- tially less invasive ways to treat gallstones as patients were entered into clinical trials. THE DYNAMICS OF INNOVATION The recent evolution of treatments for gallstone disease emphasizes the interplay of public demand, payers' preferences for less costly alternatives to cholecystectomy, professional interest, and innovation. Lithotripsy for the treatment of gallstones has fallen out of favor because of its great ex- pense and the problem of fragment retention. Oral dissolution by the inges- tion of ursodiol, although safe, is effective in only a small number of pa- tients who have small (<3 mm) floating gallstones. Percutaneous dissolution has not progressed beyond early phases of development. All of the alterna- tives to cholecystectomy have been superseded by the current enthusiasm for laparoscopic cholecystectomy, a procedure that has been adopted into surgical practice without formal evaluation and assessment of outcome. With this new technique, surgical treatment is again the treatment of choice for the majority of patients with symptomatic gallstones. There remains a small group of patients who might benefit from alternative treatments for example, patients who are at risk of associated medical problems if anesthe- tized. The elderly, who have the highest incidence of gallstones as well as the greatest risk from their complications, might also benefit from a mini- mally invasive, yet effective, approach to their problem. It is in this popu- lation that oral and direct dissolution with or without lithotripsy may play a role. These techniques, however, are limited in their application because, as noted earlier, they are effective only in patients with cholesterol gall- stones and are best suited to patients with small stone burdens. Advances in the field are continuing; a recent example currently under evaluation is a device called a lithotrite. The lithotrite can be placed into the gallbladder lumen through a small puncture wound in the skin using local anesthesia (Miller et al., 1991~. Interventional radiologists who are experienced in percutaneous transhepatic cholangiography, a commonly performed procedure, can use the lithotrite with a high level of precision and safety. The lithotrite consists of a metal basket, small at its base, with a propeller, or impeller, as it is called. Rotations of the impeller at a rate of between 20,000 and 30,000 revolutions per minute create a vortex that draws gall- stones into the basket and leads to their rapid pulverization. The debris is then drained from the gallbladder, and after irrigation, its lumen is exam- ined by contrast radiography to demonstrate stone clearance. The device is unique in that it can fragment cholesterol as well as noncholesterol and calcified stones and thereby clear the gallbladder of stones with a single treatment and without general anesthesia. In preliminary trials, it appears

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SURGICAL TECHNrIQUES AND THE CHANGING ECONOMY 243 to be not only safe but effective in the hands of biliary interventional radiol- ogists. Advances in technology have a remarkable interactive synergy. For example, the lithotrite has been adapted for use by surgeons to gain stone clearance from the gallbladder during performance of a laparoscopic chole- cystectomy. The ultimate worth of this technology will not be known until controlled trials are conducted. Even at this early stage of assessment, however, researchers have learned that the device will not accommodate large stones. The fragmentation of large stones by lithotripsy may offer a way to further extend the applicability of the lithotrite. The device may also solve the main problem associated with direct dissolution and lithotrip- sy: clearance of residual fragments from the gallbladder. The lithotrite emphasizes how novel techniques may enhance the usefulness of older ther- apies that during their own evaluations were found to be lacking in effec- tiveness. It also highlights the complexities involved in predicting the use- fulness of novel technology. SUMMATION The current focus on the costs of health care is likely to continue into the next century as the United States attempts to deal with the complex illnesses of an ever-larger aging population. Life expectancy in the not too distant future will approach 100 years, and it is projected that there will be one elderly adult (>65) for each child by the turn of the century. It is imperative that we continue to seek new approaches to old problems and to adapt technology to the task. Although prevention of disease is the goal being sought, the realities and consequences of disease as it exists in each patient must nevertheless be addressed. There should be little argument with the concept that the treatment for each patient should be the one that is most effective and safest. Thus, risk-benefit ratios should take precedence over cost-effectiveness concerns; cost-effectiveness analysis should include an assessment not only of the immediate outcome and the financial resources required to accomplish it but of the ultimate impact of the resolution of the problem as it relates to future general costs and benefits to society. Managed care, for better or for worse, is growing in popularity as a solution to the rising cost of health care. At issue is whether controls will be applied at the site of care or at some central point by the establishment of general budgets for service centers, such as exists in Canada. The way surgery is practiced in this country would be significantly and probably negatively affected by the latter kind of system, because the volume of services would be restricted by the dollars available in the budget. The American public has become accustomed to receiving the benefits of mod- ern health care in a timely fashion. Unfortunately, the sheer expense of

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244 FRANK G. MOODY providing the ultimate in therapy on demand has denied a large segment of our population access to even the basic rudiments of medical care. Specialization has provided surgeons a way to perfect their skills and to develop techniques for treating complex problems. If carried to an extreme, however, it could deprive the public of broadly trained physicians who have the breadth of knowledge and skills to treat the majority of conditions that occur in most communities. With regard to innovation and the development of innovative therapies, specialization and its demands for new products are the driving forces be- hind the development of safer, more effective, and more cost-effective ther- apies. As outcomes research is further refined and applied to the assess- ment of surgical results, it is likely that specialized services will be regionalized. Cardiac surgery, trauma care, and organ transplantation have already moved in that direction, and it is likely in the future that the treatment of severe abnormalities of other organ systems will follow suit. Optimism is needed during this transition from an inefficient, highly personalized, and relatively expensive health care delivery system to one that with further refinements in surgical techniques and knowledge of the origins of disease will lead to a healthier, more productive population. The increased availability of public and private funds that would result from better health of the citizenry should go far in covering the expense of main- ta~ning the health of those living in this country; the development of more effective, safer surgical techniques would clearly contribute to achieving this goal. Economic considerations and their political implications should not be allowed to be a major deterrent to the health of a nation as richly endowed with human and physical resources as the United States. REFERENCES Barrey, J. D. 1933. Lithiasis. In: B. Lewis, ed. History of Urology, vol 2. Baltimore: Williams and Wilkins, pp. 1-25. Berte, E., Buzdar, A. U., Smith, T. L., and Hortobagyi, G. N. 1988. Bilateral primary breast cancer in patients treated with adjuvant therapy. American Journal of Clinical Oncology 11:114-118. Cello, J. P., Grendell, J. H., Crass, R. A., Weber, T. E., and Trunkey, D. D. 1987. Endoscopic sclerotherapy versus portacaval shunt in patients with severe cirrhosis and acute variceal hemorrhage. New England Journal of Medicine 316:11-15. Fromm, H. 1986. Gallstone dissolution therapy. Current states and future prospects. Gastro- enterology. 91: 1560-1567. Garner, T. I., and Dardis, R. 1987. Cost-effectiveness analysis of end-stage renal disease treatments. Medical Care 25:25-34. Kumar, S., Stauber, R. E., Gavaler, J. S., Basista, M. H., Dindzans, V. J., Schade, R. R., et al. 1990. Orthotopic liver transplantation for alcoholic liver disease. Hepatology 11:159- 164. McSherry, C. K. 1989. Cholecystectomy: The gold standard. American Journal of Surgery 158: 174-178.

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SURGICAL TECHNIQUES AND THE CHANGING ECONOMY 245 Miller, F. J., Rose, S. C., Buchi, K. N., Hunter, J. G., Nash, J. E., and Kensey, K. R. 1991. Percutaneous rotational contact biliary lithotripsy: Initial clinical results with the Kensey Nash lithotrite. Radiology 178 :781-785. National Institutes of Health. 1991. Consensus Statement for Gastrointestinal Surgery for Severe Obesity. Bethesda, Md.: Office of Medical Applications of Research. North American Symptomatic Carotid Endarterectomy Trial Collaborators. 1991. Beneficial effect of carotid endarterectomy in symptomatic patients with high-grade carotid stenosis. New England Journal of Medicine 325:445-453. Peters, J. H., Ellison, E. C., Innes, J. T., Liss, J. L., Nichols, K. E., Lomano, J. M., et al. 1991. Safety and efficacy of laparoscopic cholecystectomy. Annals of Surgery 213:3-12. Ravitch, M. M. 1981. A Century of Surgery: The History of the American Surgical Associa- tion. Philadelphia: J. Lippincott. Reddick, E. J., and Olsen, D. O. 1989. Laparoscopic laser cholecystectomy. Surgical Endos- copy 3:131-133. Resnick, R. H., Iber, F. L., Ishihara, A. M., Chalmers, T. C., and Zimmerman, H. 1974. A controlled study of the therapeutic portacaval shunt. Gastroenterology 67:843-857. Rikkers, L. F. 1982. Operations for management of esophageal variceal hemorrhage. Western Journal of Med. icine 136: 107- 121. Rikkers, L. F. 1990. Portal hypertension. In: F. G. Moody, ed. Surgical Treatment of Digestive Disease, 2nd ed. Chicago: Year Book Medical Publishers, pp. 363-380. Roslyn, J. J., and DenBesten, L. 1990. Gallstones and cholecystitis. In: F. G. Moody, ed. Surgical Treatment of Digestive Disease, 2nd ed. Chicago: Year Book Medical Publish- ers, pp. 253-275. Russell, L. B. 1986. Is Prevention Better than Cure? Washington, D.C.: The Brookings Institution. Sackmann, M., Delius, M., Sauerbruch, T., Hall, J., Weber, W., Ippisch, E., et al. 1988. Shock-wave lithotripsy of gallstones. New England Journal of Medicine 318:393-397. Schwartz, W. B., and Mendelsen, D. N. 1991. Cost containment in the 1980's. New England Journal of Medicine 324: 1037- 1042. Showstack, J. A., Stone, M. H., and Schroeder, S. A. 1985. The role of changing clinical practices in the rising costs of hospital care. New England Journal of Medicine 313:1201- 1207. Thistle, J. L., May, G. R., Bender, C. E., Williams, W. J., Leroy, A. J., Nelson, P. E., et al. 1989. Dissolution of cholesterol gallbladder stones by methyl tert-butyl ether adminis- tered by percutaneous transhepatic catheter. New England Journal of Medicine 320:633- 639. Wennberg, J. E. 1990. What is outcomes research? In: A. C. Gelijns, ed. Medical Innovation at the Crossroads. Vol. 1, Modern Methods of Clinical Investigation. Washington, D.C.: National Academy Press, pp. 33-46. Wennberg, J. E., Mulley, A. G., Jr., Hanley, D., Timothy, R. P., Fowler, F. J., Jr., Roos, N. P., et al. 1988. An assessment of prostatectomy for benign urinary tract obstruction. Jour- nal of the American Medical Association 259:3027-3030. Wittels, E. H., Hay, J. W., and Gotto, A. M., Jr. 1990. Medical costs of coronary artery disease in the United States. American Journal of Cardiology 65:432-440.

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