Defense procurement budgets and food stamps would seem to have little to do with health policy, but as budgets become tighter, these issues are increasingly intertwined. Earlier this year Defense Secretary Robert Gates sounded the alarm on the Department’s growing health budget, noting that “health care costs are eating the Defense Department alive.” In August, the House of Representatives voted to increase aid to states for Medicaid with offsetting cuts to food stamps. One representative likened it to “Sophie’s Choice.”
An overstatement? Yes. But in the coming years politicians in all levels of government will be forced to make difficult tradeoffs between health care and other programs.
The problem with health care spending is not simply that it is increasing. We spend more money today on many goods and services—computers, for example—than we did in the past. Rising expenditures on information technology are not a political or policy problem. We can afford information technology because we spend less on other goods, like typewriters, and because decades of productivity growth have resulted in per-capita income levels that are almost twice as high as they were in 1970. Eventually spending on computers will level off as the as-yet unexploited opportunities to improve our lives through information technology diminish. Because consumers and firms pay the costs of computers out of their own pockets, the process will be gradual and non-disruptive.
Health care is different. Medicare, Medicaid, and other public programs account for almost 50 percent of health spending. These programs pay for medical care, the cost of which is increasing by about 7 percent per year, using taxes on wages and income, which are growing but at much lower rates. This gap, combined with an aging population and a pay-as-you-go financing scheme, is a fiscal time bomb.
It is not as if the extra money we’ve spent on health care has been wasted. A number of studies show that new medical technologies, from anticlotting drugs and surgery for heart attack patients to intensive care for low birthweight infants, have been accompanied by large gains in health. The technologies are expensive but worth it.
I recently undertook a study with my Winship Cancer Institute colleagues Joseph Lipscomb and John Kauh to measure the value of new chemotherapeutics for patients with late stage colorectal cancer. Medicare and other insurers pay thousands or tens of thousands of dollars for every patient who receives one of these drugs. Using Medicare claims data, we found that, on net, these drugs cost about $100,000 for every additional “quality adjusted” life year gained. Most estimates of the willingness to pay for a life year are in excess of $100,000, and so even these drugs, which are often cited as prime examples of high cost/low value medical care, would pass a cost-benefit test.
Yet cost control will be a top priority in the coming decades, if for no other reason that the ability of the federal government to finance spending via borrowing is limited. The recently passed health reform act makes some tentative steps towards cost control, and perhaps some of the act’s pilot projects will pay off down the road, but most experts agree that the bill did not go far enough in terms of reining in spending.
In the absence of a debt crisis that forces severe and immediate budget cuts, Congress over the next decade or so will probably undertake a number of incremental steps to lower costs. Medicare and Medicaid will reduce reimbursement rates for drugs. Hospitals, physicians, and other providers, which have grown accustomed to near-automatic inflation adjustments, will face stagnant reimbursement rates.
Congress and the federal bureaucracy will gradually restrict coverage for costly new treatments. The process has already started. In 2009, the Center for Medicare & Medicaid Services (CMS) decided not to cover CT colonography, a non-invasive screening test for colorectal cancer. CT colonography costs about $500 and ought to be performed every five years, whereas colonoscopy, the main competitor, costs $650 but is recommended only once every ten years. CMS justified its decision on the basis of effectiveness, but the extra cost of CT colonography was clearly an important consideration.
Avastin is a chemotherapy drug that costs tens of thousands of dollars per year. The Food and Drug Administration (FDA) approved Avastin for treatment of colorectal cancer in 2004 and breast cancer in 2008. In July of this year, however, the FDA’s Oncology Drug Advisory Committee took the unusual step of recommending that the FDA revoke coverage for Avastin as a treatment for breast cancer. Officially, the decision was based on Avastin’s benefits and side effects. Like CMS, the FDA is not allowed to consider costs. It seems unlikely, however, that the drug would have received such careful scrutiny had it been less expensive. One panel member, Jean Grem, admitted as much: “We aren’t supposed to talk about cost, but that’s another issue.” A final decision by the FDA is forthcoming.
There is only so much agencies can do on their own. Earlier in the year, for example, the FDA approved a controversial therapy for advanced prostate cancer that extends life by four months but costs between $50,000 and $100,000. At some point, Congress will decide that we can no longer afford the luxury of carte blanche coverage policies and begin to chip away at the principle that approval and coverage depend on effectiveness, not costs. Drugs, devices, and procedures that do not pass a cost-benefit test will be subject to coverage restrictions or not covered at all.
An alternative to this piecemeal approach for controlling costs has been set forth in Congressman Paul Ryan’s (R-WI) Roadmap for America’s Future. The Roadmap plan would give each Medicare beneficiary a voucher with which to buy health insurance in the private market. The plan is a radical shift in the context of Medicare, but it is not so different from the scheme the federal government uses to provide insurance to its own employees. The key element of the plan is that over time the value of the voucher would rise by the inflation rate, but not the rate of growth of health care spending, which is much higher. With the stroke of a pen, the plan goes a long way towards putting the U.S. on a firmer fiscal footing. Of course private plans would have to restrict coverage of costly new technologies, but the mechanism for reaching these decisions—market competition—is very different from the centralized approach envisioned by many health reformers. Ryan’s plan has yet to attract many supporters, even from his own party, but it may look more attractive as pressure to cut costs intensifies.