Yearly Archives: 2020

Medicare Reimbursement for Prescription Drugs: An Overlooked Policy Lever for Innovation

Mar 11, 2020 Jessica Lind MantelAdd a Comment

Over the past few decades, policymakers have used Medicare reimbursement policy to achieve wide-ranging changes in the health care system. Recent efforts have focused on using the levers of Medicare payments to encourage innovation in providers’ organizational structures and health care delivery. In their forthcoming article The Medicare Innovation Subsidy, Lemley, Ouellette, and Sachs consider another type of innovation influenced by Medicare reimbursement – innovation in the pharmaceutical market.

Both the Trump Administration and members of Congress have put forth various proposals to address high prescription drug costs in the Medicare program. In addition, some Democrats have advanced health reform proposals that would broaden insurance coverage for prescription drugs and lower patients’ out-of-pocket drug spending. While debates over these proposals have largely focused on the policy goals of lowering prescription drug costs and increasing access, Lemley et al. argue that attention also should be given to how these proposals impact incentives for developing new drugs. Specifically, the authors argue that health insurance coverage changes market demand for prescription drugs, thereby impacting drug manufacturers’ profits and their financial incentives to innovate.

The U.S. has a long history of encouraging drug innovation through the patent system. Patent owners enjoy various legal rights that allow them to charge higher prices than they otherwise would garner in a competitive market with generic competitors. Accordingly, conventional wisdom predicts that drug policies lowering reimbursement rates below the supracompetitive prices patent holders could otherwise charge would reduce the returns for developing new drugs, thereby negatively impacting innovation. Indeed, one frequently hears this argument from the pharmaceutical industry. The authors, however, argue that this story is incomplete, as it overlooks how public subsidies funneled through the Medicare program increase incentives to innovate by expanding pharmaceutical companies’ profits.

After providing an overview of drug coverage under Medicare and other government programs in Part I of the article, Part II explains how Medicare increases innovation incentives for the pharmaceutical industry. As compared to a market without insurance, insurance coverage for prescription drugs shifts the demand curve for drugs by lowering consumers’ out-of-pocket costs. For example, a consumer with a 20 percent coinsurance obligation who is willing to pay $100 out-of-pocket for a drug can buy a $500 drug, as their insurer will cover the $400 difference. This increased demand not only leads to a larger volume of drugs sold, but also permits the monopolist-patent holder to charge a higher price to the insured consumers who can now pay more for their drugs. Consequently, adding a prescription drug benefit to Medicare (known as Part D) increased pharmaceutical companies’ profits through both higher volume and higher prices, with the additional profits creating incentives for further drug development. A number of empirical studies cited by the authors support this story, finding increases in private-sector investment in research and development (R&D) following implementation of Medicare Part D, especially for those drugs with higher Medicare market share. The authors refer to this as the Medicare innovation subsidy.

In Parts II.C and III, the authors discuss how recognition of the Medicare innovation subsidy changes the policy discussion about prescription drugs. For example, to the extent Medicare expansion would give more Americans access to generous drug benefits, policymakers wishing to keep overall innovation incentives unchanged can offset the increased Medicare innovation subsidy with reduced drug prices. Alternatively, policymakers can cut other innovation incentives, such as making patent laws less favorable to patent holders or lowering R&D tax incentives. Policymakers also should be mindful of the innovation asymmetries caused by Medicare and Medicaid reimbursement policies that make certain types of drugs more profitable than others. For example, Medicare rules that require Part D plans to cover all FDA-approved drugs within six protected drug classes has resulted in higher prices, and thus higher profits, for these drugs. The higher profits in turn have spurred a larger increase in new R&D for drugs in the protected classes relative to other drugs. Similarly, Medicaid cost-containment policies that lower Medicaid drug prices relative to Medicare drug prices can bias new R&D in favor of drugs that primarily benefit the elderly.

More broadly, in highlighting the interplay between patent law and Medicare policy, the article reminds us that Medicare policy does not exist in a vacuum; rather, policymakers should be mindful of Medicare’s far-reaching impact and its potential to change incentives throughout the health care system.

What Ails Rural Health Care?

Feb 13, 2020 Zack BuckAdd a Comment

Numerous challenges plague health care in America’s rural areas. These challenges, which manifest as health disparities and limitations on access, are worsening as rural hospitals continue to close across the country. As this is a problem particularly located in the American south (including in my home state), I was interested to read Rural Health, Universality, and Legislative Targeting by Nicole Huberfeld, one of the truly eminent scholars within health law, and an expert in rural health care, Medicaid, and the Affordable Care Act (ACA).

In the piece written for the Harvard Law & Policy Review, Huberfeld starts by documenting the health disparities that citizens living in rural America face—from lower rates of insurance coverage; to limited access to primary care; to higher rates of chronic diseases and poverty. After providing useful discussion about the definition of what it means to be “rural” and how spatial characteristics and population trends complicate and exacerbate rural health disparities, Huberfeld then skillfully weaves these data and trends into other data that reflect higher rates of deaths of despair, mental and public health challenges, and ultimately, differences amongst financial structures that negatively impact access to health care in rural areas. Coupled with lower employment and income, rural Americans exhibit higher uninsurance rates and lower rates of access to care. A detrimental feedback pattern develops, as these factors further negatively impact population health in these areas, which heightens the need for access to rural health care. In this section of the paper she provides a particularly salient example of the impact of access challenges on maternal health in rural America.

In the second part of her paper, Huberfeld contemplates the appropriate legal solution to the challenges facing rural health care. She observes that nearly ten years ago, the ACA stepped into the space, seeking to bring universal access to health care and health insurance for all Americans—including rural Americans. But, the Supreme Court’s decision in NFIB v. Sebelius allowed states to opt out of Medicaid expansion, a decision that has had a particular impact on health care access and delivery in rural states. Here she makes the argument that the resulting non-expansion states have been most resistant to the ACA’s universal approach and, instead, have sought to apply targeted legislative solutions to what ails their health care delivery systems, segmenting off pieces of health care access crises in their states in an attempt to deal with discrete, narrow solutions. She provides a number of examples of what she calls “targeted legislation to offset ACA resistance.”

Here Huberfeld skillfully places these attempts—to establish targeted solutions to the rural health care crisis while blocking the universal solution presented by the ACA—in broader political science literature, and particularly Professor Theda Skocpol’s work that argues that anti-poverty legislative interventions are most successful when “packaged so that they do not look like special care for the needy.” In essence, the argument goes, universal application of an anti-poverty regime adds to its durability, insulating it from legislative retrenchment. Examples include the Social Security Act and universal government benefits. Huberfeld cites to the vastly different durabilities and histories of Medicare and Medicaid to help make her point.

Relying on Skocpol’s work, Huberfeld then makes the central contribution of her paper, arguing that targeted interventions meant to improve rural health care and access may “have the effect of buffering rural disparities, but targeting without universalism holds limited promise both in theory and in practice.” Focusing on targeted approaches is unlikely to solve the problem of rural health disparities, she argues.

This piece was well-written and well-researched. It is a treasure of data for those who are seeking good information on rural health disparities. And it contributes a key insight. Indeed, Professor Huberfeld is the authority on Medicaid and rural health care within the United States, and her astute observation regarding the appropriate legislative solution should be heeded by state policymakers. In a time in which the rural health care crisis is worsening and rural hospitals continue to close, Huberfeld’s well-reasoned and well-articulated suggestions should be amplified from the academy to the statehouse.

In Praise of Hassles: Why “Rationing through Inconvenience” May Be More Ethical than Other Mechanisms for Allocating Care

Jan 10, 2020 Carl Coleman3 comments

An unfortunate reality of all healthcare systems is that, left unchecked, demand for medical services will inevitably outpace available supply. On the one hand, there will almost always be one more intervention that might, at least in theory, improve a patient’s condition or avert a future harm. On the other hand, in a society with multiple urgent priorities—education, poverty reduction, and national defense to name just a few—devoting all available resources to health care is neither possible nor desirable. Moreover, some healthcare resources are finite in an absolute sense; for example, there are simply not enough transplantable organs for everyone in need.

In light of this conundrum, no matter how much the public tends to bristle at the concept of “rationing,” setting limits on access to health care is ultimately unavoidable. In a few situations, limit-setting mechanisms are explicit and transparent; examples include the national system for allocating transplantable organs, or insurers’ use of formularies to limit the cost of prescription drug coverage. Often, however, healthcare rationing occurs implicitly, with limited public scrutiny. Examples of implicit rationing include governmental decisions about which healthcare services to fund, or a healthcare professional’s judgment about whether to prescribe a particular drug or refer a patient to a hospital.

In a provocative and thoughtful article, Can Rationing through Inconvenience Be Ethical, Nir Eyal, Paul Romain, and Christopher Robertson consider a critical, but often overlooked, form of implicit rationing—the use of “burdensome arrangements” such as “application processes, forms, waiting periods, and the like,” that make accessing health care inconvenient. To the extent “rationing through inconvenience” has received attention, they note, it has typically been to condemn it. At best, it is considered a waste of time and energy; at worst, it is attacked as a harmful barrier to care. However, they argue that, “under certain conditions, rationing through inconvenience may turn out to serve as a legitimate and even a preferable tool for rationing,” as compared to other available alternatives. (P. 11.)

For purposes of their analysis, Eyal et al. define “rationing through inconvenience” as “a nonfinancial burden (the inconvenience) that is either intended to cause or has the effect of causing patients or clinicians to choose an option for health-related consumption that is preferred by the health system for its fairness, efficiency, or other distributive desiderata beyond assisting the immediate patient.” (Id.) In other words, their focus is on barriers that have the effect of nudging patients to make socially desirable choices, as opposed to barriers that are imposed for other reasons, such as to increase profits for third-party payors. They identify six considerations relevant to assessing the advantages and drawbacks of these measures.

First, they note that, like other forms of indirect rationing, rationing through inconvenience preserves patient choice. No one is denied care entirely, but a patient seeking a rationed service can access it only if she (and/or her provider) is willing to jump through various hoops. One advantage of this approach is that, “[p]atients who perceive the greatest benefits from a treatment” are more likely to be willing to undergo the burdens associated with obtaining it. “By separating individuals who are willing to accept inconvenience to procure a good or service from ones who are not,” they argue, “rationing through inconvenience gathers that information and applies it to personalize rationing policy.” (P. 14.)

Second, they argue that rationing through inconvenience may be less regressive than relying on financial incentives, such as cost-sharing mechanisms, because all people, regardless of income level, “have twenty-four hours in a day, a limited attention span, and a body that can be in only one place at a time.” (P. 15.) They recognize, however, that rationing through inconvenience can sometimes impose disproportionate burdens on disadvantaged populations, as a result of factors like limited paid medical leave, inadequate transportation, or lack of access to nearby care facilities. In light of this potential, they call for “[f]ormal, periodic assessments” to evaluate the impact of particular strategies on different populations, as well as the use of “ameliorative measures” to reduce any disparities found. (P. 16.) For example, they suggest that, in some cases, adverse impacts on disadvantaged populations might be ameliorated by “maintain[ing] a plurality of optional inconveniences—stand in a long line or fill out a long form, for example.” (Id.)

The third consideration they address is largely a negative one—the fact that inconvenience, perhaps by definition, involves wasted time and effort. This waste is incurred not only by the patient but also, in some cases, by health care professionals, who may need to divert attention away from other patients to satisfy procedural requirements (for example, completing prior authorization requests). The impact of inconveniences on health care providers also can give rise to a conflict of interest, as physicians may recommend against treatments that involve significant burdens for them.

Fourth, the authors suggest that rationing through inconvenience often has the advantage of being highly salient to patients. Unlike costs, which “are often opaque to the patient,” inconveniences such as waiting in line and filling out forms are painfully obvious to those who experience them. They point out, however, that inconveniences are not always apparent in advance; moreover, the salience of inconvenience “is a double-edged sword” because it can lead to the underuse of necessary services and “it can also make rational priority setting less acceptable to the public.” (P. 18.)

Fifth, they suggest that rationing through inconvenience is arguably preferable to rationing through cost because it avoids “put[ting] a price on people’s bodies, or health, or on professional integrity.” (Id.) On the other hand, they note that rationing through inconvenience raises other concerns about respect for persons: “Mobilizing our aversions to standing in line, to listening to annoying muzak on the phone, and jumping out of bed earlier exploit our bodily vulnerability to inconvenience—or our psychological and physical need for comfort.” (Id.) The significance of these concerns, however, depends on the extent of the inconveniences involved.

Finally, they argue that, because “the deliberate imposition of inconvenience may be outrageous to the public,” efforts to ration through inconvenience may often be adopted on a less-than-transparent basis. For example, a public hospital may simply “fail to invest in added resources that would have alleviated long waits for a certain service,” without any opportunity for public scrutiny. (P. 19.) On the one hand, they suggest that this lack of transparency is arguably a significant ethical problem. On the other hand, “some obliqueness in resource allocation” may be necessary in a society where rationing, although inevitable, “remains hopelessly unpopular.” (Id.)

In conclusion, the authors suggest several areas for future research on the effects of rationing through inconvenience. For example, what types of rationing through inconvenience is already in use? When do these mechanisms actually lead patients and clinicians to make more socially desirable choices about health care? How can the disutility associated with these mechanisms be measured? What are the effects of these mechanisms on individual and population health?

By bringing attention to the common, but under-explored mechanism of rationing through inconvenience, this article is an important addition to the literature on health care prioritization. The authors’ careful analysis persuasively demonstrates that inconvenience can be a useful mechanism for allocating limited resources, and that in some cases it may be superior to other methods currently in use. However, it also shows that, like co-payments and other financial disincentives, imposing costs in the form of time and effort can also have a downside. Ideally, once armed with the research data Eyal et al. have called for, policy makers will be better equipped to strategically use inconvenience  to achieve socially desirable goals.