David Cutler, PhD

 Many therapies have immediate costs but delayed benefits. Recent and anticipated transformative therapies may exacerbate these challenges. This study explored whether disconnects between short-term budget impacts and long-term costs and benefits, and among impacts on initial payers, downstream payers, and society, are expected for a range of such therapies and whether they are likely consistent or variable, with implications for potential policy responses. 

 We modeled the impacts of 5 hypothetical therapies affecting different patient types: curative gene therapy for a childhood disorder, highly effective hepatitis C virus therapy, disease-modifying Alzheimer disease therapy, and cardiovascular disease therapy for both rare genetic and higher-risk prior cardiovascular event populations. We constructed disease-specific models, modifying best-available Markov analysis estimates for standard-of-care state transition rates, utilities, and costs. We disaggregated total healthcare impacts into impacts on initial versus downstream payers, dividing payers into 3 types: commercial insurers, Medicaid, and Medicare. 

 Although we found gaps between the impacts on initial and downstream payers in all examples, some substantial, the magnitude and reasons vary.

 As scientific advances generate transformative therapies with substantial structural disconnects between “who pays” and “who benefits,” creative approaches may be needed by manufacturers, payers, and others to ensure appropriate access to cost-effective therapies, adequate economic incentives for future development, and sustainable payer economics. Mechanisms may amortize high up-front costs over time, provide for transfers among payers, or a combination. Our research suggests that approaches should be tailored to specific disease and therapy characteristics to be effective.

Many therapies have financial costs and benefits at different times, creating gaps between initial and downstream payers when patients switch payers between the initial therapy payment and subsequent cost offsets.

In modeling the potential impacts of 5 hypothetical new transformative therapies representing diverse patient types, clinical intervention models, and disease burdens, we found substantial and varying gaps between initial and downstream payer impacts.

New creative mechanisms may be needed to ensure economic incentives for development of transformative therapies, appropriate patient access, and sustainable payer economics.

Manufacturers and payers should tailor solutions to specific disease and therapy characteristics to be effective.

Scientific progress has transformed patient outcomes in many disease areas, leading to economic gains.

 However, such therapies can challenge short-term payer budgets if benefits are not coincident with costs. Although this phenomenon is not new, recent and anticipated therapies may exacerbate these challenges. For example, sofosbuvir (Sovaldi), lauded as a breakthrough hepatitis C virus (HCV) treatment, has been restricted by some insurers concerned about short-term budget impacts, including by delaying access for patients with asymptomatic or milder disease whose costs would be paid later by Medicare.

Disconnects between the impacts on different payers can be large in the United States, where commercial insurers, state Medicaid programs, and the federal Medicare program pay most costs. Given insurance switching by patients over time, payers covering initial costs may not benefit from all, or any, downstream cost offsets. Moreover, patients and families may highly value better health and quality of life, improved functional status and productivity, and longer life, whereas insurers may value lower costs most. 

In 5 hypothetical examples, we modeled the mismatch between who pays for and who benefits from innovative therapies. Like others, we focused on patient movement over time across Medicaid, commercial insurance, and Medicare rather than contemporaneous switching among private insurers.

 Our aim was to explore a widely acknowledged feature of US healthcare, namely that the fragmented insurance system creates potential disincentives for coverage of therapies with up-front costs and long-lived or delayed benefits, and whether the situation may be exacerbated for new clinically effective therapies that are also high-priced relative to the current standard of care (SOC). Rather than precise numerical estimates for specific diseases, we explored whether substantial disconnects may be expected under credible, but by no means the only possible, assumptions (and therefore the extent to which some cost-effective therapies with potential to improve length and quality of life may face heightened coverage disincentives); whether they vary across examples; and the implications for policy. Some prior studies' results have illustrated payer disconnects for specific diseases; others have advocated specific policy responses. This study extends the literature by comparing disconnects across diseases subject to new transformative therapies and by exploring the implications for effectiveness of potential policy responses.

We examined 5 disease states for which transformative therapies have been discussed or recently launched: highly effective HCV therapy; curative gene therapy for beta-thalassemia (BT), a rare childhood genetic disorder; disease-modifying therapy for patients with mild Alzheimer disease (AD); and cardiovascular disease (CVD) therapy for patients with the rare genetic disorder familial hypercholesterolemia (FH) and those with prior CVD. Several resemble, but do not purport to be identical with, recently introduced on-market therapies (HCV and cardiovascular therapies); others reflect areas that may produce breakthrough therapies (disease-modifying therapy for AD and gene therapy). These examples, although not exhaustive, were selected to represent diverse patient types (ie, pediatric, adult, and senior populations), clinical intervention models (ie, 1-time curative and ongoing disease-modifying therapies), and disease burdens (ie, highly certain ongoing chronic health management costs, probabilistic catastrophic hospitalization costs, and custodial and other costs from function deterioration). 

 summarizes key characteristics across the examples. 

To assess the net effect by payer type of each therapy, we constructed disease-specific analytic models and compared the present discounted value (PDV) of an individual’s expected lifetime healthcare costs under the current SOC and the hypothetical new therapy, from the age an average patient initiates the latter (eg, gene therapy at age 2 years). We adopted this analytic frame to model payers’ budget impact considerations associated with covering the new therapy for a patient of expected age. We also calculated improvements in quality-adjusted length of life associated with the new therapy and the incremental cost per quality-adjusted life year (QALY). This cost-effectiveness metric is provided as an indicator of social desirability. For US commercial payers, cost-effectiveness analysis is typically not an established coverage determination constraint, but budget impact analyses are important considerations. Therefore, we focused on budget impact in our analysis.

We first calculated the aggregate budgetary impact on all payers of the new therapy, including healthcare offsets due to morbidity improvements and additional healthcare costs due to extended life. We also incorporated the impact on elder care in the case of disease-modifying therapy for AD, including the net impact on both nursing home care and family caregiving. Second, we disaggregated these effects into those on a representative initial payer in the 3 main payer types and those on a representative downstream payer, restricting analysis to the most relevant payers (eg, 2-year-olds are generally covered by commercial insurance or Medicaid, not Medicare).

We modeled the impact of patients switching payer types as they age, rather than switching commercial insurance plans contemporaneously. Whereas approximately 1 in 8 nonelderly Americans with employer coverage switched health plans in 2010 (approximately 1 in 13 due to reasons other than job change), nearly all will transition to Medicare at age 65 years.

 If recent and expected therapy breakthroughs suggest a continuing shift toward front-loaded costs and back-loaded benefits, the implications for both commercial insurance and Medicare may be far reaching. We explored the reasonableness of this modeling choice via several anonymized interviews with medical directors at large commercial payers who confirmed that, given prohibitions on pre-existing condition exclusions and the nature of geographic competition where leading plans may tend toward similar coverage, they generally expect that short-run losses from a therapy for patients who “switch out” roughly offset gains from those patients who have “switched in” and whose therapy costs were covered by other commercial payers. However, for the effects of switching over time as patients age, similar assumptions do not apply. Respondents were not interviewed about the effects of potential Affordable Care Act repeal or about actions that could affect the balance between commercial coverage and state exchanges. 

Our analyses rely on best-available Markov-type models published by others, incorporating rates of patient transition from one health state to another and healthcare costs and patient utilities for each state. In order to compare the hypothetical new treatment with the current SOC, we adapted these models by varying parameters related to efficacy, cost, and age at therapy initiation, specific to the hypothesized intervention. We applied shared assumptions across the models for the percentage distribution of insurance type by age and sex from the literature. In calculating the total impact of the new therapy, we valued a QALY at $100,000; the impact on payers excludes this value, as there is no market to monetize the value of additional QALYs.

 (Cost-effectiveness calculations exclude the value of additional QALYs, by definition.) Throughout, the value of all costs and savings was discounted at a 3% annual rate. For additional relevant disease-specific and shared assumptions, see the 

summarizes the aggregate impact of the different therapies. For the 2 CVD examples, the model relied on recently released calculations for patients aged 35 to 74 years (rather than a single age) with FH and a history of CVD.

 Without direct access to the authors’ health state-specific model, we calculated incremental cost per QALY from these figures (after adjusting for a modeled average 20% net price discount). Figures reported for the 2 CVD therapies in 

 reflect these cost-effectiveness figures (rather than higher figures reflected in a PCSK9 inhibitor manufacturer’s technology appraisal submission to the United Kingdom’s National Institute for Health and Care Excellence).

 Regardless, we focused on the difference between the impacts on the initial and downstream payers rather than their absolute levels.

Under our assumptions, all 5 therapies would increase discounted net healthcare costs. The magnitude of additional QALYs and the healthcare costs in additional years of life would vary, depending on patient and disease dynamics. Under the assumptions used, 3 therapies were highly cost-effective, with an incremental cost per QALY of $55,000 or less; the 2 CVD therapies were cost-effective at a value of about $250,000 per QALY (less, under manufacturers’ estimates; translated from pounds to dollars without any other adjustment for differences in utilization or unit prices, the corresponding figures would be incremental costs per QALY of $33,703 for FH and $67,701 for prior CVD). Our focus, however, was on disconnects across payers, and the Figure

disaggregates the overall payer impact into impacts on initial and downstream payers. For HCV, BT, and AD, the financial impact on the initial payer was negative and the impact on at least 1 downstream payer type was positive. Table 3 reports these figures in dollar terms and, to allow for direct comparison, per dollar of aggregate payer impact. 

Under our assumptions, treating BT costs the healthcare system nearly $180,000. The impact by payer varies depending on the initial insurer. When commercial payers are the initial insurers, they face slightly lower financial impacts relative to aggregate healthcare costs, the difference being additional downstream Medicare costs from children now surviving to age 65. That said, most costs are paid by commercial payers. Children initially covered by Medicaid, however, are covered by private insurance when older (modeled at age 21). Thus, Medicaid pays all treatment costs and commercial insurers realize a gain, the net effect of more likely survival and lower per-patient costs. For every patient whose treatment at age 2 is paid by Medicaid, commercial insurers benefit by a cumulative PDV of $120,661.

Others also have analyzed the tension between long-term cost-effectiveness and the immediate budget impact of highly effective therapies for HCV and similarly find a disincentive for commercial insurer coverage, with results borne by Medicare and other downstream payers

; 1 study estimated roughly a 15-year payback period for private payer coverage.

 Under our assumptions, initial commercial payers experience a cumulative PDV net cost of about $15,000 per patient. Medicare benefits from commercial payer coverage because patients avoid later expensive catastrophic events, such as liver cancer and transplants. These savings are greater than the additional costs incurred from patients living longer, for a gain of nearly $3000 per patient.

Slowing the progression of AD costs Medicare, both because it pays therapy costs and because patients live longer. However, it also reduces the need for nursing home care, thus saving Medicaid approximately $30,000 per patient. Families benefit from reduced needs for nursing home care, but experience additional caregiving burden during longer disease progression at home, for estimated increased net costs.

For patients initiating CVD therapy before age 65, commercial insurer and Medicaid costs are lower than the aggregate impact because many therapy costs occur after age 65. Although commercial insurers and Medicaid experience lower savings from avoided cardiovascular events, they also experience lower additional healthcare costs from longer life. For patients initiating therapy after age 65, Medicare experiences all therapy costs, healthcare cost offsets, and extra healthcare costs associated with extended life. For both populations, the net effect is negative, moreso for  patients with prior CVD than those with FH. Although the magnitude reflects the assumptions used by others (which have been critiqued

), the general pattern remains under other cost and disease transition assumptions.

Our research confirms that switching between payer types over time results in financial disconnects between initial and downstream payers across multiple hypothetical examples of highly effective new therapies with front-loaded costs and back-loaded benefits. Without mechanisms to monetize the downstream benefits of health improvements to others, returns from initial payers’ investments are understated. In particular, switching from commercial to Medicare coverage at age 65 may result in systematic disincentives for some new therapies by commercial payers, depending on specifics relating to age at initial treatment, up-front therapy cost, and morbidity and mortality impacts.

Medicare may be a financial “winner” or “loser,” depending on the balance between additional therapy cost, morbidity improvement savings, and extra healthcare costs from mortality gains. For HCV, we found (as have others) that Medicare benefits from initial payer coverage.

 For BT, Medicare impacts are far in the future and somewhat negative. For disease-modifying AD therapy and the CVD therapies as modeled, Medicare would pay more. Depending on the magnitude of the effects and the numbers of patients treated, downstream Medicare impacts of commercial insurer decisions could be an important additional form of “spillover,” documented in other contexts.

 Commercial insurers face negative financial impacts across the examples when they are the initial payers, suggesting all therapies could face coverage disincentives, overlooking downstream cost offsets. Yet, from an aggregate healthcare cost point of view, the incremental cost per QALY as modeled is within standard acceptable ranges and well below for some, and investment would be socially desirable. 

Absent direct social investment or subsidies, other approaches may address disconnects between privately incented and socially desirable outcomes. Two types of approaches, or a combination, may be relevant, depending on circumstances: mechanisms to align costs and benefits over time (for the same payer) and to help finance up-front therapy costs and mechanisms to share and align therapy costs and benefits across payers (eg, transfers between winners and losers). Several alternative financing proposals of the first type have been proposed, incorporating some form of cost amortizing to address challenges of high up-front costs. These include manufacturer&shy;—payer financing mechanisms (eg, manufacturer-issued debt secured by dedicated streams of contractual payments from commercial payers)

; changes in accounting rules and/or insurance regulations to allow payers to amortize some costs over longer time periods

; monthly annuity payments or manufacturer service fees linked to clinical milestones and/or continued efficacy, rather than single up-front or per-dosage charges

 Such arrangements would be novel in biopharmaceutical reimbursement, but they are similar in some respects to financing expensive long-lived consumer medical devices, such as insulin pumps, that are used for chronic disease. Our results suggest that alternative financing mechanisms smoothing front-loaded costs over time could be relevant for 1-time curative gene therapy and highly effective HCV therapy, but they may be only partial solutions, as benefits and costs may still accrue to different payers. Disincentives for HCV therapies occur not only because initial costs for cure are high, creating short-term budget stress, but also because substantial downstream benefits accrue to others. Such mechanisms are likely less relevant for ongoing therapies, such as disease-modifying AD therapies or cardiovascular therapies, where costs are already spread over time.

The second types, cross-payer financial transfers and burden-sharing mechanisms between winners and losers, specifically address gaps between who pays and who benefits (rather than gaps in time between costs and benefits for the same payer). Transfers can address when costs to one payer type are offset by savings to another. For instance, up-front Medicaid cost burdens and future benefits to Medicare could be recognized by enhanced state Medicaid reimbursement rates or direct federal transfers. So-called burden-sharing proposals address when therapies are cost-effective but also cost-increasing, and a gap remains after transfers.

Transfers from one payer type to another theoretically could be appropriate for therapies such as those for BT, where Medicaid bears large up-front costs and commercial insurers experience substantial downstream benefits. However, proposals to smooth out therapy costs over time for the same payer will be easier to implement than proposals to transfer costs and benefits across payer types.

 More generally, future innovative therapies may benefit from proposals tailored to their specific circumstances, including mechanisms to amortize costs over time or to transfer value from downstream winners to initial losers, or a combination (see 

). Although we find disconnects between initial and downstream payers in all examples, some substantial, the magnitude and reasons vary. 

As with all modeling studies, different price, timing, and effectiveness assumptions yield different results for cumulative payer PDVs (see eAppendix sensitivity analyses). Moreover, not all relevant societal benefits have been included in the models relied upon for cost-effectiveness inputs. For instance, educational attainment and lifetime productivity impacts, important benefits of curing childhood genetic diseases, are not included for BT. Similarly, the value of reducing future transmission to others is not included for HCV and the benefits from sustained functioning and independence for patients and their families due to disease-modifying therapy are not included for AD. These benefits are not monetized but are real nonetheless, and including them could increase gaps between front-loaded costs and back-loaded benefits and/or improve cost-effectiveness. Second, for chronic therapies, we did not include changes in the new therapy’s net price over time. Third, given pre-existing health condition coverage exclusion prohibitions, we applied average population-level insurance coverage statistics and did not incorporate disease-specific insurance coverage or switching rates. We modeled at the aggregate payer type level, and this assumption may not hold true for all plans (eg, smaller payers may face greater temptations to free-ride on others’ prior coverage decisions) and patients (who may experience different switching rates post treatment). For simplicity, we assumed uniform therapy and medical costs across payer types; lower Medicaid prices could reduce Medicaid net PDVs relative to other payers. Fourth, our analyses reflect the limitations of the underlying Markov-type models (eg, constant age-specific mortality and transition rates over time), which may yield underestimated mortality benefits when extended over many years. To the degree that not all healthcare cost offsets from the new therapy are reflected in these underlying models, our calculations overstate net costs. For instance, cost offsets in heart failure and unstable angina are not included in the cardiovascular models and improvements in heart attack and stroke incidence may be understated, as they may reflect an assumed lower-risk treatment population than targeted.

 Because our focus is on general dynamics under plausible (but by no means the only possible) assumptions, our findings are representative rather than precise conclusions about specific disease—therapy combinations or forecasts of the impacts of specific therapies. Finally, our calculations reflect the assumption that, for chronic conditions, downstream payers also cover the therapy (this limitation is not relevant to 1-time therapies, such as gene therapy).

As scientific advances generate breakthrough therapies with varying profiles, creative thinking and flexible solutions by manufacturers, payers, and others will be needed to address barriers to realizing their benefits. Well-designed alternative financing or other mechanisms could help ensure economic incentives for future development, appropriate patient access, and sustainable payer economics for expensive but cost-effective transformative therapies. Although proposals have been suggested to address up-front cost barriers, proposed transfers from downstream winners to initial losers and burden-sharing mechanisms have received less attention. In some cases, both could be helpful, with the balance reflecting disease-specific circumstances. However, further research is needed to address practical and theoretical challenges, including defining why and under what circumstances Medicare would or would not incent private payer coverage, how to maintain incentives for private-sector coverage, and how and when to implement acceptable cross-payer transfers. The framework we used to disaggregate potential impacts on initial and downstream payers of new therapies, and to identify potential gaps between who pays and who benefits, may be a useful tool for manufacturers and others to map sources of potential coverage disincentives and develop and fine-tune such proposals before presenting them to payers. Failing to consider relevant disease-specific dynamics may mean the promise of new transformative therapies is not fully realized.&ensp;

The authors acknowledge and thank C.J. Enloe for data analysis and Kimberly Westrich and Howard Birnbaum for helpful suggestions.

Department of Economics, Harvard University (DC), Cambridge, MA; National Pharmaceutical Council (MC, RD), Washington, DC; Analysis Group, Inc (GL, NK), Boston, MA.

 Ms Long and Dr Kirson received funding for this research from the National Pharmaceutical Council. 

 Mr Ciarametaro and Dr Dubois are employees of the National Pharmaceutical Council, an industry-funded health policy research group not involved in lobbying or advocacy. Ms Long and Dr Kirson are employees of Analysis Group, Inc, a consulting company that has provided services to biopharmaceutical manufacturers and insurers. Dr Cutler reports no relationship or financial interest with any entity that would pose a conflict of interest with the subject matter of this article. 

 Concept and design (DC, MC, GL, NK, RD); acquisition of data (GL, NK); analysis and interpretation of data (DC, MC, GL, NK, RD); drafting of the manuscript (DC, MC, GL, NK, RD); critical revision of the manuscript for important intellectual content (DC, MC, GL, NK, RD); statistical analysis (DC, GL, NK); obtaining funding (GL); administrative, technical, or logistic support (DC); and supervision (DC, NK).

 David Cutler, PhD, Harvard University, 1805 Cambridge St, Littauer Ctr 230, Cambridge, MA 02138. E-mail: dcutler@fas.harvard.edu.

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Articles

Transformative therapies with high up-front costs will exacerbate the need to address gaps between payers when costs and benefits occur at different times.

Insurance Switching and Mismatch Between the Costs and Benefits of New Technologies

In September 2009, we released a set of concrete, feasible steps that could achieve the goal of significantly slowing spending growth while improving the quality of care. We stand by these recommendations, but they need to be updated in light of the new Patient Protection and Affordable Care Act (ACA). Reducing healthcare spending growth remains an urgent and unresolved issue, especially as the ACA expands insurance coverage to 32 million more Americans. Some of our reform recommendations were addressed completely or partially in ACA, and others were not. While more should be done legislatively, the current reform legislation includes important opportunities that will require decisive steps in regulation and execution to fulfill their potential for curbing spending growth. Executing these steps will not be automatic or easy. Yet doing so can achieve a healthcare system based on evidence, meaningful choice, balance between regulation and market forces, and collaboration that will benefit patients and the economy (see 

We focus on three concrete objectives to be reached within the next five years to achieve savings while improving quality across the health system:

1. Speed payment reforms away from traditional volume-based payment systems so that most health payments in this country align better with quality and efficiency.

2. Implement health insurance exchanges and other insurance reforms in ways that assure most Americans are rewarded with substantial savings when they choose plans that offer higher quality care at lower premiums.

3. R eform coverage so that most Americans can save money and obtain other meaningful benefits when they make decisions that improve their health and reduce costs.

We believe these are feasible objectives with much progress possible even without further legislation (see 

 for a listing of recommendations). However, additional legislation is still needed to support consumers — including Medicare beneficiaries – in making choices that reduce costs while improving health.

Objectives for Moving Forward Health Reform

OBJECTIVE 1: Speed payment reforms away from traditional volume-based payment systems so that most health payments in this country align better with quality and efficiency.

Our previous report emphasized that reorienting providers’ financial incentives and support toward improving value is essential. Medicare fee-for-service (FFS) payments are becoming steadily less generous. Reductions in payment updates for most providers, in addition to lack of funds to provide longer-term updates for physicians, creates rising pressure for policymakers, private payers, and especially healthcare providers to find better alternatives to current payment models. FFS payments may be the best payment strategy in some circumstances and adjustments to make FFS payments more accurate and efficient can help. But reducing payments for “overpriced” services, combating fraud, and reducing administrative costs are insufficient to solve the fiscal challenges facing the healthcare system. Moreover, reducing payment and administrative costs will not address other shortcomings of the healthcare system such as fragmented care, the lack of evidence-based care, and the lack of accountability for improving quality and efficiency in the US healthcare system.

The ACA offers a number of opportunities to develop evidence on alternatives to traditional FFS provider payments to transform our health system. It grants broad new authority to reform Medicare payments, and for Medicare to support private-sector payment reforms. Still, there is high uncertainty as to whether these initiatives will successfully address the issues associated with controlling spending growth and increasing quality; payments are still largely disconnected from quality and the use of unnecessarily costly services. There is also no clear path yet to identify and quickly implement effective combinations of payment reforms or to scale effective reforms quickly. Furthermore, political pressure has repeatedly undone past efforts to reform Medicare provider payments, making it essential to take steps now to build momentum to use these new opportunities effectively.

Specific Recommendations for Bending the Curve

1. Design Medicare payment reform pilots, demonstrations and programs, including accountable care organizations (ACOs), to achieve rapid innovation, synergy, and scalability. The overall aim is to move toward payment for a broader set of services for a patient, with shared savings and losses based on prospective budgets for total spending, partial or full capitation, or bundled payments.

• Pilot a range of ACOs in Medicare before 2012, accommodating the diversity of market characteristics across the country; use the new Center for Medicare and Medicaid Innovation (CMMI) as a vehicle for accelerating these pilots.

• Implement bundled and related payment reforms for hospital, physician, and other clinical services for important episodes that cover enough of the medical costs in aggregate (eg, chronic conditions as well as hospital-based episodes) to change behaviors across the health system.

• Promptly introduce downside risk to ACOs, as well as episode and bundled payment pilots, even at early stages of implementation.

2. Coordinate CMMI and other Medicare pilot initiatives to promote collaboration with private and state payers, as well as across federal initiatives.

• Ensure that the private sector is an active partner in the research and design of payment reforms, building on concepts that have been proven to work at the state, regional, or federal level. Specifically, Medicare should give preference to multi-payer initiatives to test reforms.

• Clarify regulatory guidance and policies that are essential in a FFS environment but that could stifle public and private sector innovation around value-based payments. Further guidance and opinions may be needed to address potential anti-trust concerns related to provider collaboration, as well as anti-kickback concerns.

• Implement consistent methods to measure improvements in performance across pilots, and across the public and private sectors. Tracking the evolving combinations of payment and other reforms that achieve maximum impact is essential. Trying to evaluate individual payment reforms in isolation, rather than focusing on combinations of reforms that achieve the largest effects, may lead to overly narrow and slow reform, without full understanding of unintended consequences, complementary incentives, and reinforcing organizational and community contexts.

3. B uild comparable data collection, aggregation, analytics, and reporting capabilities to more rapidly develop consistent evidence of the impact of reforms on cost and quality. This involves making better use of existing data sources and supporting incremental, progressive improvements in electronic data, instead of waiting for full electronic records.

• Develop timely and consistent data feeds from Medicare, private payers, and other data sources. This will give providers the information they need to take steps to improve care for beneficiaries, as well as to support better performance measures.

• Adopt standardized performance metrics by leveraging measures already endorsed as consensus standards (such as through the National Quality Forum). Measures should be both timely enough to enable action by providers and broad-based enough to reflect the experience of the entire US population and the full spectrum of care. Measures should also be outcome oriented and widely available to facilitate knowledge transfer to all populations, communities, and consumers.

4. Strengthen and clarify the authority and capacity of the Independent Payment Advisory Board (IPAB). Doing so will enable the IPAB to effectively apply pressure to transition away from the current FFS payment model.

• Recruit knowledgeable representatives of the entire health system and other experts, particularly those of provider groups. Attracting the right talent pool will require sensitivity to time commitment and avoidance of overly broad conflict of interest disqualification.

• Assure IPAB’s mandate allows a broad range of payment reforms beyond reductions in payment rates for particular services in achieving its “GDP 1%” goal for per-capita spending growth. In the short term, this should include many reforms considered by the Medicare Payment Advisory Committee (MedPAC) — which are available now and have already been tested by states and the private sector. Doing so could provide a pathway for IPAB to take action before its “due date” of 2014.

• Empower IPAB with tools (eg, performance measures and clinical, economic, and actuarial expertise) to identify emerging treatment and payment trends quickly.

These steps focus on using the broad authority in the reform law for Medicare and other public programs to implement effective payment reforms. Additionally, they stress opportunities for government programs to complement and promote effective private sector reforms. The following objectives provide much stronger accountability and incentives for private payers to implement payment reforms that reduce costs and improve quality as well.

OBJECTIVE 2: Implement health insurance exchanges and other insurance reforms in ways that assure most Americans are rewarded with substantial savings when they choose plans that offer higher quality care at lower premiums.

The best design of health insurance plans for protecting consumers and promoting better care is still evolving, but is likely to be something other than traditional third-party FFSbased indemnity insurance. To encourage the development and adoption of insurance plans that are more effective at improving care while lowering costs, we recommend the availability of a broad array of health plan products in all insurance markets, and the opportunity for consumers to share in the savings when they choose coverage that leads to lower costs and higher quality.

ACA provides important opportunities to enhance plan competition based on quality and efficiency and avoid adverse risk selection through state exchanges, reinsurance and risk adjustment provisions, and minimum coverage requirements. The flat subsidy for low-income people purchasing coverage from exchanges — which means those choosing a higher-cost plan pay the full additional cost – is particularly important in encouraging value-based decision making.

However, ACA is not clear on whether a broad array of innovative insurance plan designs will be permitted, potentially creating barriers to needed support for changes in the delivery of care. For example, it is unclear that value-based insurance design will be permitted, let alone encouraged. Such lower-cost options will be especially important to achieve the very broad participation needed to keep coverage costs down.

1. Set a clear process for promoting vigorous competition among plans in insurance exchanges.

• Promote a broad range of meaningfully different plan options. Provided actuarial equivalence is met, plans should be able to compete using the innovative benefit designs described more fully under Objective 3 of this report.

• Create penalties, such as exchange exclusion or marketing restrictions, for plans that underperform on important quality metrics while otherwise promoting year-to-year continuity in available plan offerings.

• Assure that exchanges provide practical, useful cost, quality, and patient experience information for individuals to compare plans and their associated provider networks, so that people can confidently switch plans for better value.

2. Develop viable alternatives to avoid adverse selection, especially if it is difficult to achieve a strong mandate for individuals to obtain coverage.

• Balance need for choice with enrollment restrictions that limit rapid movement from less generous to much more generous plans. These could include limiting open enrollment periods, limiting range of switching from plans of lower to plans of higher actuarial value each year, and adding late enrollment penalty and/or restrictions.

• Monitor effectiveness of the transitional reinsurance program in encouraging competition among insurers for high-risk patients. As needed, secure additional subsidies for high-risk patients, using existing funding augmented or replaced with direct, ongoing funding. Like the exchange subsidies, these subsidies should be fixed prospectively based on health characteristics.

3. Provide comparative monitoring and evaluation of insurance exchanges across states based on their performance related to the minimum functions required under ACA as well as additional functions added by states. These efforts should help ensure that states, which are often resource constrained, have adequate technical assistance to implement and manage the exchanges.

• Assure regular and consistent performance reporting as a basis for developing better evidence for promoting insurance competition that improves quality and lowers costs.

• Identify and publicize effective strategies among states for limiting cost growth while achieving high coverage rates and consumer satisfaction, particularly for high-risk and vulnerable patients.

While these recommendations focus on insurance exchanges, the same principles should apply to private insurance and Medicare coverage options discussed below.

OBJECTIVE 3: Reform coverage so that most Americans can save money and obtain other meaningful benefits when they make decisions that improve their health and reduce costs.

Like our recommendations for holding providers and insurers more accountable for high value in healthcare (Objectives 1 and 2), we recommend that consumers also have stronger incentives and support for making higher-value choices related to their health and healthcare.

To address this issue, we originally recommended capping income tax exclusions for health insurance to encourage workers to choose more cost-effective coverage. We further proposed expanded competitive bidding in Medicare Advantage (whereby Medicare beneficiaries bear the additional cost of plans with above-average bids), potentially with a transition to include Medicare FFS. Along with coverage in insurance exchanges that involves a fixed subsidy, the vast majority of Americans would be able to keep the savings from choosing less costly coverage.

The excise tax under ACA is an important step in addressing the incentive for carriers and employers to provide high-cost, rich benefit plan options to employees. Nonetheless, a number of political and structural uncertainties could weaken the impact of this provision. In particular, the provision has a high threshold with substantial exceptions and a very late implementation timeline (2018), which provides opportunities for legislation that could lead to further delays or possibly elimination of this provision.

Moreover, ACA made little progress in giving Medicare beneficiaries opportunities to save money when choosing coverage and care that costs less while meeting their needs. While the legislation does make significant strides in promoting preventive care and provides some other measures that may improve health decisions such as menu labeling, much more could be done to directly reward consumers and employers for changes in their actions that reduce healthcare costs.

1. Maintain, at a minimum, the current provision on taxing high-premium insurance plans and, ideally, take further legislative action to strengthen this provision. Strengthening this very important tax reform should be considered as part of the upcoming debates on extending the 2001 and 2003 tax cuts and on deficit reduction.

• Enact legislation to implement the tax earlier — potentially phasing in the tax beginning in 2014 instead of 2018.

• Lower the threshold to encourage more than a small fraction of employers to design — and workers to choose – more cost-effective coverage.

• Increase the breadth of employers affected by reducing the exclusions from the tax, while taking steps to increase risk adjustment and high-risk payments for those with chronic illnesses to more efficiently assist workers and retirees with disabilities and chronic health problems.

2. Reform Medicare FFS benefit design and implement a competitive plan choice process that is consistent with our recommendations on plan choice for insurance exchanges, to promote beneficiary savings from choosing higher-value care.

• Consider a transition to including Medicare FFS in the bidding system.

• Allow co-pay reforms in Medicare FFS that parallel the reforms in provider payments, so that Medicare beneficiaries as well as providers can get savings when they use higher-quality, lower-cost care.

• Increase flexibility for Medicare to alter benefits over time, without reducing actuarial value, based on evidence of better quality and lower costs. Such models should go beyond variations in co-pays and include other incentives for consumers based on their specific needs and conditions. For example, beneficiaries who participate in high-value ACOs or beneficiaries with serious illnesses who choose providers that offer a bundle of services (surgery, chronic disease management) at a lower cost should share in the savings.

• For Medigap, allow variations in co-pays based on evidence (eg, allow tiered co-pays for providers and services based on evidence of quality and efficiency), and support a redesign of incentives for Medigap plan choice that reflect their overall Medicare cost impact.

3. Provide clarification or loosen restrictions around ACA reforms, and existing laws and regulations, which may impede health plans from adopting these value-based design options.

• For exchange-based plans, assure that Medical Loss Ratio (MLR) requirements do not discourage health plans from implementing non-traditional benefit designs and services that encourage and support consumer use of higher-quality, lower-cost care. For example, costs of developing better evidence for services where the risks and benefits for particular patients are unclear, costs of implementing value-based insurance designs, and costs of providing information to patients to support decision-making should be considered “medical” costs under the MLR requirements.

4. Develop and expand demand-side wellness incentives, including premium rebates, to encourage all beneficiaries to undertake measurable health and risk-factor improvements. Doing so includes building incentives with risk adjustment so that all beneficiaries have a meaningful opportunity to participate and save, regardless of health status.

Authors from The Brookings Institution update their recommendations by focusing on 3 concrete objectives to slow spending and improve quality of care within the next 5 years.


Bending the Curve Through Health Reform Implementation

publish only original research — not works reprinted from other sources. In light of the importance and timeliness of the topic, we felt it was necessary to make an exception. This report was first published online (

) and is reprinted below with permission from the Brookings Institution.

Reducing the growth of healthcare spending is a top priority of Congress and the Administration, but identifying specific, feasible steps that can achieve this goal has proven difficult. While the political debate has focused on several contentious issues, we believe there is a set of sustainable steps that together can slow spending growth significantly while building the high-value healthcare system our nation urgently needs. In combination with steps to cover the uninsured, reforms to constrain spending growth are feasible and essential for the nation’s fiscal stability and economic well-being.

These steps are not meant to be exhaustive, but rather a set of mutually-reinforcing reforms that we collectively agree could lead to significant reductions in costs and spending growth and improve quality of care at the same time. If implemented together, the impact on spending growth could be substantial. Some of these steps will generate reductions in spending in the short run. Others may take more time to have an impact, but hold more promise for reducing the rate of increased spending over time.

Many of these steps work together to address a critical flaw in American healthcare policies today: the lack of accountability for costs and results. Providers, patients, insurers, employers, and governments all participate in a system with little incentive—or often adverse financial consequences&mdash;to improve quality or reduce overall costs. Transitioning to a system of greater accountability will require greater flexibility for private and public stakeholders to experiment with programs and measure results, to see what works best.

First, as a foundation for improving value, all stakeholders in the system need better information and tools to be more effective. Second, provider payments should be redirected toward rewarding improvements in quality and reductions in cost growth, providing support for healthcare delivery reforms that save money while emphasizing disease prevention and better coordination of care. Third, health insurance markets should be reformed and government subsidies restructured to create competition and improve incentives around value improvement rather than risk selection. This step requires near-universal participation in insurance markets to succeed. Finally, individual patients should be given greater support for improving their health and lowering overall healthcare costs, including incentives for achieving measurable health goals. Specific steps to accomplish these goals follow.

Building the Necessary Foundation for Cost Containment and Value-Based Care 

As an essential foundation for reform, constraining spending growth while improving value requires information and tools like health information technology (IT) systems. But providing these tools is not enough; stakeholders will also need better incentives to use them, including other reforms described in subsequent sections.

Ensure Investments in Health IT Are Effective

• Link “meaningful use” health IT bonuses to achieving better results 

as part of systems of quality measurement, quality improvement, and care coordination.

• Create interoperability and provider communication standards, 

with a focus on filling priority gaps in standards for practical exchange.

to ensure providers adopting health IT have access to comprehensive support for overcoming implementation challenges.

Make Best Use of Comparative Effectiveness Research (CER)

• Create an entity to allocate CER funding 

based on the expected value of the evidence to be developed, including the national burden of disease and the likelihood that the research will lead to real improvements in care.

• Emphasize areas of medical uncertainty, 

public health interventions, and broader provider practice patterns and the policies that influence them.

• Protect providers and insurers from liability 

when they follow best practices and implement safe systems, as identified by evidence.

• Create incentives for states to amend the scope of practice laws 

to allow for greater use of nurse practitioners, pharmacists, physician assistants, and community health workers.

to better support the use of allied health professionals.

• Reform graduate medical education payments 

to promote the teaching of high-value care practices, including training in ambulatory settings, team-based care, quality improvement tools, geriatrics, and complex patient care management.

Reforming Provider Payment Systems to Create Accountability for Lower-Cost, High-Quality Care

Reorienting providers’ financial incentives and support toward improving value is essential and requires both a short- and long-term strategy. Adjustments in fee-for-service payments can rectify some problems initially, but simply reducing payment rates for “overpriced” services is insufficient. Fundamental change is needed through a timely transition to new payment systems that have accountability for reducing costs and increasing quality, reinforced by increasing pressure to make fee-for-service less attractive over time. Because experience with payment reform will lead to important refinements, it is also crucial to promote rapid learning and flexibility in responding to new evidence on the effectiveness of payment reforms.

Adjust Medicare and Medicaid Fee-for-Service Payment Systems

It will take time to reform value-based payments and delivery systems; however, some payment adjustments within fee-for-service programs can be made more quickly. These can support providers in transitioning to more effective payment systems, and include:

such as hospital and post-acute care, hospital and physician services, high-cost episodes of care.

• Expand the use of pay-for-performance, 

ideally using health outcome and patient experience measures, when evidence demonstrates that such reforms do not increase costs.

• Increase payment rates for primary care, 

• Provide additional payments during this transition period 

to physicians whose practices serve as “patient-centered medical homes” responsible for first contact and coordination across all care received.

• Ensure Medicare payments support the use of allied health professionals.

• Reduce payments for care of low value relative to cost

—for example, by reducing clearly inappropriate utilization and overpayments, as identified by the Medicare Payment Advisory Commission (MedPAC).

• Increase spending on programs to reduce waste, fraud, and abuse in Medicare, 

including provider education and guidance programs.

• Enable Medicare Prescription Drug Plans (PDPs) to share in overall cost savings 

created by more effective use of prescription drugs.

• Establish a regulatory pathway for follow-on biologics.

Build New Payment Systems for Provider Accountability

In conjunction with adjusting fee-for-service, new payment systems are needed that promote accountability for health outcomes and overall costs. The following are the most promising ideas that—because they are not yet well developed&mdash; should be rapidly piloted, refined, and expanded if effective:

• Pilot Accountable Care Organizations (ACOs),

 which integrate a group of physicians, hospitals, and other providers around the ability to receive shared savings bonuses by achieving measured quality targets and reducing overall spending growth for a population of Medicare beneficiaries. Advanced ACOs could also receive partially capitated payments with quality bonuses, as in the “Alternative Quality Contract” model developed by Massachusetts Blue Cross/Blue Shield. The Centers for Medicare & Medicaid Services (CMS) would facilitate public-private collaborations in which private plans adopt payment incentives for ACO providers based on consistent measures. Expedited processes for exemptions from Stark and anti-gainsharing laws are necessary for ACO pilots to work.

• Pilot “enhanced episode-based payment” systems and other promising payment systems.

 Payment rates for certain types of episodes of care would be set through competitive bidding with risk-adjustment, with public reporting of provider outcomes and quality bonuses. On the beneficiary side, tiered copayments should be implemented, to encourage use of providers that deliver more efficient bundles of services. Other promising reforms that might be piloted include new pay-for-performance models or care-coordination bonuses. These payment reform pilots must be accompanied by an effective measurement capability, so that the impact of each reform on improving quality and reducing costs for a population of patients can be demonstrated quickly and reliably.

• Incorporate other bonuses into a transition to accountable payment systems, 

including health IT payments, medical home payments, pay-for-reporting bonuses, pay-for-performance bonuses, and other payment reforms described above in Initial Reforms. These multiple payment reform initiatives should all be aligned to the common goal of measurable impact on quality and costs.

Apply Pressure to “Non-Accountable” Medicare Payments

As accountable payment systems become available, traditional fee-for-service payments should be made less attractive through reduced payment updates:

• Establish “Virtual ACO” incentives 

several years after implementing reforms, in which providers outside of accountable payment systems would be grouped based on the utilization patterns of the Medicare beneficiaries that they treat, and virtual ACOs with high cost growth or poor quality would receive market basket update penalties.

• Freeze market basket updates for two years

—several years after reforms are implemented, for example, 2013-14&mdash;for providers not participating in accountable payment systems.

Improve Payment/Coverage Flexibility and Rapid Learning to Achieve Lower Costs and Better Quality

• Expand and streamline CMS’s piloting authority and resources

 to support the rapid testing, evaluation, and expansion or elimination of new payment models in Medicare and Medicaid, through the availability of timely and meaningful quality and spending measures and resources for enhanced evaluation capacity. With compelling and timely measures of cost and quality impacts, CMS would have a greater capability to expand payment and coverage changes that improve care while reducing costs.

• Support public-private regional collaborations 

with Medicare, Medicaid, and private payers using consistent quality and cost measures for payment, in order to increase providers’ incentives for value improvement and delivery reform.

• Empower an entity to improve the value and ensure the long-term sustainability of Medicare and Medicaid 

by proposing policy changes that are subject to fasttrack, up-or-down votes in Congress.

to increase support for providers and insurers to make decisions based on high-value, evidence-based practices. This could be achieved through: (1) health courts with specialized expertise in medical liability; (2) a rebuttable presumption of non-liability for providers with consistently high measured safety or who demonstrate adherence to evidence-based guidelines; and (3) a legal pathway for early communication, apology, and remuneration.

• Reform anti-trust laws and create processes for expedited waivers from anti-gainsharing and Stark laws, 

A group of experts who have spent their careers studying the healthcare system have convened to identify a path for sustainable reform in healthcare cost growth.


David Cutler, PhD

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