The American Journal of Managed Care
May 2004
Volume 10
Issue 5

Economic Analysis in Healthcare Decisions


Sean R. Tunis, MD, MSc, is chief clinical officer at the Centers for Medicare and Medicaid Services(CMS) and director of the Office of Clinical Standards and Quality. Dr. Tunis is responsible for makingevidence-based national coverage policies; setting quality standards for Medicare and Medicaid providers;and leading quality measurement and improvement activities for the CMS. Over his career,he has devoted considerable attention to the role of cost effectiveness in guiding decision making.Given his stature as a thought leader on these issues, we felt he was the ideal person to comment onthe topics raised in this issue of the .

The potential use of economic analysis in healthcaredecision making has strong natural appealas it becomes clear how an individual's healthcaredecisions can affect, through insurance coverage,the ability of others to obtain the care they need.Healthcare spending in the United States continues torise faster than inflation and worker salaries. Financialpressures force difficult decisions about whether toincrease premiums, reduce benefits, or reallocateresources. Using analytic methods that are designed tomaximize the value of the health services purchased fora given level of spending makes intuitive sense. The failureto adopt such a framework given the current economicrealities in healthcare seems, at best, unwise.The two articles by Neumann 1 and Bloom 2 that appearelsewhere in this issue illustrate this point quite well.


The application of economic analysis in healthcaredecision making, however, particularly with regard tomedical necessity, has proven to be highly controversial.Evidence varies regarding the extent to which decisionmakers actually use economic analysis, a point thatBernard Bloom discusses in this issue of the .2 The reluctance to explicitly address financial issues inthis context may well reflect a "deep-seated abhorrenceof limits and of the corporate or government officialswho impose them," and Peter Neumann's article cogentlypresents this case.1 In addition, the discussion of theuse of cost-effectiveness analysis (CEA) can benefitfrom a broader understanding of other importantsources of tension within the policy process throughwhich decisions are made about coverage of specificitems and services. Significant disagreement exists overthe appropriate locus for medical decision making, theintegrity of the process used by payers to make thesedecisions, and the proper role of scientific evidence.

Locus of Decision Making

One important source of tension regarding decisionsabout medical necessity is the degree of deferenceaccorded to judgments and preferences of patients andtheir physicians. The idealized view is that clinicians andpatients arrive at optimal choices by carefully consideringthe pros and cons of the existing alternatives, free ofall factors other than clinical risks and benefits and individualpatient preferences. In this model, cliniciansattempt to identify the clinical intervention that bestmeets the patient's need, separating this clinical decisionfrom any consideration of what the indirect impact of thisdecision might be. Only at the level of these individualdecisions, it is argued, can all the subtle variations in clinicalpresentation and social context be thoroughly understoodand factored into determinations about what is thebest medically necessary care for the patient.

Unquestionably, clinical decisions are best made byinformed patients consulting with their clinicians.However, many outside factors that have little to dowith clinical benefits and preferences also influencehealthcare decisions. Patients are exposed to anincreasing volume of direct-to-consumer advertisingand to healthcare information from the Internet andother sources that are of variable objectivity and quality.Clinicians also receive a large volume of informationfrom commercial entities and the media that may notreflect a carefully balanced perspective on the value ofmedical alternatives. Several decades of health servicesresearch, documenting widespread underuse, overuse,and misuse of healthcare technologies and services,demonstrate that reliance on judgments at the level ofindividual patient encounters does not ensure that medicallynecessary care will be consistently provided.3

The persistent discomfort with payers as a locus formaking decisions about medical necessity is manifestedin a range of social and legal developments. The backlashagainst managed care in the 1990s was primarilydriven by the powerful concern of patients and policymakers over the idea that those who pay for healthcareservices could override the decisions of clinicians andpatients regarding diagnosis, treatment, and specialistreferral. In legal proceedings, challenges to noncoveragedecisions are generally received with considerable sympathyby judges and juries who see sick patients withlimited options for getting well having their doctorsoverruled by organizations whose primary functions areadministrative, not clinical. States continue to pass lawsmandating that specific services be covered in order toprevent insurers from limiting access to certain technologiesand services, and requiring independentappeals mechanisms outside the control of the payer formedical necessity decisions. In the past few years, theUS Congress passed federal laws that allow beneficiariesto appeal local and national medical necessity policies,and that require Medicare to issue draft coverage decisionsfor public comment. These changes reflect steadypressure from industry advocates and a demand foradditional accountability when making policy thatblocks payment for medical services deemed to be medicallyappropriate by patients and their physicians.

Process for Medical Necessity Decision Making

A second important source of tension over coveragedecisions made by public and private payers is theprocess for making these decisions, particularly withrespect to explicitness, consistency, transparency, andopportunity for outside input. With a few exceptions,payers have been rightfully criticized on each of theseelements of the process. Historically, the process bywhich payers made these decisions was not describedin detail; few payers provided any clear description intheir contracts or other documents about how thesedecisions were made, by whom, with what information,and in what time frame. Prior to 1999, the Medicareprogram communicated coverage decisions throughbrief statements in the policy manual describing whatwould or would not be covered. Furthermore, no formalprocess was in place for making these decisions, andoutside stakeholders had limited opportunity to participatein or even track the development of specific policydecisions.

Many public and private payers have taken a very differentapproach over the last several years, investingconsiderable resources to make the medical policyprocess more scientific and transparent. The Blue Crossand Blue Shield Association has conducted rigorous scientificreviews of medical technologies for nearly 20years and applies well-defined criteria in evaluatingexisting evidence. Initially available only to subscribinghealth plans, the technology assessment reports havebeen made available to the public since June 2003. Morerecently, the Medicare program has made significantchanges to improve the process for making medicalnecessity decisions.4 A description of the process nowappears in the Federal Register and can be found on theMedicare coverage Web site ( studies are evaluated through the well-describedframework of evidence-based medicine, and decisionmemos are now posted on the coverage Web site, providingdetailed explanations of what evidence wasreviewed and how the coverage policy was derived fromthe evidence. Substantial opportunity for outside inputexists, with numerous calls and meetings with stakeholderstaking place for each coverage decision. An independentexpert Medicare Coverage Advisory Committeewas also established to provide a public forum in whichparticularly complex or controversial decisions can bediscussed. While these process improvements have noteliminated significant differences of opinion regardingspecific decisions, the aggregate effect has been to substantiallyreduce the frequency and intensity of conflictswith stakeholders, and to allow for an orderly andinformed exchange of views on a better-defined andmore tractable set of issues.

While considerable progress has taken place, thereremains a high level of discomfort with many aspects ofthe process for making coverage decisions. Significantvariations in medical necessity policy still exist betweenhealth plans that cannot be easily explained. Manyhealth plans continue to develop these policies throughmechanisms that are neither reliable nor transparent.5 Medicare has not yet been successful in publishing regulationsor guidance documents providing a definitionof medical necessity, or articulating the criteria that areapplied to medical technologies in order to determinewhether they are "reasonable and necessary."

The Role of Evidence-based Medicine inMedical Necessity Decisions

While an increasing number of organizations haveadopted evidence-based medicine as the analyticframework for making medical necessity decisions, considerablediscussion continues regarding the appropriateapplication of this framework. First and foremost isthe question of how to determine when the overallquality of evidence is adequate to demonstrate medicalnecessity for individual technologies and services.While the framework provides a well-defined set ofrules to guide the appraisal of evidence from clinicalstudies, the translation of this assessment into categoricaldecisions of medical necessity may require subtlejudgments about study methods.6

A second critical and challenging issue is how differentsources of information about risks and benefitsshould be weighed when making medical necessitydecisions. Specifically, different views exist about therelative importance of local expert opinion as reflectedin community standards of care, national expert clinicalconsensus as articulated in clinical practice guidelinesand consensus documents, and conclusions aboutclinical effectiveness derived directly from high-quality,peer-reviewed clinical research. Many stakeholdersmaintain that the state of the art in clinical practicemay sometimes be ahead of the state of the science inthe published literature, and that the clinical communitydetermines the value of clinical interventionsthrough experience long before confirmation is providedin published studies. Others raise questions aboutthe reliability of professional consensus by pointing tothe large geographic variations in care,7 high rates ofinappropriate care, and underuse of services of proveneffectiveness.8

Beyond these fundamental issues, numerous secondaryissues must also be addressed. Should evidencerequirements be applied differently for different categoriesof technologies (eg, drugs versus devices)? Shoulddiagnostic technologies be evaluated based on diagnosticaccuracy alone, or should there be evidence to supportthe impact of the technology on patient managementand health outcomes? What is the optimal point in timeto assess new technologies? Should technologies in widespreaduse be reviewed to determine whether they aresupported by good clinical studies, and should they beheld to a different standard of evidence than new technologies?Who is responsible for generating evidenceregarding the effectiveness of existing and new technologies?These and many other issues related to theuse of evidence-based medicine in healthcare policymaking are the subject of highly spirited debate, againhighlighting the fact that the challenges and resistanceattributed to the use of cost-effectiveness analysis mustbe viewed as part of a broader set of challenges.

Challenges Specific to CEA

In addition to the 3 categories of issues discussedabove, several critical challenges must be confrontedregarding the use of CEA in medical necessity decisions.These major challenges include concerns aboutvalidity and transparency of CEA methods, uncertaintiesabout motivations for use of CEA, and the difficultiesinherent in applying results to individual patients.

Neumann correctly notes that tremendous progresshas been made in developing and standardizing themethods of economic analysis in healthcare over thepast 25 years. The number of such studies published infirst-tier peer-reviewed journals provides strong validationof the credibility and usefulness of thesereports. Whether or not the methods are sufficientlyrobust or transparent to be used in medical necessitydeterminations is a separate question. Economic modelsare inherently more complex and less transparentthan analyses of the clinical studies that comprise theeffectiveness component of the models. Many importantassumptions are embedded in decisions about themodel structure, and it is challenging to ensure thatevery important decision is fully disclosed andexplained. This complexity poses particular problemsbecause CEA sponsors' motivations may be suspectedof guiding the analysis in ways that may be difficult todetect. Given the critical role of transparency andcomprehensibility in the legitimacy of policy decisionsabout medical technology, CEA raises special challengesover and above those faced when weighing clinicalrisks and benefits.

Even under the assumption of robust and generallyaccepted CEA methods, the application of these techniquesto payers' decisions remains problematic. Somediscomfort with these techniques may be explained bya general public resistance to recognizing that healthcareresources are limited, but the discomfort isheightened when decisions to limit care are made byorganizations for whom reduced spending may belinked to improved financial performance. Use of economicanalysis under the premise that resources arelimited raises questions about who is actually benefitingfrom any savings, particularly when applied by forprofitentities.9 Greater acceptance of economicanalysis for decision making in the United Kingdom(and other countries with a publicly funded nationalhealth service) may reflect in part a greater culturalemphasis on equity, but may also emerge from thestructure and financing of the British healthcare system.Because virtually all healthcare in the UnitedKingdom is paid for through a single national program inwhich all individuals participate, the reality of a fixedbudget is more self-evident, and the logic of applyingCEA to use resources efficiently becomes less suspect.While fundamental differences in history and valuesmay explain why the United States and United Kingdomhave such different approaches to financing and delivering healthcare, the substantial differences that nowexist between these systems could themselves explainobserved differences in receptivity to the use of CEA indecision making.

Finally, and possibly most significant, the applicationof economic analysis in making decisions aboutmedical necessity becomes highly problematic wheneverit is translated to decisions about the care of individualpatients. The determination that a particulartechnology or service is not cost effective means thatspecific individuals, someone's parent, spouse, child, orfriend, may be unable to obtain that potentially beneficialintervention because it has been deemed not to beworth the price. Confronting such dilemmas on theindividual level invariably raises virtually impossibleobjections to the use of CEA for individual yes/no decisionsabout what will and won't be covered. When adecision not to pay for a particular service is made byweighing the clinical risks against the benefits, theunderlying logic is to avoid exposing the individual topossible harm. Using CEA for such decisions can betranslated to mean that a clinical benefit must be foregonebecause the price is too high.

Putting Resistance to CEA in Context

It has become a widely held view that the inability tocomplete a federal rule-making process to define theterm "reasonable and necessary" results primarily fromdiscomfort with the proposed inclusion of cost effectivenessas one of the criteria. Neumann's articleexplains this in the context of our unwillingness as asociety to accept that healthcare resources are limited.I would agree that the public desire for healthcare servicesexceeds the allocated resources. However, successfulcompletion of rule-making related to coveragedecisions, with or without inclusion of a cost-effectivenesscriterion, would also require the development ofsome consensus regarding the locus of decision making,transparency of the process, and the appropriateuse of evidence in decision making.

Despite the challenges facing the use of economicanalysis in decisions about technology and procedures,it does have a critical role to play in healthcare. Whileit may not be a perfected tool, it provides a robustmethodology to support efforts to purchase the greatestamount of health for any given level of healthcarespending. Because of the special challenges raised byusing economic methods to make categorical decisions,it may be preferable to further develop policyapproaches that include cost outside the realm of medicalnecessity. Medicare has recently taken some stepsin this direction with respect to 2 very high cost technologieswith marginal, operator-dependent benefits:lung volume reduction surgery for end-stage lung diseaseand left ventricular assist devices for destinationtherapy for end-stage heart failure. In each case,Medicare limited coverage of these procedures to centerswith evidence of unique expertise, both to increasethe likelihood that patients would have improved outcomesand to promote appropriate use of these high-risk,costly interventions. The pricing of a newimmunoassay used to screen for colorectal cancer wasderived in part from an economic model comparingthis test to alternative colorectal cancer screening technologies.In this case, the statutory language authorizingMedicare to add coverage for the new colorectalcancer screening test explicitly directed the Secretaryto include costs as one of the factors to be considered.

Obtaining good value from healthcare spending is anurgent policy priority, made more so by the acceleratingpace of medical discovery. Perhaps the most importantbenefit of expanding the use of economic analysisin health policy decision making would be to supportmore informed public dialogue about how best toachieve a healthcare system that produces high-qualityand safe healthcare, allows patient freedom of choice inhealthcare decisions, maintains healthy innovation,and expands access to care while remaining affordable.A decision-making framework that explicitly includeseconomic analyses would enable us to adopt explicitand consistent reimbursement guidelines that linkhealthcare benefits to the amount paid.10 Without sucha framework, linkage between quality and cost is considerablymore difficult. In an environment of increasingpressure on healthcare resources, importantopportunities to improve public health may be missed.

From the Centers for Medicare & Medicaid Services, Baltimore, MD.

This editorial reflects the views of the author, and does not necessarily represent theviews of the Centers for Medicare & Medicaid Services or the Department of Health andHuman Services.

Address correspondence to: Sean R. Tunis, MD, MSc, Centers for Medicare &Medicaid Services, 7500 Security Boulevard, Baltimore, MD 21244.

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