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‘Cost-Effectiveness Analysis’ and U.S.

Health Care
BY UWE E. REINHARDT
 MARCH 13, 2009 6:45 AMMarch 13, 2009 6:45 am

Uwe E. Reinhardt is an economics professor at Princeton.

As I had noted in an earlier post, the inclusion in the recently passed economic stimulus
bill of some $1 billion over 10 years for “comparative effectiveness analysis” in health
care prompted a vehement reaction from the defenders of the status quo. They wrote
darkly about “cookbook medicine” or, even more hysterically, about Hitler-
style euthanasia.

With so much brouhaha over what should be thought of as basic operations research for
health care, it may be well to explore what “comparative effectiveness analysis” is, and
how it is related to what is known as “cost-effectiveness analysis.”

The sketch below describes the basic structure of “comparative effectiveness analysis.”

It is assumed that researchers compare two therapies aimed at the same medical
condition. The researchers try to determine which of these therapies can be judged
“better” in terms of the positive and negative consequences associated with them. In
principle, the clinical practice guidelines promulgated by medical specialty societies to
help physicians with their daily treatment decisions should be based on this type of
carefully structured comparative effectiveness research.
Source: Uwe Reinhardt A diagram of comparative effectiveness analysis.
Alas, in practice most of the currently promulgated guidelines lack that kind of rigorous
scientific foundation. For example, as the science reporter Ronald Winslow
recently reported in The Wall Street Journal, “just 11 percent of more than 2,700
recommendations approved by cardiologists for treating heart patients are supported by
high-quality scientific testing, according to new research.”

That circumstance alone justifies spending billions more than we traditionally have on
operations research for an industry that now absorbs $2.5 trillion or close to 17 percent
of our gross domestic product. Why anyone would oppose that kind of research
challenges one’s imagination.

Early drafts of the economic stimulus bill, however, referred not only to “comparative
effectiveness research,” which keeps the analysis strictly in the clinical realm, but also to
“comparative cost-effectiveness analysis,” which brings economics into the inquiry. That
analysis seeks to establish which of several alternative therapeutic strategies capable of
achieving a given therapeutic goal is the least-cost strategy. It seems a sensible form of
inquiry in a nation that is dismayed over the rising cost of its health care.

Indeed, in recent years most industrialized nations have begun to subject clinical
practices in their health systems to this type of analysis, as have private insurers in the
United States (see, for example, the American Journal of Managed Care).
In Congress, however, the word “cost” in this connection remains anathema. This is
despite the fact that that same Congress rings its hands in despair over the millions of
American families priced out by the ever-rising cost of health care, and over the bigger
chunk of the federal budget taken up by Medicare and Medicare.

So, in the end, the offensive term “cost-effectiveness analysis” was stricken from the bill.

The opposition to cost-effectiveness analysis in health care comes from two distinct
groups that work closely together and reinforce one another.

The first group includes individuals or enterprises that book other people’s health care
spending as their own health care income.

The manufacturers of pharmaceutical and biotechnology products or of medical devices

are often found in that group, even though in some instances the greater economic
transparency provided by cost-effectiveness analysis might help them market their
health products or health services. Also in this group are physicians who thrive
economically from highly resource-intensive medical treatments, even if some of its
components are of only marginal clinical benefit.

The second group among the opponents of cost-effectiveness analysis includes

individuals who sincerely believe that health and life are “priceless” — for them, cost
should never be allowed to enter clinical decisions. It is an utterly romantic notion and,
if I may say so, also an utterly a silly one. No society could ever act consistently on such
a credo.

See, for example, this classic paper by Tammy Tengs, et al.

You will learn that in their daily decisions, American citizens and their political
representatives routinely trade health and life for money, which allows economists to
infer the value-per-life-year the decision makers had in mind. Alternatively, from the
decision citizens and politicians make, economists can infer the price-per-life-year-
saved these decision-makers seem willing to pay to “purchase” better health and added
life-years. As a courtesy to the reader, the authors of this paper literally list such “prices”
in an appendix.

In my next post, I shall explore whether any health system can forever escape the
troublesome question, “At what price human life?”

Comments are no longer being accepted.

david March 13, 2009 · 8:35 am

As a person who has done several cost effectiveness analyses in the past, it always
amazes me that there are people who believe that human life is invaluable. It is not. We,
as individuals, value life everyday. This transaction occurs even without thinking. It is
the reason why we wear seatbelts. It is the reason why we do not take our blood
pressure pills. It is the reason (well partly) why we excercise. There is no difference in
having objective scientists, policy analysyts, physicians and the like, analyzing what is
the most appropriate use of our limited resources for healthcare.

HPLeft.com March 13, 2009 · 8:58 am

Americans persist in their belief in the free lunch, at least for a chosen few – despite the
fact that our life expectancy is lower than that of citizens in most other developed
nations.
Who cares if we drive the cost of health care for everyone else through the roof – thus
making it unavailable for many – so long as we have access to that ‘Hail Mary’
treatment, the treatment that likely will make little difference, but allow us to hold on to a
misguided hope for a few days longer.

andrew weinstein March 13, 2009 · 9:01 am

Glad to see this question being discussed. It would be great to have a more efficient
health system, but the bottom line is this;
if every one of us is entitled to a million dollars in end of life care, than every one of us
has to put in a million dollars

Karen March 13, 2009 · 9:06 am

Cost Effectiveness Analysis was discussed in Daschle’s book.

Ian Spatz, Rock Creek Policy Group March 13, 2009 · 9:09 am

“..in some instances the greater economic transparency provided by cost-effectiveness
analysis might help [the manufacturers of pharmaceutical and biotechnology products or
of medical devices] market their health products or health services.” This is most true of
the very high cost products that lack close therapeutic substitutes.
That looking at cost as a factor is legitimate is hard to argue with. The real issue is what
level of evidence is sufficient to deny (or provide) a treatment. The fear among
manufacturers is that a poorly designed and underpowered study will lead to a coverage
denial while a similar level of research will NOT force a coverage approval.
Comparative effectiveness research and cost-effectiveness analysis are neither evil nor
a panacea. Hopefully, the exciting interest in this provided by the stimulus will lead to
greater understanding and a more informed discussion — the very kind that Prof.
Reinhardt is stimulating here.

William Davies March 13, 2009 · 9:10 am

I would urge anyone interested in this topic to read “Die in Britain, Survive in America”,
written well before the onset of the current debate.
//www.factcheckers.org/showArticle.php?id=520
“You have a better chance of living to see another day in the American mishmash non-
system with its sweet pills of charity, its dose of municipal care and large injection of
rampant capitalist supply (even despite the blanket of over-regulation) than in the British
system where the state does everything. It is not that America is good at running
healthcare.
It is just that British state-run healthcare is so amazingly, achingly, miserably and
mortally incompetent.”
As are all government bureaucracies.

Ken March 13, 2009 · 9:16 am

This is an interesting and important topic, but Professor Reinhardt could describe the
difference between comparative effectiveness and cost-effectiveness more clearly.
Comparative effectiveness looks at the difference in health or clinical outcomes
between two or more treatments. The problem is that clinical trials are meant to
establish efficacy, not effectiveness. For instance, clinical trials compare a treatment to
placebo, involve strict protocols that don’t necessarily apply in the real-world, and
involve a group of patients that may not be reflective of who will actually be treated. And
once a drug is brought to market pharmaceutical companies generally don’t have
incentives to conduct real-world pragmatic trials that compare their drug to other drugs.
This is where public research funding would serve to remedy a classic public goods
problem.
Professor Reinhardt writes of cost-effectiveness analysis, “That analysis seeks to
establish which of several alternative therapeutic strategies capable of achieving a
given therapeutic goal is the least-cost strategy.” This is not strictly true. The goal of
cost-effectiveness analysis is NOT to determine which treatment is the least costly, but
whether the added benefit of more costly treatments is worth the added cost. The
principle behind this is fundamental to all economic decision making. When an
individual is confronting a decision about whether to purchase a more expensive TV, the
choice comes down to what additional benefit in terms of features, quality, reliability
they will get for the added expense.
It should be the same with health care, but unfortunately the problem is that the
consumer of health care is not the payer in most systems (including ours). The result is
that health care that is often of little value is overconsumed. There are two ways around
this problem: (1) privatize all health care (ie, make the consumer the payer), or (2) for
third-party payers to utilize the principles of cost-effectiveness (as

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