BBI Contributing Writer

FDA approval of a new medical technology or drug sets into motion a cascade of events designed to successfully position a product in the marketplace. These activities include the publication of clinical papers, positioning for insurance coverage and reimbursement, production of marketing and sales materials and direct outreach to purchasers, physicians and patients.

Publication. Although publication of clinical papers typically accompanies product launch, information about the economic value of the new technology plays an increasingly important role in the process of clinically justifying a new technology. A growing number of clinical trials are including sub-studies exploring the economic outcomes of technologies under development. The results of the sub-studies are often published along with the clinical trial data to demonstrate the potential for cost effectiveness of the technology. These publications are used by health plan technology assessment committees to fuel discussion about impending coverage and reimbursement decisions, as well as by physicians to justify their requests to hospitals for technology purchases.

Reimbursement. As most technology companies know, the first step in generating reimbursement for a new technology is the development or assignment of a billing code covering the physician procedures using the new technology. These codes, called Current Procedural Technology (CPT) codes, are assigned by the American Medical Association (AMA; Chicago, Illinois). During the last several years, the AMA subcommittees charged with evaluating requests for CPT codes and assignments have been requesting data covering the cost-effectiveness of the technologies they are examining. But receiving a billing code does not guarantee reimbursement from the nation's health plans or state and federal health care programs (Medicaid and Medicare). These entities make decisions about whether to include the technology (and the medical procedures that use it) as part of its covered services to insureds, and if covered, if and how they will reimburse for the technology.

Marketing/sales and direct outreach. Most technology companies claim that their technologies will save money. The question most purchasers and users want answered is where those cost savings are going to occur and estimates of the amounts saved. As any good sales representative knows, the key to sales is to demonstrate value within the context most relevant to various customers.

Perspectives of value

Every group of stakeholders within the health care delivery system has a somewhat different perception of the "value" of new technologies. These perspectives are based in large part on each group's economic ties to the industry; specifically, how they make their money or otherwise attain success, and what represents "costs" to them.

Society's perspective is naturally the most general perspective. It's also a particularly complex one because the concept of cost-effectiveness is not limited to the ability of a technology to save money, but to the extent to which the technology contributes enough "value" to be considered worthwhile, given the expense associated with it. The value of the technology must compete with the value of all other things that require society's resources, or at minimum, other health care resources.

A common unit of measurement in the academic literature for this perspective is based on the relationship of technology cost to improvements in "quality-adjusted life years" (QALY). A quality-adjusted life year represents a year of life adjusted for its value or quality. For instance, a year in perfect health would be considered equal to 1 QALY. However, a year in ill health must be discounted according to the utility of that health state. Thus, a year bedridden might have a value equal to 0.3 QALY. The lower the ratio between QALY and cost, the more perceived value the technology brings. The advantage of this perspective is that it allows for like comparisons across many technologies. The disadvantage is that it is considered less relevant to technology purchasers who are constrained by short-term budget considerations and who seek to understand the more immediate returns (or costs) generated by new technologies.

Ideally, the perspective of the nation's health plans would come close to society's perspective because of the comprehensive medical coverage offered by most health plans. The reality is somewhat different, however. Disenrollment rates from health plans remain high enough that there is a distinct possibility that individuals treated by a health plan today are likely to belong to another health plan a year from now. So technologies that take many years to deliver clinical and associated cost returns (through reduced societal expenditures) may be less attractive to health plans, irrespective of potential gains in quality-adjusted life years. Moreover, health plans are trying to survive in an extremely competitive and price-sensitive industry. Despite much discussion about the quality of health care over the last few years, employers still overwhelmingly use price as the basis for decision-making about health plan contracts. A few dollars difference in premium can mean significant amounts of market share to a health plan, and technology costs are considered to be a major driver of recent increases in health care costs.

In reality, the health plans' perspective is much shorter term than society's. Health plans want to know how the new technology is likely to change conventional treatment patterns and costs in the near-term. They want to know how long it will take to accrue financial benefits from the use of the new technology. And if financial benefits are not likely, they want to know how much the technology is going to cost in relation to the short term medical or lifestyle benefits it brings, so they can determine how to budget for it, charge employers extra for it, or possibly limit access to it.

The hospital perspective is even narrower than that of health plans. The hospital is constrained by its need to generate margins on the procedures performed within its walls. And the margins vary depending on the mix of reimbursement the hospital receives. Each reimbursement system brings with it a set of financial opportunities and constraints that affects hospital profitability on every procedure performed and every piece of equipment it purchases:

Diagnosis-related groupings (DRGs), the reimbursement methodology used by the Health Care Financing Administration (HCFA; Baltimore, Maryland) for the Medicare program, pays hospitals on the basis of the patient's assigned diagnosis. Each diagnosis is assigned to a group (DRG) that is associated with a specific payment amount. The payment is a flat fee amount, irrespective of the services provided or length of time the patient stays in the hospital. (There are exceptions to this for patients who are very ill and remain in the hospital over a specified length of time.) The opportunity to generate profits under this reimbursement is dependent on a hospital's ability to reduce inpatient length of stay without spending more on intensive inpatient procedures than can be saved through reductions in lengths of stay. Technology that contributes to inpatient cost efficiencies or reduces length of stay without adding disproportionately to operating costs is considered attractive under this reimbursement approach.

Per diems are a common form of reimbursement for commercial (non-Medicare) health plans. Hospitals are paid a flat fee per day, depending on the type of unit the patient is in. Intensive care and coronary care units are reimbursed at higher amounts than are medical/surgical units and so on. Under this form of reimbursement, hospitals want to minimize the cost of services provided to patients on any given day, but are less concerned about minimizing length of stay.

Case rates are an increasingly popular form of reimbursement, especially for cardiovascular services like coronary artery bypass grafting. Case rates operate similarly to DRGs. Under a case rate, the hospital is paid a negotiated flat rate for a procedure. The rate typically includes inpatient professional and hospital facility expenses and follow-up care. Hospitals want to minimize length of hospital stay under case rates, but are interested in increasing admissions.

Capitation reimbursement is growing among hospitals. Under capitation, a hospital accepts a flat monthly fee for every member covered in an enrolled population. The hospital is paid whether or not patients need hospital services. In return, hospitals must provide any hospital services patients require as long as they remain eligible under the health insurance plan. Under this form of reimbursement, hospitals want to keep patients out of the hospital whenever possible.

A discounted-billed charge is the most traditional form of reimbursement for hospitals, but is also disappearing in some parts of the United States. Under this form of reimbursement, a hospital negotiates a discount of its retail charges for each service provided. Under discounted billed charges, hospitals want to maximize admissions, services and length of stay, while still meeting objective measurements of efficiency compared to their competitors. Hospitals with plenty of this form of reimbursement tend to be most friendly to new technologies.

As a result of this hodgepodge of reimbursement, the type and combination of reimbursements a hospital receives has a significant impact on how new technology is perceived. "Payer or contract mix" is the terminology used by the hospital industry to describe the mix of commercial, Medicare and Medicaid business a hospital is supporting. "Reimbursement mix" is the terminology used to describe the combination of reimbursement (DRG, per diem, case rate, etc.) the hospital receives. Technology companies are in the difficult position of offering products to hospitals that have different financial opportunities to generate profit from them. So, in addition to convincing a health plan or government payer to cover the technology, technology companies must convince hospitals to pay for it.

Health economics data can provide hospitals with the information they need to decide whether a technology represents a sound investment. Does this consideration outweigh clinical considerations? Generally not, but hospitals are much more likely to purchase and use a technology they believe to be a good financial investment.

Physicians and their patients have perspectives of value that don't necessarily correspond with other stakeholders. Generally speaking, physicians want to provide the highest quality and most cutting-edge technologies, when they can get paid for it. And patients want anything that will improve their health status, especially if their health insurer will pay for it. A technology with demonstrated clinical utility and economic value is most likely to overcome the hurdles – namely coverage and reimbursement policies – that inhibit demand by these two groups of stakeholders. If favorable coverage and reimbursement policies are attained, then physicians are likely to get paid for providing the service using the technology and will be more likely to use it and promote it. And patients will be able to get access to the procedure without having to pay for it out of pocket. Consequently, they are more likely to seek access to the technology.

Given what we know about purchasers' clear incentives to evaluate the economic consequences of new technology, it seems reasonable that these groups would be actively developing measurement tools and approaches to assess technology value. In fact, the opposite is true. Purchasers and users of technology have turned to technology manufacturers for proof of technology value. Although paradoxical, the reasons purchasers and users do not directly address issues of technology value include the following: lack of appropriate staffing and resources, an unwillingness to invest in knowledge that is difficult to hold as proprietary and a fear of being perceived as making coverage, reimbursement and use decisions on the basis of economic concerns as opposed to clinical considerations.

As cost pressures continue to mount (driven in part by technology use), the pressure on manufacturers to present compelling economic evidence of value mounts as well. As a result, a well-designed product launch strategy will increasingly include value analyses as part of its outreach to customers.

(Coming in the July issue of BBI: a comparison of value analyses and traditional cost-effectiveness research.)