medical researchers examining a test tube of liquid


(The Health Care Blog)

April 29, 2014

10 Ways Innovation Could Help Cure the U.S. Health Spending Problem

by Steven Garber

The United States spends more than $2 trillion per year on health care, surpassing all other countries in per capita terms and as a percentage of gross domestic product.

New, expensive medical technologies are a leading driver of ballooning U.S. health care spending. While many new drugs and devices are worthwhile because they substantially extend lives and reduce suffering, many others provide little or no health benefit.

Many studies grapple with how to control spending by considering changing how existing technologies are used. But what if the problem could be attacked at its root by changing which drugs and devices are invented in the first place?

Recently, my colleagues and I explored how medical product innovation could be redirected to reduce spending with little, if any, sacrifice to health and to ensure that any spending increases are justified by sufficient health benefits. The basic approach is to use “carrots and sticks” to alter financial incentives for drug and device companies, their investors, health care payers and providers, and patients.

The ten policy options below could change which technologies are invented and how they're used. In turn, this could cut spending or increase the value (health benefits per dollar spent) derived from new products that do increase spending.

We urge policymakers—both public and private—to consider these options soon and to implement those that are most promising. Policymakers should also consider how to reduce spending and get more value from health services that don't involve drugs or devices.

The longer the delay, the more money will be badly spent.

Encourage Creativity in Funding Basic Science

The National Institutes of Health (NIH), the leading funder of basic biomedical research, typically favors low-risk projects. Funded researchers who fail to achieve their goals are much less likely to secure additional NIH funding. Encouraging more creativity and risk-taking could increase major breakthroughs.

Reward Inventors with Prizes

Public entities, private health care systems, the philanthropic sector, or public-private partnerships could award prizes to the first to invent drugs or devices that satisfy certain performance criteria, including a potential to decrease spending. Winners could receive a share of future savings that their product brings the Medicare program, which spends more than $500 billion annually.

Buy Out Patents

Public agencies, philanthropists, or public-private partnerships could purchase patents on already-invented products that could help reduce spending, ensuring they're commercialized and offered at low prices. A patent purchaser could put the patent in the public domain to generate price competition, or license the technology selectively, specifying the highest price licensees could charge. The best approach might be to offer patent holders a share of the Medicare savings their inventions produce.

Establish a Public-Interest Investment Fund

Market rewards for inventing products that reduce spending are often too low because inventors and their investors cannot capture shares of spending decreases. A public-interest investment fund could provide both initial and ongoing capital for creating such products. The opportunity to invest in funded projects, with a share of Medicare savings to make potential returns attractive, could tap the expertise of private investors who are most capable of assessing the promise of technical concepts and inventor teams.

Expedite FDA Reviews and Approvals

Expediting Food and Drug Administration (FDA) review and approval processes—without watering them down—for medical products that could substantially reduce spending could lower inventors' regulatory costs. This would likely require new legislation to expand the FDA's mission beyond ensuring safety and effectiveness.

Reform Medicare Payment Policies

If the Centers for Medicare & Medicaid Services (CMS) were allowed to consider cost in determining payment rates, it could set Medicare rates to save money in the short run and improve inventors' incentives over the long run. Medicare could more rapidly adopt approaches that reduce financial rewards to providers when spending is higher than needed to deliver quality care (e.g., bundled and capitated payment arrangements). This would put more providers at financial risk for low-value care, increasing their demand for less costly approaches.

Reform Medicare Coverage Policies

If CMS were allowed to consider cost, they could also change their coverage determination policies in ways that would increase health benefits per dollar of Medicare spending. For example, CMS could stop paying for tests, procedures, and technologies deemed inappropriate or typically ineffective. And if other legislative changes were made, they could stop covering off-label use of some very expensive cancer and specialty drugs for patients in circumstances under which there is little or no evidence of effectiveness.

Coordinate FDA and CMS Processes

Coordinating CMS coverage and payment determination with FDA review and approval could reduce the time required to move a product to the U.S. market and for companies to obtain revenues from the Medicare market.

Increase Demand for Technologies That Lower Spending

Changing payer, provider, and patient incentives could increase demand for products likely to reduce spending. A promising approach is expanding use of value-based insurance designs (VBIDs), which require patients to pay more out of pocket the less likely a service is to benefit them. A major challenge in implementing VBIDs is determining which services are likely to benefit which patients.

Produce More and More Timely Technology Assessments

Health technology assessments (HTAs) provide systematic evidence about the safety, efficacy, effectiveness, and cost of drugs, devices, and procedures. Because health technologies and knowledge about them evolves quickly, HTAs are much more useful if they're up to date.

Steven Garber is a senior economist at the nonprofit, nonpartisan RAND Corporation and leader of the Redirecting Medical Product Innovation project.

This commentary originally appeared on The Health Care Blog on May 1, 2014. Commentary gives RAND researchers a platform to convey insights based on their professional expertise and often on their peer-reviewed research and analysis.