Value Assessments, Thresholds and
Budgets in the US Market-based
Health and Insurance System
Mark V. Pauly
University of Pennsylvania
Collective Choice versus Insurance Markets
and Value: Motivation
• Many of the concepts and techniques of
determining the value of an intervention and its
level of reimbursement were developed for tax
financed social insurance with no out of pocket
payments.
• But in the US more than half of the population
obtains private insurance bought in open markets
by employers (mostly) or individuals (less than
10%) with positive (and growing) levels of out of
pocket payment.
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Collective Choice versus
Individual Markets: the Question
• When can the approaches for determining
value and deciding on adoption of
technology be used in a voluntary insurance
market setting and when should they differ?
• What approaches are suggested in the US
for non-market insurances Medicaid and
Medicare?
The welfare optimizing assessment of value in
the simple collective choice model
• It is efficient to adopt a new intervention if its incremental
cost per Quality Adjusted Life Years (QALYs) added is
below some socially determined threshold that represents
the value (to everyone in society) of a QALY.
• Reimbursement or price paid should never exceed this
ratio
• All interventions with values below the ratio should be
adopted and made available at zero user cost
• No intervention with a value above the ratio should be
covered wholly or in part
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This process can function well for one shape
of a demand or marginal benefit curve but not
for all.
• Define the marginal benefit (in $) as (QALYs added) x
(Threshold dollar value per QALY).
• The simple welfare optimizing rule is appropriate if the
marginal benefit (in $) for every member of the affected
population is the same or is assumed to be the same.
• Ignoring externalities, this would correspond to a horizontal
demand curve for the intervention at the threshold value for all
members of the population to be treated (or for identifiable
subpopulations).
The Market Scenario in the US
• But suppose as is often true that marginal
benefit varies across members of the
population in unobservable ways.
• Then the demand or marginal benefit curve
will slope down and to the right.
• This will mean there is no common measure of
value for all members of the population, but
rather value will vary across members of the
population.
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Alternative Demand Scenarios
The Market Scenario: When Is It
Different?
• Market insurers (with managed care) will
make choices about buying interventions
based on the value of their members which
can vary across plans. And consumers may
sort across plans based on those choices
(and the tax subsidy).
• Implication: There will be no single value
measure or value based price that is best for
all private insurers.
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Public Insurance Scenarios in the US
• Medicaid adheres very closely to the simple collective
choice welfare optimization model where the threshold
will depend on taxpayer/voter values (which may not be
nationally uniform).
• Values in Medicare should depend on preferences of
beneficiaries and (usually younger) taxpayers. Some
variation in value now across MA plans and could be much
more in a premium support system
• What to assume about the Medicare social contract: was
my generation promised that if we paid taxes while
working our values would guide choices after retirement?
Or do we depend on the affection of our grandchildren?
Affordability and budget constraints as modifiers
of the decision models: One Degree of Freedom!.
• “Affordability” has no technical meaning in economics but
sometimes there are budget constraints or costs of adjusting the
budget for private and public insurers in the short run.
• The threshold model assumes that the budget will pay for all
interventions that exceed the threshold in value—no budget
constraint. Even if uncertainty leads to varying total costs.
• So if paying for all interventions that exceed the assumed
threshold exceeds some binding budget constraint, that implies
that the effective threshold is lower. You respond to a new high
value costly technology by dropping some other services with
ratios now below the threshold (Diminishing marginal value).
• Thus a binding budget constraint fixes value, even though a
predetermined value should have determined the budget ex ante.
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How fixed are private insurer fixed
budgets (my opinion)
• Private insurer: Forecast expected
expenses next period to determine the
premium. If a costly new tech shows up,
you have an underwriting loss, and a
profit if it is a bad year for new drugs.
• If the new tech remains, you raise
premiums next year (and hope not to lose
business)
How fixed are public insurer
fixed budgets?
• Medicaid: State legislatures approve a
budget: you may have to delay or limit an
intervention while you plead for more
budget (if it’s worth it).
• Medicare: Current law specifies a future
budgetary path. Hospitals, physicians, and
MA plans may have to cut some “close
call” treatments to fit in good new tech.
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Affordability at the individual level and value
• For individuals potentially purchasing private insurance,
value of a treatment for a person should include both the
person’s own value and any positive value of other people
in the community on the person’s behalf.
• Hence the value of non-users should be part of total value
for subsidized premiums (in exchanges or in tax subsidized
group insurance), but users with high personal values
should perhaps get more.
• This value is a subjective judgment and cannot be
determined solely based on QALYs alone or only on a
uniform social value threshold.
The role of provider based value scoring
systems in a market context
• Determining value in a market is ultimately up to the consumer,
not the physician. Anything consumers value should be
considered in the market (and will add to insurer profit if it is).
• Providers are experts on clinical benefits but know little about
what consumers value and how much
• Markets will demand attention to other dimensions of value like
uncertainty/insurance value, psychological benefits.
• Markets tend to be intolerant of efforts to compel equity in
insurer choice when the underlying distribution of wealth is very
unequal. There will be clashes between what people are willing
to pay and what different people think is rightful.
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Conclusions
• Market based systems usually cannot use the conventional
simplistic welfare optimization rules to determine a
unique value measure or value based choice.
• Because they have to determine value from consumers, not
society or some social deliberative body
• Because there is heterogeneity in value across consumers
• Because their budgets are not fixed
Linked Task Force
Recommendations
• Rec. 5.1: Payers should consider decision
rules guided by what is good value for
money given their budget constraint… In
the US, different public and private
insurance programs could use different
thresholds…
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Linked task force
recommendations
• Rec. 5.2: …Over time, the availability of
new technologies may increase the amount
populations want to spend on health care.
My Predictions
• Value based payment (beyond looking for
large cost offsets or pure waste) has a long
way to go to get beyond a slogan.
• The level of value used by a plan will (or
should) become an informational and
competitive tool for insurers.
• And an important plan characteristic for
buyers.
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