The Changing Healthcare Environment

GUEST EDITORIAL

PharmacoEconomics 1 (l): 5-7, 1992 1170-7690/92/0001-0005/$01.50/0 © Adis International Limited. All rights reserved.

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The Changing Healthcare Environment Socioeconomic Evaluation of Drug Therapy

David B. Evans Special Programme for Research and Training in Tropical Diseases, World Health Organization, Geneva, Switzerland

Governments dominate the market for health­care. Even in the US they provide 40% of total health expenditures, and in Europe the figure is be­tween 80 and 90% (Drummond et al. 1988). For many years limited government budgets have faced the dual pressures of rising demand for care and increasing costs, and the recent economic ortho­doxy preaching reductions in taxation and govern­ment expenditures has further restricted their abil­ity to fund health services. Rationing is inevitable in any system, and even perfectly competitive mar­kets ration by allocating goods and services only to people who can afford them (and who are will­ing to pay for them). However, the extent of ra­tioning in government-funded care is becoming in­creasingly obvious, expressed as restrictions on either the number of people eligible for publicly funded care or on the services that are provided. For example, over 40% of people below the Federal poverty line are ineligible for Medicaid in Oregon and over 35 million people in the US are unin­sured (Editorial 199 I b). European countries, which have traditionally valued equity in access to care more highly, are facing increases in waiting lists and limitations in the use of services. Accordingly, the past 10 years have seen numerous attempts to reduce or stem the rate of increase in health care costs (Editorial 1991c; Hutton 1987; Schrijvers 1991).

Although pharmaceutical products typically ac­count for less than 10% of health expenditure, they

still represent a significant cost item - over 1.2% of gross domestic product (GDP) in the US and between 0.7 and 0.9% in other developed countries (Editorial 1991a,c). The US Congress has also been concerned that drug prices may have risen faster than other health care costs (Di Masi et al. 1991). There may be a number of valid explanations, in­cluding increasing costs of research and develop­ment (Di Masi et al. 1991) and of government reg­ulation (Dranlove 1991), the shift to treatment for chronic and degenerative diseases, and rapid tech­nical change which reduces the period during which a drug can be a market leader (Editorial 1991a). However, this has not prevented governments de­veloping a number of schemes aimed at controlling their expenditures on pharmaceuticals.

Co-payments for subsidised drugs have been in­creased in a number of countries including Aus­tralia, although recent attempts to do the same in Spain and Italy were unsuccessful (Editorial 1991c). The British Pharmaceutical Price Regulation Scheme restricts the rate of return companies can earn on investment, leaving them free to set prices within this limit, and a similar review body was established recently in France (Editorial 1991 c). At the other end of the scale, the British system pro­vides feedback to general practitioners on the cost implications of their prescribing, which the doctor can compare with a notional or indicative (i.e non­mandatory) drug budget which had been set cen­trally on the basis of prescribing behaviour con sid-

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ered appropriate for the particular practice. Japan and Italy have considered imposing price controls on drugs (Editorial 1991a).

However, the most common form of cost con­trol is the use of drug lists or formularies, for which governments will, or will not, pay. Canadian prov­incial governments, the Australian federal govern­ment and the governments of France and Italy sub­sidise only listed drugs, while the governments of the Netherlands and Belgium have lists of drugs they will not subsidise (Editorial 1991a). In the US, the states provide drugs to Medicaid patients from formularies, and costs are shared by state and fed­eral governments. In addition, the federal govern­ment has introduced legislation in which the sup­pliers of outpatient drugs to the state formularies will provide rebates to the states. The rebate will be the difference between the price paid by the for­mulary and the average wholesale price for that drug, or the difference between the price paid by the formulary and the 'best' price available else­where in the US, whichever is greater. Suppliers are required to report both the average and best prices each year, and penalties are provided for misreporting.

Most of these developments seek to control costs rather than to improve the efficiency of resource allocation. Indeed some, such as the ceiling on drug company profits, could discourage efficiency by re­moving competitive pressures and the incentive to reduce costs. Recognising this, some governments have moved to incorporate economic efficiency considerations into decision making. The Austra­lian government has notified companies that they will be required to include an economic analysis in applications for inclusion on the list of subsi­dised drugs, and has provided guidelines for them to use (Evans et al. 1990; Henry 1992). The On­tario provincial government in Canada is devel­oping similar guidelines. The Oregon 'experiment' involves a priority list of pairs of conditions and treatmen'ts (including drug therapy), with the final ranking of each pair based on cost-effectiveness calculations. This experiment is one of the few at­tempts to include social as well as economic factors in decisions about medical technologies, by assess-

PharmacoEconomics 1 (1) 1992

ing the implications of moving toward more equity in access to care. If the Congressional waivers nec­essary to begin the experiment are approved, any future budgetary problems will be met by cutting the least desirable condition-treatment pairs from the list approved for Medicaid funding, rather than cutting people from coverage (Eddy 1991).

Other governments are informally encouraging companies to provide cost-effectiveness informa­tion with their marketing applications (Drum­mond et al. 1988), and companies are independ­ently sponsoring studies and using them to support marketing applications and promotional activities (Editorial 1991d). In the UK, the pharmaceutical industry supports the Office of Health Economics and a Pharmaceutical Industry Health Economists Group (Drummond et al. 1988).

The increased interest in economic analyses presents certain dangers. These include the possi­bility of bias, especially when industry funds re­search (Hillman et al. 1991); absence of a standar­dised methodology, making comparisons between studies difficult (Luce & Elixhauser 1990); and paucity of skills in government to assess such stud­ies (Editorial 1991d; Henry 1992). Perhaps the greatest danger is that efficiency studies will be used by governments simply to control costs. The tech­nical notes accompanying the Australian guide­lines on cost-effectiveness analysis indicate clearly that a product which will add to a government's drug bill may yet be efficient, in that it could lead to cost reductions elsewhere in the system (Evans et al. 1990; Henry 1992). Moreover, a guiding prin­ciple of economics is that people are willing to pay for improved benefits, and a comparison of costs and benefits could equally be used to justify higher, not lower, prices for improved drugs.

Governments have, therefore, been concerned with measuring and controlling health care costs for many years, but recently efficiency considera­tions, in the form of socioeconomic evaluations of drug therapies, have received more attention. A number of challenges lie ahead, but perhaps the most important is to ensure that questions of ef­ficiency are not lost in the search for cost contain­ment.

Changing Healthcare Environment

References

Di Masi JA, Hansen RW, Grabowski HG, Lasagna L. Cost of innovation in the pharmaceutical industry. Journal of Health Economics 10: 107-142, 1991

Dranlove D. The costs of compliance with the 1962 FDA amend­ments. Journal of Health Economics 10: 235-238, 1991

Drummond MF. Economic evaluation of pharmaceuticals: sci­ence or marketing? PharmacoEconomics I: 8-13, 1992

Drummond MF, Teeling-Smith G, Wells N. Economic evalua­tion in the development of medicines, Office of Health Eco­nomics, London, 1988

Editorial. Farewell to promotinggoodbuys? Lancet 338: 416-417, 1991d

Editorial. Priceless medicines. Economist, 26 October: 14-15, 1991a Editorial. Healthy results. Economist, 26 October: 85, 1991b Editorial. Dangerous medicine. Economist, 9 November: 48, 1991c Eddy OM. Oregon's plan: should it be approved? Journal of the

American Association 266: 2268-2271, 1991 Evans 0, Freund 0, Dittus R, Robertson J, Henry D. The use

of economic analysis as a basis for inclusion of pharmaceutical products on the Pharmaceutical Benefits Scheme, Common­wealth Department of Community Services and Health, Can­berra, 1990

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Henry D. Economic analysis as an aid to subsidisation decisions: the development of Australian guidelines for pharmaceuticals. PharmacoEconomics I (I): 55-68, 1992

Hillman AL, Eisenberg JM, Pauly MV, Bloom BS, Glick H, et al. Avoiding bias in the conduct and reporting of cost-etfec­tiveness research sponsored by pharmaceutical companies. New England Journal of Medicine 324: 1362-1365, 1991

Hutton J. Economic appraisal of health technology: a review of the current state of the art in EC countries. In Drummond MF (Ed.) Economic appraisal of health technology in the European Community, Oxford University Press, Oxford, New York, Tokyo, 1987

Luce BR, Elixhauser A. Standards for socio-economic evaluation of health care products and services, Springer-Verlag, Berlin, 1990

Schrijvers AJP. The Netherlands introduces some competition into the health services. Journal of the American Medical Association 226: 2215-2217, 1991

Correspondence and reprints: David B. Evans, Special Pro­gramme for Research and Training in Tropical Diseases, World Health Organization, CH-1211 Geneva-27, Switzerland.

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