Roosevelt Institute | Cornell University

Why The Government Should Be Embracing, Not Rejecting, Cost-Effectiveness Analysis

By Matthew HersmanPublished April 25, 2014

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Medicare is barred from using comparative effectiveness studies run by the Patient Center Outcomes Research Institute in determining how much to pay for specific treatments. Rather than rejecting these studies in fear of "rationing," the government should instead use this information to shift the extra financial burden from the government to the patients for expensive treatments that show little added benefit.
By Matthew Hersman, 04/25/2014


When looking at healthcare spending between countries, the United States sticks out like a sore thumb.  The United States government spends nearly 18% of its total GDP on healthcare and $8,508 per capita, the most in the world.  The next highest countries are Norway and Switzerland who spend $5,669 and $5,643 respectively. That is an incredible $3,000 difference for little to no increase in health benefits.  The reasons for the great discrepancy can be attributed to many factors, but one large reason is that many European countries use cost-effectiveness analysis to limit the number of costly treatments that do not increase one's health significantly.  In America however, the government allows the free market to decide the cost of treatments.  While this is great in terms of increased access to healthcare, it has had negative consequences that lead to increased healthcare costs with minimal health benefits.

The lack of cost-effectiveness strategies has been magnified due to the fact that, traditionally, doctors have been paid using a fee-for-service method, which means that they get paid according to every service that they provide.  The fee-for-service method gives doctors an incentive to provide extra treatments that may not necessarily be beneficial because they get paid for the quantity, not quality of care. While the American healthcare system has started to see a shift away from the traditional fee-for-service model, it will likely be many years before other payment methods are widely used.  As a result, the United States government needs to take the first step in minimizing healthcare waste and that is by allowing Medicare to use cost-effective techniques in regulating the prices of the services it covers.  Without any regulation, doctors will continue to ignore costs when prescribing treatments.

            As a result of the Affordable Care Act, Patient Center Outcomes Research Institute (PCORI) has established a comparative research agenda in order to finance competing studies on various treatment techniques.  These studies should shed light on how much more effective "leading treatments" are for diseases are compared to the next most effective option. In an ideal system, this would discourage insurance providers from encouraging costlier treatments that  seem to add little benefit. However, another provision of the Affordable Care Act bans Medicare from using any of this research in determining their prices and whether or not to cover certain treatments.  This means that, despite PCORI funding studies that show exactly how effective certain treatments are in comparison to one another, Medicare cannot use that data in determining patients' coverage or prices.

Because of the stigma of "socialized medicine" in the United States, instead of restricting the treatments available for patients, what the government should be doing with Medicare is shifting the cost burden for expensive treatments from the government to the patients.  This would mean using the data available from PCORI and pharmaceutical conducted studies to set a cap on the amount it covers for each service.  If the treatment exceeds the cap price, then the extra payments should fall on the patient.  By shifting the financial burden, the patients will be more wary on how effective the treatments they receive really are, and it will limit people from seeking the most expensive treatment simply because it is available.  If the cap is set correctly, doctors should still be able to provide high quality service with little sacrifice to health.  Then, if the patients still wish to receive the more expensive treatment, they would be able to, just at their own expense and not at the expense of the government.  By utilizing cost-effective analysis more readily, the United States could minimize costs without foregoing health.