Clinicians: Beware the Claim of Cost-Effectiveness

Brad Spellberg, MD


February 28, 2017

Making the Decision Relevant to Your Setting

Trying to save money. How should clinicians and hospital formulary or device decision-makers think about adding new medications and technologies to clinical practice? Consider our scenario in which clinicians want to prescribe oritavancin to a patient with cellulitis to avoid an admission to the hospital, on the grounds that it will "save the patient and the hospital money."

If the patient has Medicare and is admitted to the hospital, the patient bears no cost for the drug, because the hospital bears all inpatient costs. In contrast, if the patient is given oritavancin in the ED and discharged home, the patient will have to pay a deductible before Medicare Part B coverage kicks in. The hospital will be paid much more for an admission than for an ED visit. With admission, the hospital will make more money by using a cheaper alternative to the new, expensive antibiotic. Thus, the patient and the hospital might not agree that costs have been saved by prescribing the pricey new antibiotic and discharging the patient from the ED.

So, what does it mean to consider costs from the perspective of society? Out-of-pocket patient costs (eg, the patient's deductible and copay) and provider or hospital costs (eg, from salary, supplies, physical plant, and other overhead) are not societal costs. Rather, societal costs include insurance premiums that are shared among patients and employers, taxes that fund Medicare and Medicaid, lost economic productivity due to illness or death, and social welfare costs to care for families of employees who cannot work. In the current era, these societal costs are often intentionally dissociated from the actual costs of delivering healthcare.

For an inpatient covered by Medicare, the hospital, and not society, bears the actual costs of care delivery. Medicare pays for inpatient care through a flat-rate, bundled payment based on the patient's diagnosis-related group (DRG), irrespective of how much money is spent by providers and the hospital in the actual care of the patient. Medicare is firewalled away from the true out-of-pocket costs by the flat-rate, DRG-based payment.

[N]ewer payer models are designed to contain costs by dissociating the societal costs...from the actual costs.

Similarly, for the increasing numbers of patients in managed care health plans, payments are made to the healthcare system on a per member, per month basis, and costs required to deliver care are borne by the hospital or provider group. Society is thereby sequestered from the cost of the patient's hospital stay.

As for inpatient care, outpatient fee-for-service models are increasingly being replaced by models based on value-based purchasing and managed care.[7,8] These newer payer models are designed to contain costs by dissociating the societal costs paid by health plans from the actual out-of-pocket costs of care borne by patients, providers, and hospitals.


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