Obscure Model Puts a Price on Good Health—and Drives Down Drug Costs

Concept called QALY places dollar value on the health medicines can restore; ‘starting to influence decision-making’

By Denise Roland of The WSJ. Excerpts:

"The makers of the cholesterol-lowering drug Praluent, which first went on sale for $14,600, offered to sell it for as little as $4,500, after rebates. A new migraine drug called Aimovig, expected to cost up to $10,000 a year, went on sale for $6,900. And Zolgensma, a lifesaving gene therapy for children that its maker said might cost up to $5 million, was priced at $2.1 million.

Behind all the price restraint was a complex economic model invented decades ago to determine how to price health care fairly. These days, a little-known Boston nonprofit group is using it to shame drug manufacturers to lower their prices.

The Institute for Clinical and Economic Review, an outgrowth of Harvard Medical School with no political affiliation or official policy-making role, has latched onto the concept, called the QALY, for “quality-adjusted life year.” It puts a dollar figure on a year of healthy life, calculates how much health a drug restores to a sick patient, then prices drugs accordingly."

"The model, pioneered by U.S. and Canadian economists in the 1960s, has been used for years in slightly different form in many countries, including Canada and the U.K. In the U.S., drugmakers long have opposed such pricing systems, arguing they could lead Medicare to refuse to pay for expensive drugs and cut patients off from new treatments."

"Unlike much of the rest of the world, the U.S. generally doesn’t exclude medicine on the grounds of cost from its publicly funded health-care programs, Medicaid and Medicare. Because of that, drugmakers can typically charge much more than elsewhere in the world.

That is where QALY (pronounced QUAL-ee) comes into the picture. It works like this: One year spent in perfect health equals one QALY. A year with some kind of health problem that affects quality of life would be worth less than one QALY. How much less depends on the severity of the problem."

"For someone suffering from untreated rheumatoid arthritis, though, those 24 years could be marked by extreme pain and loss of mobility and translate to just 10 QALYs. If a certain drug reduces the pain and improves mobility, it might add back another five QALYs, for a total of 15. ICER works out the QALY benefit by reviewing the available data on the drug and translating the outcomes into QALYs.

ICER has affixed a maximum value, $150,000, for each QALY a drug can add. That is based on various health-economics studies into how much Americans are willing to pay for health care and how health-care expenditure compares to per-capita income around the world.

Because the arthritis drug adds five QALYs, the maximum cost should come out to five times $150,000, or $750,000. That cost is then spread over the 24 years the patient is expected to use it. That comes out to $31,250 per calendar year."

"That gives such government buyers leverage over drugmakers in price negotiations and has proved effective at significantly lowering drug prices. Branded prescription drugs in England can cost less than half of what they do in the U.S.

The approach also can cut off patients from new drugs if they are priced above the maximum those governments have set.

England has just emerged from a yearslong standoff with Vertex Pharmaceuticals Inc. over the cystic fibrosis drug Orkambi. The National Health Service, the U.K.’s free-for-everyone, government-funded health-care system, in 2016 used a QALY-based assessment to determine that the drug’s £104,000 ($132,000) a year price tag was too high.

It refused to pay for it. Negotiations on a compromise took nearly four years. Last month, the two sides announced a deal, without disclosing the final price.

Concerns like those are at the heart of the U.S. government’s unease with QALY-based methodology. The Obama administration banned its use in the Medicare program in the 2010 Affordable Care Act.
“This is a cultural issue,” says Steve Miller, chief clinical officer at Cigna Corp., an insurer. “This is America not wanting to put a value on the price of a life.”"

"In the U.S., insurers don’t have the option that makes cost-per-QALY analyses so effective in curbing drug prices in other countries: the ability to walk away. They are prohibited from refusing to pay for treatments solely on the grounds of cost.

They can, however, nudge customers toward better-value drugs by throwing up barriers, such as higher copays, for pricier ones. They also can use those levers to extract bigger discounts from drugmakers. Some are using ICER’s cost-per-QALY reports to help with that."

"Many drugmakers, though, say QALYs are too blunt a tool for measuring the value of drugs and don’t take into account a new medicine’s novelty or its effect on the lives of caregivers, not just patients. Critics also say the values used in QALY calculations are arbitrary and unscientific.

“You win or you lose, based on some arbitrary, nontransparent, non-peer-reviewed report,” says Terry Wilcox, executive director and co-founder of Patients Rising, an industry-funded group that campaigns for improved access to drugs.

The ICER spokesman says that before each planned report, the organization engages with manufacturers, patient advocacy groups and doctors, seeks public comment and shares its economic models with drugmakers. He says the reports eventually appear in peer-reviewed journals."

The Sahm rule and recessions

See Are We in a Recession? Experts Agree: Ask Claudia Sahm: Sahm rule is reassuring to economists looking for new ideas on stimulus when interest rates are already low by Kate Davidson of The WSJ. Excerpts:

"a Federal Reserve economist has come up with a simple rule based on movements in unemployment to rapidly determine when a recession is under way. In conjunction with that rule, Claudia Sahm has also proposed policies to immediately soften the downturn without the political hurdles that usually slow stimulus efforts."

"In January 2008, Fed officials projected the flagging U.S. economy would avoid a recession. Fed staff believed the probability of recession within the next six months was 45%, according to a policy meeting transcript.

In fact, a recession had begun the previous month, a determination the official arbiter, the National Bureau of Economic Research—a nonpartisan, nonprofit academic network—would take almost a year to make. It took six to 21 months to call previous recessions.

“That’s too long for stabilization policy to wait,” Ms. Sahm said on Twitter earlier this year. “Stimulus early could help reduce the severity of a downturn.”

The unemployment rate has risen sharply in every recession, and thus economists have long looked for recession signals in its behavior. Ms. Sahm spent weekends playing with a massive spreadsheet, testing different rates of increase over varying periods of time, to arrive at the following formula: If the average of unemployment rate over three months rises a half-percentage point or more above its low over the previous year, the economy is in a recession.

Her formula would have accurately called every recession since 1970 within two to four months of when it started, with no false positives, which could trigger unnecessary and costly fiscal stimulus.

Ms. Sahm says her rule is based on historical relationships in the U.S. and thus can’t be applied to other countries or individual states, whose labor markets may behave differently."

"Ms. Sahm proposed that the Treasury begin sending payments to households equal to 0.7% of gross domestic product, or 1% of consumer spending, when the Sahm rule trigger is met, and extend those payments in subsequent years if the unemployment rate increases at least 2 percentage points above the level at the time of the first payment, then gradually scaling them back as the jobless rate declines.

Under her proposal, payments in the last recession would have started in April 2008 and continued into 2013, after the last of the big household stimulus programs expired. The boost to spending in 2008 and 2009 together would have been about 50% larger than under the stimulus actually enacted, she estimated.

Expanding automatic stabilizers this way could have drawbacks, warns Douglas Holtz-Eakin, president of the American Action Forum, a right-of-center think tank, and former Congressional Budget Office director. They would boost mandatory spending, which already weighs on the federal budget, and lawmakers would still face political pressure to respond with additional discretionary stimulus, he said."

Economist Scott Sumner seems to agree with the rule. See Sahm’s Rule and mini-recessions. Excerpts:

"Sahm suggested that she got the idea from Jason Furman, who heard about the idea from Doug Elmendorf.

Back in 2011, I had a similar insight in a blog post on mini-recessions (or more specifically the lack of mini-recessions):

I searched the postwar data, which starts at 1948 and covers 11 recessions.  During expansions I found only 12 occasions where the unemployment rate rose by more than 0.6%.  In 11 cases the terminal date was during a recession.  In other words, if you see the unemployment rate rise by more than 0.6%, you can be pretty sure we are entering an recession.  The exception was during 1959, when unemployment rose by 0.8% during the nationwide steel strike, and then fell right back down a few months later.  That’s not called a recession (and shouldn’t be in my view.)  Oddly, unemployment had risen by exactly 0.6% above the Bush expansion low point by December 2007 (when the current recession began) and by 0.7% by March 2008, and yet many economists didn’t predict a recession until mid-2008, or even later.

Now here’s one of the most striking facts about US business cycles.  When the unemployment rate does rise by more than 0.6%, it keeps going up and up and up.  With the exception of the 1959 steel strike, there are no mini-recessions in the US.  The smallest recession occurred in 1980, when the unemployment rate rose 2.2% above the Carter expansion lows.  That’s a huge gap, almost nothing between 0.6% and 2.2%.

Sahm’s formulation is superior to mine because the month-to-month unemployment rate is noisy. By taking a three-month average in measured unemployment she gets a better view of the underlying trend in actual unemployment."

"The FT argued that the Sahm indicator doesn’t really “predict” recessions, as it’s a coincident indicator. But even that is highly useful, as we often don’t know that we are in a recession until 6 to 9 months after it began. The most recent recession began in December 2007, but as late as August 2008 the Fed didn’t even know we were in a recession. By that time, the Sahm rule had been indicating a recession for months.

The Sahm Rule has a deep connection to the mini-recession mystery. The rule works in the US precisely because we never have any mini-recessions (for some unknown and deeply mysterious reason.) It doesn’t always work in foreign countries because they do have mini-recessions."

Fewer Jobless Americans Tap Unemployment Benefits

The U.S. work force’s reliance on unemployment insurance is dwindling amid tighter rules and a strong job market

By Sarah Chaney of The Wall Street Journal.

When I cover unemployment, I don't spend much time on how the unemployment insurance system works. This article has some good information on it. Excerpts:

"Last year, 28% of jobless people received benefits, down from 37% in 2000—a period of similarly low unemployment.

Among the main reasons, experts say: After the last recession ended, state legislatures passed policies reducing unemployment benefits and tightening eligibility requirements.

Ten states cut the duration of benefits, five adopted stricter work-search requirements and several trimmed the average weekly-benefit amount"

"A strong labor market also means many jobless people today quit their jobs voluntarily and so are ineligible for benefits in most cases.

The quitting rate was 2.3% for much of last year, well above 1.3% in the month after the recession ended in mid-2009"

"Some economists like Michael Farren, a research fellow at the right-leaning Mercatus Center at George Mason University, say the state unemployment-insurance cutbacks and policy changes have motivated jobless Americans to undertake faster searches for new work.

Absent the state changes, he said, “you end up with policies created in the crisis that may help smooth the passage through the crisis, but…actually help stall the recovery.”

Other economists say state unemployment systems aren’t providing unemployed people the support they need to find the best jobs possible while the labor market is humming.

“There are people who are having to make transitions in the economy at all times,” said Martha Gimbel, an economist at Schmidt Futures, a philanthropic initiative of longtime Google CEO Eric Schmidt. “If we aren’t helping them make the transition now in a strong economy, then they may be still left on the sidelines when a serious recession hits.”"

"States administer unemployment insurance programs and make determinations on eligibility for benefits, as well as the amount and duration of benefits, based on federal guidelines.

In the majority of states the benefits are funded by taxes on employers. A few states require employees to contribute.

Americans generally are eligible for jobless benefits if they are laid off while working in a position covered by unemployment insurance. Once they begin collecting benefits they must meet certain requirements, which vary by state, such as applying for a certain number of jobs a week.

Benefits typically expire in 26 weeks or less, depending on state laws.

In the wake of the 2008 crisis, several states turned to the federal government as a backstop for funding when they depleted their unemployment-trust funds.

As the economy improved, states that owed money to the federal government had to rebuild their trust funds. To do so, they could raise employer taxes or cut benefits—or some combination of the two. Many states opted to reduce benefits."

What if companies can't afford real models for their ads? Use AI generated fake pictures

See Dating apps need women. Advertisers need diversity. AI companies offer a solution: Fake people by Drew Harwell of Washington Post. Excerpts:

"Artificial intelligence start-ups are selling images of computer-generated faces that look like the real thing, offering companies a chance to create imaginary models and “increase diversity” in their ads without needing human beings.

One firm is offering to sell diverse photos for marketing brochures and has already signed up clients, including a dating app that intends to use the images in a chatbot."

"Icons8, an Argentina-based design firm that sells digital illustrations and stock photos, launched its online business Generated.photos last month, offering “worry-free, diverse models on-demand using AI.”

The site allows anyone to filter fake photos based on age (from “Infant” to “Elderly”), ethnicity (including “White,” “Latino,” “Asian” and “Black”) and emotion (“Joy,” “Neutral,” “Surprise”), as well as gender, eye color and hair length. The system, however, shows a number of odd gaps and biases: For instance, the only available skin color for infants is white.

The company says its faces could be useful for clients needing to jazz up promotional materials, fill out prototypes or illustrate concepts too touchy for a human model, such as “embarrassing situations” and “criminal proceedings.” Its online guide also promises clients they can “increase diversity” and “reduce bias” by including “many different ethnic backgrounds in your projects.”

Companies infamously have embarrassed themselves through haphazard diversity-boosting attempts, Photoshopping a black man into an all-white crowd, as the University of Wisconsin-Madison did on an undergraduate booklet, or superimposing women into group photos of men.

But while the AI start-ups boast a simple fix — offering companies the illusion of diversity, without working with a diverse set of people — their systems have a crucial flaw: They mimic only the likenesses they’ve already seen. Valerie Emanuel, a Los Angeles-based co-founder of the talent agency Role Models Management, said she worried that these kinds of fake photos could turn the medium into a monoculture, in which most faces look the same.

“We want to create more diversity and show unique faces in advertising going forward,” Emanuel said. “This is homogenizing one look.”

Icons8 created its faces first by taking tens of thousands of photos of about 70 models in studios around the world, said Ivan Braun, the company’s founder. Braun’s colleagues — who work remotely across the United States, Italy, Israel, Russia and Ukraine — then spent several months preparing a database, cleaning the images, labeling data and organizing the photos to the computer’s precise specifications.

With those images at the ready, engineers then used an AI system known as StyleGAN to output a flood of new photos, generating 1 million images in a single day. His team then selected the 100,000 most convincing images, which were made available for public use. More will be generated in the coming months.

The company, Braun said, signed three clients in its first week: an American university, a dating app and a human-resources planning firm. Braun declined to name the clients.

Clients can download up to 10,000 photos a month starting at $100. The models will not be paid residuals for any of the new AI-generated images built from their photo shoots, Braun said.

Another firm, the San Francisco-based start-up Rosebud AI, offers clients a chance at 25,000 photos of “AI-customized models of different ethnicities.” Company founder Lisha Li — who named it after an infinite-money cheat code she loved as a kid for the people-simulator game “The Sims” — said she first marketed the photos as a way for small businesses on online-shopping sites to invent stylish models without the need for pricey photography.

Her company’s source images came from online databases of free and uncopyrighted photos, and the system allows clients to easily superimpose different faces on a shifting set of bodies. She promotes the system as a powerful tool to augment photographers’ abilities, letting them easily tailor the models for a fashion shoot to the nationality or ethnicity of the viewer. “Face is a pain point that the technology can solve,” she said."

Related posts:

A fake job reference can be just a few clicks away.

Fake Economist Fools Portugal.

Slave Redemption in Sudan. (Fake slaves are sold to those who buy slaves and then give them their freedom)

Can A Product Work Just Because It's Expensive?. (fake medicine)

If It Pays To Have Friends, Can You Pay To Have Friends?. (you can hire fake boyfriends)

Study: Half of American Doctors Give Patients Placebos Without Telling Them.

Saudis grapple with fake street sweepers .

Rent a White Guy: Confessions of a fake businessman from Beijing (by Mitch Moxley in The Atlantic Monthly)

Can adding a phantom third story to their homes help families find a wife for their son?

Why do employers pay extra money to people who study a bunch of subjects in college that they don’t actually need you to know? Signaling

Mexicans buy fake cellphones to hand over in muggings
 
Conspicuous Consumption, Conspicuous Virtue, Thorstein Veblen (and Adam Smith, too!)

How does a company selling used luxury goods spot fakes? (signalling and conspicuous consumption).

Why do stores sometimes pay people to be fake shoppers?