A Prescription for Controlling Health Care Costs: Federal Research Grant Reform

12/11/2012 03:43 pm ET | Updated Feb 10, 2013

In his farewell address to the American people, President Eisenhower showed remarkable prescience with his warning of a growing military-industrial complex, consuming massive public resources along the way. Since his address, an even larger medical-industrial complex has evolved. Between 1960 and 2012 health spending increased from 5 to 18 percent of GDP with 46 percent funded by the public sector.

This shift toward health spending in the economy is widely recognized, usually with deep concern. While there are many reasons for increased health care costs, from greater population to higher per capita income, what is not well understood is the role federal research dollars play in underpinning growth of health care costs with technology resulting from relatively unconstrained third party payment -- insurance companies, Medicare and Medicaid.

One critical solution to control costs that has not received adequate attention is federal funding for comparative and cost-effectiveness research, to determine how well new medicines and technologies work. This is particularly relevant, given the very real risk of cuts to research grants in the current "fiscal cliff" scenario. Health research also should be directed toward productivity improvement to reduce costs rather than toward cost increasing innovation. Otherwise, health care costs will continue to spiral out of control as America's medical-industrial complex seeks ever more revenue.

One example of unnecessarily high costs created in part by inefficiency is birth control. The "pill" is not the most effective reversible birth control available in the long-run as the IUD has a much higher effectiveness rate at a fraction of the cost [1]. But the pill is marketed to the public because it is highly profitable. Make no mistake: Federal research grants lead to medical innovation and are a good use of public funds. For fiscal year 2013 the Office of Management and Budget proposes $31 billion for the National Institutes of Health, as well as lesser amounts for research at other agencies. While representing a fraction of the nation's health expenditures, these grants have an outsized impact on costs by cultivating expensive new interventions and treatments.

Generous research spending also impacts physician supply, which further exacerbates medical costs. Allopathic medical schools have grown accustomed to research allocations as part of their income stream, with 30 percent of their revenues generated from grants and contracts, much of it for federally sponsored research. Tuition, at only 4 percent of all medical school revenue, does not incentivize administrators to increase enrollment. This helps explain why the number of graduates at allopathic medical schools was only 8 percent higher in 2011 than in 1985 in spite of real national health expenditures more than doubling.

There is bipartisan agreement that health care costs are on an unsustainable trajectory. The Simpson-Bowles Commission recommended targeting federal health care expenditure increases to GDP growth plus one percent, a sustainable rate, but Democrats and Republicans offer different prescriptions behind the scenes with reluctance to publically raise the issue of research constraints. After all, what politician would oppose this sacrosanct public infrastructure expenditure?

The American Recovery and Reinvestment Act (stimulus bill of 2009) included over $14 billion in supplemental research funds, most of which was provided to the health sector. Although more than $1 billion was allocated to comparative effectiveness research, stakeholders vigorously resisted any initiative to address costs and cost-effectiveness. Both health care providers and the public have a sense of entitlement that will not easily yield to such changes. But it's clear that efficiency criteria are necessary.

Funding for medical research should be shifted toward prospective technologies with the greatest impact on health and social welfare per dollar as well as toward more efficient production of health services as other developed nations have done. Health research funding in the UK and Germany, for example, has become more pluralistic, serving broader constituencies using comparative and cost-effectiveness research. Ultimately, efficiency criteria are important tools to "bend the curve" and should be pursued in a more deliberate and systematic manner.

Health care costs generally grow faster than GDP driven by technology, though there is no logical reason this must happen, as technical change in other parts of the economy commonly reduces costs and prices. Fueling this problem is third-party payment driving quality competition, not price competition and leading to too many heroic decisions by providers, patients, and their families.

If our own pockets do not restrain us, something else must. Cost increases in health care have appropriated productivity gains and displaced wage increases contributing to middle class income stagnation, and undermining the very stability of our society. Part of the solution is to reframe the national health research agenda. Failure to constrain health care spending to reasonably efficient levels has adverse consequences that can no longer be ignored. To echo President Eisenhower's cautionary voice from an earlier time, such excess is "gravely to be regarded."

[1] Contraception. 2009 Jan;79(1):5-14. Epub 2008 Sep 25
Cost effectiveness of contraceptives in the United States.

Trussell J, Lalla AM, Doan QV, Reyes E, Pinto L, Gricar J.
Office of Population Research, Princeton University, Princeton, NJ 08540, USA.

Hum Reprod. 2008 Jun;23(6):1338-45. Epub 2008 Mar 26

National Collaborating Centre for Women's and Children's Health (NCC-WCH), Royal College of
Obstetricians and Gynaecologists, London, UK.