The evolution of lighting vs. cholesterol treatments: a tale of innovation and value

In a famous essay, Nobel prize-winning economist William Nordhaus studied the evolution of lighting. From medieval times until the beginning of the 19th Century, the most advanced lighting device was the wax candle. The 19th Century witnessed an era of rapid innovation: first oil lamps, then coal gas-powered lamps, then kerosene lamps, and finally Edison’s electric filament bulbs. Innovation continued into the 20th Century with fluorescent bulbs (the 1930s) and compact fluorescent bulbs (the 1980s). Newer technologies such as light-emitting diodes (LEDs) continue the evolutionary process.

Over this period, residential lighting became much brighter and more reliable— and cheaper. Around 1800, lighting services we take for granted today imposed a high economic cost on even the wealthiest individuals. Thomas Jefferson’s household consumed approximately 200 pounds of candles in a year, and his total lighting expenditures were roughly $250/ year or 7 percent of his annual salary as secretary of state. It took 5.4 hours of work at the average farm-laborer rate to produce 1,000 lumen- hours of light in 1800, while in 1992, this same amount of light could be paid for by just 0.43 seconds of work at the average hourly nonfarm rate. Put differently, the average cost of residential lighting in 1992 was 0.03 percent of what it was in 1800.

Contrast the story of innovation in residential lighting to innovations in treating high cholesterol.

Among adults in rich countries, a large proportion of all deaths are due to blocked arteries. Over the past century, an impressive body of biochemical, biomedical, and epidemiological research established that lowering low-density lipoprotein cholesterol (LDL or “bad” cholesterol) through diet and medications reduces the incidence of coronary artery disease and coronary events and also prolongs life. In the late 1980s, a new class of drugs for lowering LDL in the blood, statins, was approved for human use. Subsequent clinical trials have established that statins decrease heart attacks and prolong life.

A new class of LDL cholesterol-lowering drugs, PCSK9 inhibitors, were recently discovered that exploit a different physiological mechanism than statins. Two new drugs in this class, evolocumab and alirocumab, reduced LDL cholesterol in the blood. It is worth noting that these trials were of relatively short duration. Because coronary artery disease develops slowly over many years, the trials relied on biomarkers— indicators of a therapeutic response— rather than actual clinical outcomes such as strokes and heart attacks to assess efficacy. As a result, the trials offered only indirect evidence that these new drugs reduce disease and prolong life.

The initially approved uses for PCSK9 inhibitors were quite narrow and were focused on patients with a genetic disorder that makes it impossible for their bodies to remove LDL from the blood or on other patients who need to achieve a very low level of LDL. Later, the approved use of evolocumab expanded to include adults with cardiovascular disease at risk of heart attack or stroke. Further expansion of aliocrumab’s approved uses is likely forthcoming.

The initial list prices for these drugs exceeded $14,000 per patient per year. This is a high price considering that patients must take cholesterol-lowering drugs regularly throughout their lives. Much less expensive alternatives are available, some costing only a few hundred dollars annually. The high initial prices of PCSK9 inhibitors matter for patients: only half of the prescriptions for PCSK9 inhibitors were approved in the year these drugs became available, and one-third of the approved prescriptions were not filled due to high copayments.

Residential lighting is the poster child for how innovation should work. Consumers buy innovations that lower the cost of illumination and cast better light. They can directly perceive the quality of light and bear the total cost of their purchasing decisions.

In contrast, patients can’t directly perceive the quality of the cholesterol treatments available to them. They must rely on physicians who, in turn, evaluate scientific evidence. Moreover, this evidence has limitations. For PCSK9 inhibitors, these limitations include reliance on indirect measurements (biomarkers) rather than the outcomes that patients care about most: mortality and quality of life. So unlike consumers of lighting products, consumers must rely on agents— physicians— and imperfect information to make their purchasing decisions.

In addition, patients do not bear the total cost of their decisions. Instead, third-party payers such as Medicare, Medicaid, and private insurers pay most of the costs. Neither patients nor their physicians have to consider the cost-benefit tradeoffs that consumers of lighting products do. PCSK9 inhibitors may be a valuable treatment for a limited set of patients. However, the expanded use of PCSK9 for a broader group of patients— including some that may benefit from statins— illustrates that a high-cost innovation can find a market in health care even in the presence of lower-cost substitutes. PCSK9 inhibitors may be a treatment with low economic value for some of the patients for whom it is prescribed, meaning the benefits are low compared to costs.

The evolution of lighting illustrates the enormous economic value that innovations can produce, and the contrast with PCSK9 hints at a fundamental aspect of the U.S. health care system. The health sector is rife with innovation that fails to generate much economic value. Rather than delivering higher quality care at lower cost, health care innovation too often produces new treatments of uncertain value and fails to drive down costs.

Innovation in the health sector suffers from two interrelated problems: a value-creation problem and a related but distinct cost-reduction problem. Health care has a value-creation problem because new drugs, devices, and other interventions with low economic value can find a ready market, while inventions with high economic value may not. The prevalence of low-value treatment is such that nearly 80 clinical societies have combined with 70 consumer organizations to form Choosing Wisely, a national campaign to educate doctors and patients about low-value interventions. Choosing Wisely has identified more than 500 tests and treatments that may be of little or no value to patients. Indeed, recent estimates suggest that low-value or unnecessary treatments account for $75– 100 billion in waste each year.

The second innovation problem, the cost-reduction problem, results from a failure to adopt new drugs, treatments, devices, and processes that reduce the economic resources used to deliver a unit of health services. Finding new ways to deliver care more efficiently with less burdensome administration ought to be profitable, but for the reasons we detail later in this chapter, it is often hard for innovators to capture the value created by these innovations. As a result, innovators don’t focus much on cost reduction, and when cost-reducing innovations do emerge, they struggle to move from pilot projects to widespread adoption.

Taken together, the value-creation and cost-reduction problems mean that health sector innovation is not delivering the benefits to our society that it could. This book explores the reasons for this underperformance. Our analysis focuses on three issues:

Incentives: Financial incentives for health care innovators align poorly with creating economic value. In addition, shared savings contracts— which payers can use to provide financial incentives for cost reduction— face severe challenges in the health sector. These incentive problems weaken the demand for value-enhancing and cost-reducing innovations.
Norms: Professional and social norms often provide insufficient non-financial motivation for value- creating and cost- reducing innovation and, at times, actively inhibit the adoption of such innovations.
Competition: The nature of competition in health care markets allows dominant incumbent firms to overlook potentially value-enhancing and cost-reducing innovations and inhibits disruption by more efficient new entrants.

We are not the first to observe that innovation responds to financial incentives. Others have also discussed the roles that professional norms and competition play in the various dysfunctions of the U.S. health care system. However, prior work has not analyzed how these three factors lead to the value-creation and cost-reduction problems that plague innovation in health care.

James B. Rebitzer and Robert S. Rebitzer are authors of Why Not Better and Cheaper: Healthcare and Innovation.