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New medical technologies are often argued to be a leading force behind the growth in health care spending. In order to manage the costs imposed by such technologies and to prioritize health care dollars, both public and private payers have increasingly relied on combined measures of the benefits and costs of new technologies. These measures include cost-effectiveness, cost-utility, or cost-benefit analysis, hereafter referred to collectively as CE analysis.

It is self-evident that payers should attempt to maximize the returns in health they obtain from the limited resources available for health spending. Thus, CE analysis offers an important means to allocate scarce health care budgets, whether privately or publicly funded.

CE thresholds, which dictate that a given technology will be reimbursed only if the incremental costs per quality-adjusted life year (QALY) they provide are below a given threshold, is one way in which CE-based adoption is implemented in practice. The most prominent examples are the UK's National Institute for Clinical Excellence (NICE) and Australia's Pharmaceutical Benefits Advisory Committee. As a consequence of the extensive use of CE analysis by payers, an enormous health economics literature has developed and shown the conditions under which CE analysis, when applied under a fixed budget constraint, can lead to gains in static efficiency. Indeed, the amount of work done on the CE of medical technologies may perhaps be the largest field within health economics, particularly in European countries where such analysis guides a large share of public spending.

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Tomas J. Philipson is a visiting scholar at AEI.