Endogenous Cost-Effectiveness Analysis in Health Care Technology Adoption

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.

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About the Author

 

Tomas J.
Philipson
  • Tomas J. Philipson is a visiting scholar at AEI and the Daniel Levin Chair in the Irving B. Harris Graduate School of Public Policy as well as an associate member of the department of economics at the University of Chicago. He was a senior health care adviser to the 2008 presidential campaign of John McCain and served in the Bush administration as the senior economic adviser to the commissioner of the Food and Drug Administration from 2003 to 2004 and subsequently as the senior economic adviser to the administrator of the Centers for Medicare & Medicaid Services from 2004 to 2005. Mr. Philipson is an editor of Forum for Health Economics & Policy and is on the editorial board of Health Economics and The European Journal of Health Economics. He has twice been the recipient of the highest honor of his field, the Kenneth Arrow Award from the International Health Economics Association, in 2000 and 2006.  Mr. Philipson is the cofounder of Precision Health Economics, is an adviser to the Gerson Lehrman Group, and is a consultant for Compass-Lexecon and Analysis Group.
  • Email: t-philipson@uchicago.edu

 

Anupam B.
Jena
  • Anupam B. Jena, M.D., Ph.D. is an assistant professor of health care policy and medicine at Harvard Medical School and an assistant physician in the Department of Medicine at Massachusetts General Hospital, where he practices general inpatient medicine and teaches medical residents.


    Dr. Jena's research involves several areas of health economics and policy including medical malpractice, the economics of medical innovation and cost-effectiveness, geographic variation in medical care, and insurance benefit design. Using unique data from a nationwide professional liability insurer, Dr. Jena's work on malpractice has provided new estimates of medical malpractice risk according to physician specialty, the costs of defending malpractice claims, and outcomes of malpractice claims undergoing litigation.

  • Email: jena@hcp.med.harvard.edu

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