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Public subsidization of technology assessments in general, and Comparative Effectiveness Research (CER) in particular, has received considerable attention as a tool to simultaneously improve patient health and lower the cost of health care. However, little conceptual and empirical understanding exists concerning the quantitative impact of public technology assessments such as CER. This paper analyses the impact of CER on health and medical care spending interpreting CER to shift the demand for some treatments at the expense of others.

We trace out the spending and health implications of such demand shifts in private--as well as subsidized health care markets. In contrast to current wisdom, our analysis implies that CER may well increase spending and adversely affect patient health, particularly when treatment effects are heterogeneous across patients. We simulate these economic effects for antipsychotics that are among the largest drug classes of the US Medicaid program and for which CER has been conducted by means of the CATIE trial in 1999. Using conservative estimates, we find that if Medicaid would have eliminated coverage for the least cost-effective treatments of the CATIE trial then under homogeneous effects, it would save about 90% of the $1.3B Medicaid class sales annually in non-elderly adult patient with schizophrenia. However, taking into account the observed heterogeneity in treatment effects, it would incur a loss of health valued annually at about 98% of class spending and thus a net loss of about 8% of annual class spending.

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