The past several decades have seen stunning advances in medical technology. But as governments pay for an increasing share of health care, they are relying on "cost-effectiveness analysis" to keep spiraling costs under control. For example, 67 percent of senior public health officials in the United States use some form of economic evaluation in their decision-making, and such criteria are making their way into Medicare, as well as national health systems in other developed countries. Although it is an admirable fiscal impulse, what does cost control mean for health innovation and the promise of better therapies in the future?

In Innovation and Technology Adoption in Health Care Markets (AEI Press, September 2008), Anupam B. Jena and Tomas J. Philipson argue that cost-effectiveness criteria may constrain future innovation. "Cost-effectiveness criteria implicitly are concerned with maximizing consumer surplus, which leads to too small a share of the total social surplus being appropriated by innovators making R&D investments," they write. They urge policymakers to consider the tradeoff between cutting costs today and cutting innovation tomorrow. Jena and Philipson use antiretroviral drugs for HIV/AIDS as a case study. Estimating the social benefit of these drugs at $1.4 trillion, they find that "producers appropriated only 5 percent of the social surplus arising from new drug therapies."

Innovation and Technology Adoption in Health Care Markets is a technical economic work, but general readers will benefit from Jena and Philipson's findings, as well as a lucid and engaging foreword by John E. Calfee.

For more information about this book, visit www.aei.org/book965/.