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Cost-effectiveness analysis and innovation

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  • Jena, Anupam B.
  • Philipson, Tomas J.

Abstract

While cost-effectiveness (CE) analysis has provided a guide to allocating often scarce resources spent on medical technologies, less emphasis has been placed on the effect of such criteria on the behavior of innovators who make health care technologies available in the first place. A better understanding of the link between innovation and cost-effectiveness analysis is particularly important given the large role of technological change in the growth in health care spending and the growing interest of explicit use of CE thresholds in leading technology adoption in several Westernized countries. We analyze CE analysis in a standard market context, and stress that a technology's cost-effectiveness is closely related to the consumer surplus it generates. Improved CE therefore often clashes with interventions to stimulate producer surplus, such as patents. We derive the inconsistency between technology adoption based on CE analysis and economic efficiency. Indeed, static efficiency, dynamic efficiency, and improved patient health may all be induced by the cost-effectiveness of the technology being at its worst level. As producer appropriation of the social surplus of an innovation is central to the dynamic efficiency that should guide CE adoption criteria, we exemplify how appropriation can be inferred from existing CE estimates. For an illustrative sample of technologies considered, we find that the median technology has an appropriation of about 15%. To the extent that such incentives are deemed either too low or too high compared to dynamically efficient levels, CE thresholds may be appropriately raised or lowered to improve dynamic efficiency.

Suggested Citation

  • Jena, Anupam B. & Philipson, Tomas J., 2008. "Cost-effectiveness analysis and innovation," Journal of Health Economics, Elsevier, vol. 27(5), pages 1224-1236, September.
  • Handle: RePEc:eee:jhecon:v:27:y:2008:i:5:p:1224-1236
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    References listed on IDEAS

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    Cited by:

    1. Afschin Gandjour, 2014. "Comment on: “Are Current Cost-Effectiveness Thresholds for Low- and Middle-Income Countries Useful? Examples from the World of Vaccines”," PharmacoEconomics, Springer, vol. 32(12), pages 1245-1246, December.
    2. Patricia Danzon & Adrian Towse & Jorge Mestre‐Ferrandiz, 2015. "Value‐Based Differential Pricing: Efficient Prices for Drugs in a Global Context," Health Economics, John Wiley & Sons, Ltd., vol. 24(3), pages 294-301, March.
    3. Rodrigo Camejo & Clare McGrath & Marisa Miraldo & Frans Rutten, 2014. "Distribution of health-related social surplus in pharmaceuticals: an estimation of consumer and producer surplus in the management of high blood lipids and COPD," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 15(4), pages 439-445, May.
    4. John Vernon & Robert Goldberg & Joseph Golec, 2009. "Economic Evaluation and Cost-Effectiveness Thresholds," PharmacoEconomics, Springer, vol. 27(10), pages 797-806, October.
    5. Anupam B. Jena & Stéphane Mechoulan & Tomas J. Philipson, 2010. "Altruism and Innovation in Health Care," Journal of Law and Economics, University of Chicago Press, vol. 53(3), pages 497-518.
    6. Basu, Anirban & Jena, Anupam B. & Philipson, Tomas J., 2011. "The impact of comparative effectiveness research on health and health care spending," Journal of Health Economics, Elsevier, pages 695-706.
    7. Boone, J., 2013. "Does the Market Choose Optimal Health Insurance Coverage," Discussion Paper 2013-008, Tilburg University, Tilburg Law and Economic Center.
    8. Jena, Anupam B. & Philipson, Tomas J., 2013. "Endogenous cost-effectiveness analysis and health care technology adoption," Journal of Health Economics, Elsevier, pages 172-180.
    9. Brent, Neiman, 2011. "A state-dependent model of intermediate goods pricing," Journal of International Economics, Elsevier, vol. 85(1), pages 1-13, September.
    10. repec:bla:jpbect:v:19:y:2017:i:1:p:121-141 is not listed on IDEAS
    11. Gandjour, Afschin & Chernyak, Nadja, 2011. "A new prize system for drug innovation," Health Policy, Elsevier, vol. 102(2), pages 170-177.
    12. Rodrigo Refoios Camejo & Clare McGrath & Marisa Miraldo & Frans Rutten, 2013. "The Determinants of Cost-Effectiveness Potential: An Historical Perspective on Lipid-Lowering Therapies," PharmacoEconomics, Springer, vol. 31(5), pages 445-454, May.
    13. Lakdawalla, Darius & Malani, Anup & Reif, Julian, 2017. "The insurance value of medical innovation," Journal of Public Economics, Elsevier, pages 94-102.
    14. Levaggi, Rosella, 2014. "Pricing schemes for new drugs: A welfare analysis," Social Science & Medicine, Elsevier, pages 69-73.
    15. Rosella Levaggi & Michele Moretto & Paolo Pertile, 2017. "The Dynamics of Pharmaceutical Regulation and R&D Investments," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 19(1), pages 121-141, February.
    16. Kristopher J. Hult & Sonia Jaffe & Tomas J. Philipson, 2016. "How Does Technological Change Affect Quality-Adjusted Prices in Health Care? Systematic Evidence from Thousands of Innovations," NBER Working Papers 22986, National Bureau of Economic Research, Inc.
    17. Tomas Philipson & Gary S. Becker & Dana Goldman & Kevin Murphy, 2010. "Terminal Care and the Value of Life Near Its End," Working Papers 2010-005, Becker Friedman Institute for Research In Economics.
    18. Marlon Mundt & Larissa Zakletskaia, 2014. "That’s What Friends Are For: Adolescent Peer Social Status, Health-Related Quality of Life and Healthcare Costs," Applied Health Economics and Health Policy, Springer, vol. 12(2), pages 191-201, April.
    19. Jobjörnsson, Sebastian & Forster, Martin & Pertile, Paolo & Burman, Carl-Fredrik, 2016. "Late-stage pharmaceutical R&D and pricing policies under two-stage regulation," Journal of Health Economics, Elsevier, pages 298-311.
    20. Anupam Jena & Tomas Philipson, 2009. "Endogenous Cost-Effectiveness Analysis in Health Care Technology Adoption," NBER Working Papers 15032, National Bureau of Economic Research, Inc.
    21. Boone, J., 2013. "Does the Market Choose Optimal Health Insurance Coverage," Discussion Paper 2013-008, Tilburg University, Tilburg Law and Economic Center.

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