Cost-effectiveness analysis and innovation
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.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Edwin Mansfield & John Rapoport & Anthony Romeo & Samuel Wagner & George Beardsley, 1977. "Social and Private Rates of Return from Industrial Innovations," The Quarterly Journal of Economics, Oxford University Press, vol. 91(2), pages 221-240.
- Garber, Alan M. & Phelps, Charles E., 1997. "Economic foundations of cost-effectiveness analysis," Journal of Health Economics, Elsevier, vol. 16(1), pages 1-31, February.
- William D. Nordhaus, 2004.
"Schumpeterian Profits in the American Economy: Theory and Measurement,"
NBER Working Papers
10433, National Bureau of Economic Research, Inc.
- William D. Nordhaus, 2004. "Schumpeterian Profits in the American Economy: Theory and Measurement," Cowles Foundation Discussion Papers 1457, Cowles Foundation for Research in Economics, Yale University.
- Mansfield, Edwin, 1985. "How Rapidly Does New Industrial Technology Leak Out?," Journal of Industrial Economics, Wiley Blackwell, vol. 34(2), pages 217-223, December.
- Manning, Richard L, 1994. "Changing Rules in Tort Law and the Market for Childhood Vaccines," Journal of Law and Economics, University of Chicago Press, vol. 37(1), pages 247-275, April.
- Darius Lakdawalla & Neeraj Sood, 2005. "Insurance and Innovation in Health Care Markets," NBER Working Papers 11602, National Bureau of Economic Research, Inc.
- Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, July.
- Meltzer, David, 1997. "Accounting for future costs in medical cost-effectiveness analysis," Journal of Health Economics, Elsevier, vol. 16(1), pages 33-64, February.
- Johannesson, Magnus & Weinstein, Milton C., 1993. "On the decision rules of cost-effectiveness analysis," Journal of Health Economics, Elsevier, vol. 12(4), pages 459-467, December.
- David Meltzer, 1997. "Accounting for Future Costs in Medical Cost-Effectiveness Analysis," NBER Working Papers 5946, National Bureau of Economic Research, Inc.
- Joseph P. Newhouse, 1992. "Medical Care Costs: How Much Welfare Loss?," Journal of Economic Perspectives, American Economic Association, vol. 6(3), pages 3-21, Summer.
- Garber Alan M & Jones Charles I. & Romer Paul, 2006. "Insurance and Incentives for Medical Innovation," Forum for Health Economics & Policy, De Gruyter, vol. 9(2), pages 1-27, March.
- Alan M. Garber & Charles I. Jones & Paul M. Romer, 2006. "Insurance and Incentives for Medical Innovation," NBER Working Papers 12080, National Bureau of Economic Research, Inc.
- Alan M. Garber, 1999. "Advances in Cost-Effectiveness Analysis of Health Interventions," NBER Working Papers 7198, National Bureau of Economic Research, Inc.
- Weinstein, Milton C. & Manning, Willard Jr., 1997. "Theoretical issues in cost-effectiveness analysis," Journal of Health Economics, Elsevier, vol. 16(1), pages 121-128, February.
- Richard C. Levin & Alvin K. Klevorick & Richard R. Nelson & Sidney G. Winter, 1987. "Appropriating the Returns from Industrial Research and Development," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(3), pages 783-832. Full references (including those not matched with items on IDEAS)