Economic Incentives to Develop and to Use Diagnostic Tests: A Literature Review

This survey examines the economic literature on the incentives that shape both the use and the development of diagnostic tests, with a particular focus on companion (biomarker) tests central to precision medicine. Misdiagnosis, underdiagnosis, and overdiagnosis represent a substantial global burden, driving healthcare costs and adverse patient outcomes. The study synthesizes theoretical, empirical, and experimental evidence to assess how healthcare providers' decisions regarding diagnostic tests are influenced by payment schemes, altruism, and time constraints. Fee-for-service arrangements are shown to encourage excessive testing, while capitation and salary-based contracts help contain costs, though sometimes at the expense of quality. Physicians' non-monetary motivations, such as altruism and reputational concerns, interact with financial incentives in complex ways, occasionally leading to unintended consequences such as undertesting. From a normative perspective, the literature highlights the trade-offs inherent in reimbursement design: mandating even costless diagnostic tests is not always optimal, and greater altruism does not necessarily enhance welfare. Current practices, such as reimbursing biomarker tests separately from associated treatments in the U.S., are criticized for discouraging their adoption. At the industry level, the survey explores incentives for developing innovative tests. Pre-approval companion tests can improve drug approval prospects and justify higher prices, whereas post-approval test development faces weaker incentives due to reduced market size. Competition among firms strengthens incentives relative to monopolistic settings, but test introduction may also dampen price competition. The findings suggest that pay-for-performance schemes, procurement design, and value-based pricing can help better align private and social incentives for both test use and development. Overall, the survey underscores the importance of carefully designed reimbursement mechanisms and policy tools to promote the efficient integration of diagnostic innovations into healthcare systems.