Endogenous cost-effectiveness analysis in health care technology adoption

"As health care costs continue to rise, governments and private payers are being forced to make difficult coverage decisions about new health care treatments. Cost-effectiveness (CE) analysis is the main method used to prioritize this spending. The self-evident efficiency rationale for CE is that resources should be spent where they have the highest health impact. This has led to perhaps the largest field in health economics which attempts to provide better estimates of value through CE analysis. However, the costs invariably used in CE analysis are prices set by producers rather than resources used to produce treatments. Therefore, observed CE levels are endogenous because the pricing of new technologies is chosen to maximize profits. This is important because optimal prices, and hence observed CE levels, are affected by demand factors such as patient/doctor demand and payer adoption policies. This implies that traditional measures of "costs" reflect these demand-determined mark-ups rather than resource costs and moreover, CE-based reimbursement policies affect the endogenous CE levels payers observe. Reimbursement based on endogenous CE may therefore bear little relationship with efficient use of scarce medical resources. Using data from technology appraisals by the National Institute for Health and Clinical Excellence (NICE), we test for conditions under which adoption based on standard CE analysis may lead to adoption of more inefficient technologies in terms of resource use"--National Bureau of Economic Research web site