Endogenous Cost-Effectiveness Analysis in Health Care Technology Adoption

Increased health care spending has been argued to be largely due to technological change. Cost-effectiveness analysis is the main tool used by private and public third-party payers to prioritize adoption of the new technologies responsible for this growth. However, such analysis by payers invariably reflects prices set by producers rather than resources used to produce treatments. This implies that the "costs" in cost-effectiveness assessments depend on endogenous markups which are, in turn, influenced by demand factors of patients, doctors, and payers. Reimbursement policy based on endogenous cost-effectiveness levels may therefore bear little relationship to efficient use of scarce medical resources. Using data on technology appraisals in the United Kingdom, we test for conditions under which adoption based on endogenous cost-effectiveness may lead to adoption of more inefficient treatments in terms of resource use.