Endogenous cost-effectiveness analysis and health care technology adoption

Abstract

Increased health care spending has placed pressure on public and private payers to prioritize spending. Cost-effectiveness (CE) analysis is the main tool used by payers to prioritize coverage of new therapies. We argue that reimbursement based on CE is subject to a form of the "Lucas critique"; the goals of CE policies may not materialize when firms affected by the policies respond optimally to them. For instance, because 'costs' in CE analysis reflect prices set optimally by firms rather than production costs, observed CE levels will depend on how firm pricing responds to CE policies. Observed CE is therefore endogenous. When CE is endogenously determined, policies aimed at lowering spending and improving overall CE may paradoxically raise spending and lead to the adoption of more resource-costly treatments. We empirically illustrate whether this may occur using data on public coverage decisions in the United Kingdom.