Economic Evaluation of Health Economic Evaluation of Health Technology: OverviewTechnology: Overview

Gerald F. Kominski, Ph.D.Gerald F. Kominski, Ph.D.

Professor, UCLA Department of Health Professor, UCLA Department of Health ServicesServices

Medical Technology DefinedMedical Technology Defined

Narrowly defined, medical technology includes Narrowly defined, medical technology includes the equipment, devices, drugs, and techniques the equipment, devices, drugs, and techniques used in the diagnosis and treatment of used in the diagnosis and treatment of diseases or conditionsdiseases or conditions

Broadly defined, it includes all the inputs, Broadly defined, it includes all the inputs, including all forms of labor and capital, used in including all forms of labor and capital, used in medical care delivery medical care delivery - e.g., physician practice patternse.g., physician practice patterns

How Does Technology Assessment Occur How Does Technology Assessment Occur in Most Markets?in Most Markets?

Firms invest in R & D to develop new products Firms invest in R & D to develop new products that are “better” than existing productsthat are “better” than existing products- Technology assessment is generally done by firms Technology assessment is generally done by firms

prior prior to introducing new products into the marketto introducing new products into the market

CompetitionCompetition imposes discipline on the market, imposes discipline on the market, because firms can’t afford to introduce because firms can’t afford to introduce products that aren’t useful or beneficialproducts that aren’t useful or beneficial- When competition isn’t present, or is ineffective, When competition isn’t present, or is ineffective,

then this market discipline doesn’t occurthen this market discipline doesn’t occur

Why Assess Medical Technology?Why Assess Medical Technology?

Contrast the market for health care services with other Contrast the market for health care services with other product markets, such as automobilesproduct markets, such as automobiles

Car manufacturers conduct extensive R & DCar manufacturers conduct extensive R & D- but considerable market research is also conducted by but considerable market research is also conducted by

independent firms independent firms after after cars are introduced to marketcars are introduced to market

When purchasing a car, consumers would like When purchasing a car, consumers would like information on:information on:- purchase pricepurchase price- cost of ownership (i.e., operating cost)cost of ownership (i.e., operating cost)- reliabilityreliability- safety safety

Information Is Valuable Information Is Valuable It Is an Economic GoodIt Is an Economic Good

Where do we get information on cars?Where do we get information on cars?

Consumer organizations, e.g., Consumer Consumer organizations, e.g., Consumer ReportsReports

Quality assessment firms, e.g., A.J. PowersQuality assessment firms, e.g., A.J. Powers Automotive magazines, e.g., Motor TrendAutomotive magazines, e.g., Motor Trend Other ownersOther owners Advertising (i.e., manufacturers)Advertising (i.e., manufacturers) RetailersRetailers

What’s Important When We Purchase What’s Important When We Purchase Health Care?Health Care?

Effectiveness or appropriateness of the serviceEffectiveness or appropriateness of the service Quality of the providerQuality of the provider Likely outcomeLikely outcome Price of the servicePrice of the service

If this information is valuable:If this information is valuable:- Where do we get this information? Where do we get this information? - Why isn’t it readily available? Why isn’t it readily available?

The Lack of Information in Health Care is The Lack of Information in Health Care is a Source of Market Failurea Source of Market Failure

There are four sources of market failure, which There are four sources of market failure, which prevent markets from functioning properly:prevent markets from functioning properly:

Market power Market power Incomplete informationIncomplete information ExternalitiesExternalities Public goodsPublic goods

Why Do Health Care Markets Fail?Why Do Health Care Markets Fail?

Information asymmetry (market power)Information asymmetry (market power)- Physicians, like many professionals, possess Physicians, like many professionals, possess

substantially more information than their clients substantially more information than their clients • information on price, quality, effectiveness, and information on price, quality, effectiveness, and

outcomes is difficult to obtain outcomes is difficult to obtain

Physician agency (market power)Physician agency (market power)- Physicians may not function as perfect agents on Physicians may not function as perfect agents on

behalf of their patientsbehalf of their patients

Extensive insurance => moral hazard (externality)Extensive insurance => moral hazard (externality)- Price does not equal marginal benefitPrice does not equal marginal benefit

Why Do Health Care Markets Fail?Why Do Health Care Markets Fail?

Uncertainty (incomplete information)Uncertainty (incomplete information)- many medical services are risky, and outcomes are many medical services are risky, and outcomes are

uncertain or probabilisticuncertain or probabilistic- medicine is both art and sciencemedicine is both art and science- practice pattern variations practice pattern variations

• welfare loss due to use rates that are too high in welfare loss due to use rates that are too high in some areas, too low in otherssome areas, too low in others

Because Markets Don’t Function Perfectly Because Markets Don’t Function Perfectly in Health Care, Other Mechanisms Have in Health Care, Other Mechanisms Have Evolved to Protect Patients (Consumers)Evolved to Protect Patients (Consumers)

Professional and facility licensureProfessional and facility licensure Professional liability (i.e., malpractice)Professional liability (i.e., malpractice) Professional ethicsProfessional ethics

- ““Primum non nocere” => first, do no harmPrimum non nocere” => first, do no harm

Regulation of drugs and devicesRegulation of drugs and devices- safety and efficacysafety and efficacy

Private and public technology assessment Private and public technology assessment effortsefforts

Goals of Health Care Technology Goals of Health Care Technology AssessmentAssessment

To provide information about the effectiveness To provide information about the effectiveness and value of health care technologies, usually and value of health care technologies, usually afterafter their introduction into the market their introduction into the market

AudiencesAudiences- health care professionalshealth care professionals- consumersconsumers- purchaserspurchasers- manufacturers, including pharmaceuticalsmanufacturers, including pharmaceuticals

Goals of Health Care Technology Goals of Health Care Technology AssessmentAssessment

Increasingly, technology assessment is being Increasingly, technology assessment is being done done before before introduction of a new product into introduction of a new product into the marketthe market- for example, pharmaceutical companies want to for example, pharmaceutical companies want to

demonstrate not only the safety and efficacy but the demonstrate not only the safety and efficacy but the valuevalue of new drugs before they are approved by the of new drugs before they are approved by the FDAFDA

- nevertheless, most technology assessment still nevertheless, most technology assessment still occurs after a product that has been proven safe occurs after a product that has been proven safe and efficacious is introduced into health care and efficacious is introduced into health care practicepractice• including surgical procedures that do not undergo including surgical procedures that do not undergo

FDA approvalFDA approval

Tools of Technology AssessmentTools of Technology Assessment

Decision analysisDecision analysis Cost-effectiveness, cost-benefit, and cost-utility Cost-effectiveness, cost-benefit, and cost-utility

analysisanalysis

In principle, these are the same tools used by In principle, these are the same tools used by private companies when they are deciding how private companies when they are deciding how to maximize their return on investment (ROI)to maximize their return on investment (ROI)- the major difference is that health care technology the major difference is that health care technology

assessment is usually done from a assessment is usually done from a societalsocietal perspective, rather than the perspective of private perspective, rather than the perspective of private investorsinvestors